A VAR, VAR better thing?

Banks reported a surge in the number of value-at-risk exceptions during the third quarter of last year following extreme turbulence in the financial markets. Are risk models breaking down? What are banks doing to fine-tune risk management practices and models? Alexander Campbell reports

The credit crisis of late 2007 was largely a failure of risk management. As losses mounted, bank after bank admitted their risk models had been unable to predict the likelihood, speed or severity of the crisis. Attention turned in particular to the use of value-at-risk as a measure of the risk involved in a portfolio.

As reported in Risk's VAR survey (Risk January 2008, pages 68-71), several banks reported multiple VAR exceptions - in which daily trading losses exceed the limit predicted at the