Santander’s VAR surges 17% in Q3

Macroeconomic jitters push credit spread and interest rate risk up, but bank’s traders net income windfall

Santander’s average trading value-at-risk increased 17% to €10.6 million ($12.3 million) over the third quarter, amid resurgent worries about a global economic slowdown.

The bank’s VAR – which gauges the most its trading desk can lose on a given day – peaked at €15.2 million during the period, 21% above the zenith in Q2 and the highest in 15 months. It closed the quarter at €14.9 million, up 62% on end-June.

 

 

Fuelling the increases were credit spread and interest rate VAR, whose averages rose 58% to €6 million and 9% to €9.9 million, respectively, during the period.

The same two categories ended the quarter up 44% to €2.2 million and 47% to €12.6 million, respectively, more than offsetting a month-end pullback in commodity, foreign exchange and equity VAR.

Credit spread VAR also recorded the largest increase in intra-quarter peaks, up 49% to €7.9 million. It was followed by equities VAR, whose maximum reading of 6.5 million in Q3 was 41% above that of Q2.

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 Santander for internal management purposes captures risks including interest rates, credit spreads, commodity prices, equity prices and currency rates. It also takes into account the diversification of aggregated risk at the firm-wide level.

It is calibrated to a one-day period and a 99% confidence level, meaning actual losses should only exceed modelled ones one day out of every hundred.

Why it matters

No sooner had banks’ VAR readings managed to cool down from last year’s Covid-induced overheating, than a new set of macro jitters pushed them back up. Specifically, Santander cited supply-chain logjams and surging energy prices.

The bank is the second major European dealer, after Nordea, to report a jump in VAR for Q3. Unlike at the Nordic bank, however, Santander’s market-makers managed to increase trading and other income by 87% over the quarter.

That rewarding approach may go down better with investors than the more cautious one at rival Deutsche Bank, where a 24% cut in average VAR levels was accompanied by a €226 million plunge in trading revenue.

Santander’s VAR is still well below what it was two years ago, pre-pandemic. Still, if volatility, credit spreads or inflation get too out of hand – and the bank’s end-quarter VAR surge suggests risk levels have continued to rise into Q4 – a portfolio rebalancing may be on the cards.

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Nordea’s trading VAR up 58% in Q3

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• Topics
• Credit spreads
• Deutsche Bank
• Interest rates
• Nordea
• Risk-weighted assets (RWAs)
• Santander
• Spain
• Trading book
• Value-at-risk (VAR)
• Risk Quantum
• Banks