Goldman Sachs’ VAR hits five-year high

Stormy markets pushed Goldman Sachs’ risk-of-loss to its highest level in five years on the way to one of its biggest trading quarters ever.

Average daily value-at-risk for Q1 2020 at the New York-based dealer was $81 million, a level last reached in Q1 2015. This is up 40% on Q4 2019 and 47% on the year-ago quarter. Interest rate VAR, at $60 million, was at its highest in at least five years, as was equity VAR, at $41 million.

Currency VAR hit $18 million, up 64% on Q4 2019, while commodities VAR actually fell 8% to $11 million.

 

Diversification effects took $49 million off the aggregate VAR, the most since Q1 2015.

Net revenues for Goldman’s trading division totalled $5.2 billion for Q1, up 48% on Q4 2019 and 43% on the year-ago quarter.

What is it?

Value-at-risk measures the potential loss due to adverse market movements over a defined time horizon to a specified confidence level.    

The VAR model used by Goldman Sachs captures risks including interest rates, equity prices, currency rates and commodity prices. It also takes into account the diversification of aggregated risk at the firm-wide level.    

It is calibrated to a one-day time horizon and a 95% confidence level, meaning losses should only exceed the modelled estimate one trading day out of every 20.

Why it matters

Extraordinary volatility in March sent trading volumes through the roof, allowing dealers to book bumper revenues buying and selling securities on behalf of clients desperate to stay ahead of the market rout.

Top tier dealers like Goldman Sachs profited handsomely, but at a cost. High VAR amounts feed through to regulatory capital requirements, meaning the bank likely had to put aside more equity against its trading portfolio than in months past. It’s also possible yo-yoing markets caused VAR backtesting exceptions, which would have led to further capital add-ons.

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