Bank of America’s VAR drops 19% in Q4

Average one-day trading VAR falls to lowest point since Q1 2020

Trading risk at Bank of America fell sharply over the last three months of 2021, hitting the lowest quarterly average since the early stages of the pandemic.

Daily value-at-risk (VAR) – management’s gauge of the most the trading desk could lose on any given day – averaged $63 million during Q4, down 19% from Q3’s $78 million and the lowest since Q1 2020.

 

 

The drop coincided with an 8% decline in trading-related assets at the global markets division, to $491.2 billion at end-December.

What is it?

VAR measures the potential loss due to adverse market movements over a defined time horizon to a specified confidence level.

The VAR model used by Bank of America’s global markets unit captures risks arising from currency moves, interest rates, credit spreads, equity prices, commodities and other less liquid trading positions.

The model is calibrated to a one-day time horizon and a 99% confidence level, meaning losses should only exceed the modelled estimate one trading day out of every 100. The bank also discloses VAR calibrated to a 95% confidence level.

Why it matters

It’s not unusual for top dealers to trim their books just before year-end, in order to present a leaner balance sheet at the next global systemically-important bank benchmarking exercise. During the quarter, Bank of America also moved an unspecified liquidating business out of the global markets unit, which may have contributed to the reduction in market risk sitting in the division.

The shrinking trading book may also be because of more muted investor appetite. Uncertainty around everything from interest rates’ path to new Covid-19 variants to rising inflation may be temporarily keeping investors in wait-and-see mode, dampening demand for broker-dealers’ services.

Yet beyond pure volumes, there are also signs the bank may be paring back holdings of riskier trading assets. When calculated at a 95% confidence level, daily VAR averaged $26 million in Q4, marking a distance of $37 million from 99%-confidence VAR. In Q3, the gap between the two was $60 million.

This would signal the bank has reined in tail risk. Even so, the trading book continued to yield a nifty profit for the bank, despite its reduced size: net interest income from trading account assets totalled $977 million in Q4, up 1% quarter on quarter and 6% year on year.

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