Introduction

Despite recent events, Value at Risk (VaR) remains to be an important tool used by risk managers. However, the weight that is placed on the results returned by VaR models has changed over the recent years. Banks are now more focused on other metrics, such as stress testing and scenario analysis. Recent Lepus research indicates that the majority of banks are looking to capture risk not in VaR through improved stress testing frameworks.

Key findings

• VaR models – There was a similar response amongst the interviewed sample. In principle the interviewees agreed that VaR models are better when parsimonious. The vast majority of the participating banks acknowledge that it is understood that VaR is not a suitable measure for non VaR type risks.
• Risks not in VaR –  All participating banks have implemented a framework for risks not in VaR. Main risks that are not captured by VaR depends on sophistication of such models and on the type of positions and exposures the bank has.
• Materiality Thresholds – Materiality is an important measure when assessing risk. Risk appetite will vary, and different firms will have different thresholds. Those governed by the FSA use the recommended 5% of VaR threshold as a guideline, with one prudent bank opting for a 1% threshold. The experience and judgement of  risk managers is the determining factor to thresholds for some of the banks.
• RNIV Charge – The interviewed banks were asked how they aggregate individual RNIV charges to derive the total figure. Most of the banks spoken to add the individual charges, not taking into account the diversification effect. Many banks are wondering if the regulators truly understand VaR diversification and materiality, and feel that there are issues that need to be addressed.

Conclusion

To conclude the report, the interviewees were asked how frequently they perform calculations and whether they had any initiative planned. Research discovered that there is as of yet no global structure in regards to calculation timelines, with the various banks running these calculations as often as once every week to once a year. A number of banks are unsure and deliberating as to whether or not they should formally run the exercise more often.

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