UBS factors in Covid shock to stressed VAR, causing RWA surge

UBS’s market risk-weighted assets (RWAs), used to calculate regulatory capital requirements, jumped 11% to $11.8 billion in the last quarter of 2020. This was largely the result of the bank including Covid-19 period volatility to the historical dataset used to inform its stressed value-at-risk (SVAR) measure.

The bank disclosed in its Q4 report that its average SVAR – the calculation of which informs part of its overall market RWA amount – was driven up over the last three months of 2020 because of “very high credit shocks” applied against its long credit portfolio. These shocks were introduced because of the update to the SVAR historical look-back window to include 2019–20 data, covering the period of the initial Covid-19 outbreak.

This effect contributed most to a $2.5 billion increase in market RWAs labelled as due to “asset size and other”. Another $200 million was added because of model updates. Offsetting this somewhat was a $1.4 billion reduction of regulatory add-ons related to risks-not-in-VAR. Market RWAs as a whole were up 80% on end-2019.


Total RWAs across the group hit $289.1 billion at end-2020, up 2% on the quarter and just shy of 12% year on year. 

Credit and counterparty RWAs came to $178.1 billion at end-2020, up 3% on Q3, and operational RWAs to $75.8 billion, down 2%.


What is it?

RWAs determine the minimum amount of risk-based capital that a bank must hold to meet regulatory requirements.

Market RWAs are calculated using either the internal models approach (IMA) or standardised approach (SA). The IMA market risk calculation consists of four components: a VAR-based requirement; a SVAR-based requirement; an incremental risk charge; and risks-not-in-VAR measure.

The SVAR is estimated with the same model parameters as VAR, but using a one-year period of significant financial stress.

Why it matters

There’s no way around it – the coronavirus panic will be reflected in many banks’ market RWAs for years to come. This is because their SVAR measures have to be anchored to a period of extreme stress, and for most lenders this now refers to March 2020, when markets fell off a cliff in response to the Covid outbreak.

Higher RWAs mean higher capital requirements. However, if a bank is able to coax greater returns from larger, riskier portfolios, then this need not be a burden. UBS said its gross return on RWAs for Q4 2020 was 11.4%, up from 10.8% the year-ago quarter. The investment bank, where the majority of UBS’s market risk is taken, saw its return on RWAs increase by an even greater amount, to 9% from 7.9%.

This suggests UBS has been able to generate higher earnings off its market RWAs. Whether it will be able to keep up such a return on the current level of RWAs through 2021, though, remains to be seen.

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