The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Capital Markets

Why value at risk holds its own

The increasing complexity of financial instruments, markets and institutions is a worry for regulators and investors. Simple, intuitive ways are needed to make risk transparent. The value-at-risk measure, although sometimes criticized on theoretical grounds (see Markus Leippold in Euromoney November 2004), has established itself as the benchmark. Christopher Lotz and Gerhard Stahl explain how regulators approach the subject of market risk management and use VaR as one among many tools.

By Christopher Lotz

Gerhard Stahl


Don't rely on VaR
 - Markus Leippold, Euromoney November 2004


Regulatory market risk
Additional factor above

Basle multiplier of three

MANY FINANCIAL DISASTERS could have been averted had banks' risk management processes been working properly. For example, the losses in foreign exchange trading at National Australia Bank, one of the most prominent financial scandals of recent years, were preceded by a breakdown of management confidence in value-at-risk numbers resulting in a complete disregard of limit breaches.1 It is a clear case of a collapse of the risk management process, rather than the inadequacy of VaR as a risk measure. What is the risk management process about? It is about communication and the reduction of complexity into simple, understandable terms on which decisions can be based. Many ways to describe and compare risk exist, each with its advantages and disadvantages. VaR is only one of many possibilities. It was selected by the Basle Committee as the basis for calculating regulatory capital for market risk because it has desirable properties that we will describe below.


You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree