From VAR to stress testing

Implementation of enterprise-wide VAR models in the 1990s was an important risk management advance, but it's time to rethink some fundamental aspects of how they were designed, argues David Rowe

The authorised use of internal value-at-risk models for calculating regulatory capital was a major advance in bank supervision. It was accompanied by a drive towards best-practice risk methods as the supervisory benchmark. While we didn't fully realise it at the time, this effectively replaced sluggish advances in prescriptive regulation with far more dynamic competition over what constitutes best practice among banks.

At the same time, however, the Basel Committee's decision set off a major