VAR exceptions reflect volatile season

Investment banks reported increased numbers of high trading losses in the third quarter of this year, highlighting the volatility in the financial markets and casting doubt on their risk modelling.

Several banks reported significantly higher numbers of value-at-risk (VAR) exceptions - days on which trading losses exceeded the maximum loss expected at a certain probability level, either 95% or 99%. The VAR used for comparison was derived from the previous day's portfolio positions.

Lehman Brothers reported three exceptions at 95%, the first this year. Goldman Sachs reported five at 95%, with only one in the first half of the year. Bear Stearns reported 10 at 95% (also with only one before the crisis) and Credit Suisse seven at the higher 99% level, compared with two in the first half of the year. But the record is held by UBS, which announced 16 at 99% - its first exceptions since 1998.

While some banks blamed unusually high volatility for the abnormal losses, the news will also cast doubt on the modelling techniques used to calculate VAR. Merrill Lynch admitted VAR "significantly underestimated actual losses" and Credit Suisse announced it would revise its models to include higher levels of correlation between assets.

See also: VAR breakdown

Risk's VAR survey will be published in January 2008, with a full analysis of changes in VAR levels.