25 Aug 2009, Alexander Campbell, Risk magazine
Available figures for major bank VAR over the second quarter of 2009 show an average fall of 13.8% in overall VAR. This result was carried on over most asset classes: interest rate VAR, the largest single category, fell an average of 3.6%; currency VAR fell 8.8%; and equity VAR fell 15.5%. Commodity VAR rose an average of 14.2%, but remained by far the smallest contributor to overall VAR.
This corresponds with a quarter in which measures of volatility across asset classes fell noticeably. The Merrill Lynch Move index, a yield curve-weighted average of the normalised implied volatility of one-month Treasury options, averaged 142.35 for the quarter, down 4.6% from 149.25 in the first quarter of the year. The CBOE Vix index of equity market volatility as implied by 30-day S&P option prices averaged 32.94, down from 45 the quarter before. One measure of commodity price volatility, the CBOE's Crude Oil Volatility Index, also fell significantly, down 33.6% from 73.68 to 48.95. And the Deutsche Bank CVix currency volatility index, which is based on the implied volatility of options on nine major currency pairs, dropped 21.7% from 19.09 to 14.95.
The only exception to the trend was Goldman Sachs, which saw another increase in average VAR over the quarter, as it has done in every quarter save one since mid-2006. Measured at the one-day horizon and a 95% confidence level, the bank's average VAR rose from $240 million to $245 million. The bank noted its VAR figure had increased from 2008 because of higher interest-rate VAR. However, between March and June, this figure actually fell, and the increase over that period was in fact almost entirely due to an increase in equity VAR from $38 million to $60 million.
The bank's equity and principal investment departments performed significantly better in the second quarter than in the first: net equities revenue climbed from $2 billion to $3.18 billion, "reflecting significantly higher net revenues in derivatives and, to a lesser extent, principal strategies", the bank said. It added it had "increased equity exposures" over the course of the second quarter. Principal investments brought in $811 million in the second quarter, compared with a net loss of $1.41 billion in the first quarter, driven mainly by a $948 million gain on its shares in the Chinese bank ICBC.
Meanwhile, very few VAR exceptions (days on which actual loss exceeds VAR) have been reported this year. Morgan Stanley reported one in the first quarter of the year (at 95% confidence and a one-day window) but none in the second, while UBS reported two at 99% confidence over 10 days in the first quarter and another two in the second.
Bank of America, Credit Suisse, Goldman Sachs and JP Morgan, all of which have reported exceptions in the past, reported none in 2009 - even though, given their confidence limits, all would have expected, statistically speaking, to report at least one or two, and potentially as many as five.