Fortunes of VAR: dealers decry effect of war on risk models

European banks with large Russian derivatives exposures face risk of backtesting exceptions – and higher capital requirements

Across Europe, millions of teenagers are sitting public exams. For risk modellers at large banks, the testing never stops – and some models have been failing their tests.

The war in Ukraine has sparked market gyrations that have wrong-footed banks’ value-at-risk models. A breakdown in these models can lead to punitive add-ons in how banks calculate risk-weighted assets. Bigger RWAs mean a rise in regulatory capital.

Market risk managers sense an injustice. They say trading desks shouldn’t be