BNY Mellon incurred a VAR breach in Q2

The highest losses-to-VAR ratio was 145.75%, in the first backtesting exception reported by the bank since 2018

BNY Mellon incurred a value-at-risk backtesting exception in Q2, as a result of larger-than-expected trading losses.

The custodian bank’s losses-to-VAR ratio on the day in which it reported a backtesting exception was 145.75%. It was the first such instance since Q1 2018 and the only VAR breach in the quarter across the eight US global systemically important banks (G-Sibs).



It’s also the first time any US G-Sib has incurred a VAR breach since the Covid-driven market volatility of Q1 last year caused a record-breaking 42 backtesting exceptions in the space of three months.

Banks must disclose their three largest trading losses each quarter as a percentage of VAR. The second- and third-largest trading losses at BNY reached 79.16% and 54.65% of VAR, respectively. A ratio higher than 100% means trading losses exceeded the bank’s own estimates.

Despite the VAR breach, BNY Mellon reported 40 profit-making days, up from 35 in the last quarter – the most since Q1 last year.

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

If banks incur more than four breaches over a rolling 250-day period, the multiplier applied to their VAR-based market risk capital requirement increases. This is undesirable, as it means having to put aside more capital that cannot be put to better use elsewhere.

The good news for BNY Mellon is that this was the first VAR backtesting exception in more than three years, meaning its VAR models have performed as planned for 12 consecutive quarters. However, that the breach occurred during a fairly quiet period, goes against expectations and the exact reason for this is unclear at this stage.

If it was triggered by a one-off event, the bank’s model risk and validation teams might not necessarily be looking to calibrate their models. If it reoccurs, however, it may be a sign some adjustments are needed to avoid incurring higher capital multipliers.

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