US unit of BBVA on the brink of a VAR breach in Q1

Largest loss-to-VAR ratio at the firm was highest among the 12 intermediate holding companies

The US trading entity of BBVA edged close to incurring a value-at-risk backtesting exception in the first quarter of the year, after its largest trading loss came close to its regulatory VAR estimate.

Banks must disclose their three largest trading losses each quarter as a percentage of VAR. The largest loss-to-VAR ratio at BBVA was 95.49%, the highest of the 12 intermediate holding companies (IHCs).



The IHC of BMO reported the second-largest loss as percentage of VAR, at 87.25%, followed by Credit Suisse USA with 80.60%. On the opposite end of the spectrum, RBC US reported the smallest loss-to-VAR ratio, at 8.52%.

None of the ratios reported were greater than 100%, meaning no bank’s actual trading losses exceeded their expectations.

End-of-period VAR amounts – the estimate of worse-case trading losses – for March 30 were lower than three months prior at the banks. At BBVA, 10-day VAR was $2.5 million at quarter-end compared with $2.6 million at end-2020. At BMO, the figures were $27 million and $37 million, respectively. At Credit Suisse USA, they were $153 million and $234 million.



On average, the 12 IHCs reported a profit on 33 trading days in the quarter, and a loss on 29 days.

What is it?

US prudential regulators – the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation – require institutions subject to the market risk rule to report quarterly data on their trading risk capital calculations.

Firms disclose their VAR-based and stressed VAR-based capital requirements, any mandatory add-ons, as well as their VAR backtesting results.

The VAR-based measure must be calculated on a daily basis using a one-tail, 99% confidence level and a 10-day holding period. Banks must use at least 12 months of historical data as the basis for their estimates.

Why it matters

After incurring two large VAR breaches in the first quarter of 2020 – likely driven by the Covid-induced volatility – BBVA has now posted a clean sheet for four consecutive quarters. This is testament to the work done by the bank’s risk managers and is likely to please the US regulators.

It could also mean some good news on the horizon. If a bank incurs more than four regulatory VAR breaches over a rolling 250-day period, the multiplier applied to its VAR-based market risk capital requirement increases. This multiplier is set at three by default, but climbs in increments to a maximum of four with every additional breach above the threshold.

Currently, BBVA is constrained by the highest multiplier of four, but if the positive trend continues and no backtesting exceptions are registered, the bank might soon see its multiplier fall.

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