Exceptions to the rule

Banks back-test their daily value-at-risk every day by comparing it with the corresponding daily trading revenue (see footnote 1). A backtesting VAR exception occurs when trading losses exceed the daily VAR estimate. Nevertheless, banks calculate VAR using a confidence interval that allows for such exceptions. European banks calculate VAR at a 99% confidence interval, which means they should expect two or three days of exceptions a year (see footnote 2). Most US banks calculate VAR at a 95%