BNP Paribas notches three VAR breaches in Q1

Latest count puts bank on cusp of capital penalty

BNP Paribas notched three value-at-risk backtesting exceptions in the first quarter, leaving it on the cusp of higher capital charges for trading activities.

The latest overshoots, recorded in February and March against hypothetical profit and loss, followed a single breach in November, bringing the one-year rolling total to four, the maximum allowed under European Union rules before capital requirements are hiked.



Bar a regulatory intervention, each new backtesting excess from here until November will trigger an increase in the multiplier used to translate VAR readings into capital charges.

BNP Paribas did not say what its multiplier was at end-March. The multiplier is set at a minimum of 3x, but can be increased at regulators’ discretion, even in the absence of breaches.

The bank’s market RWAs stood at €29 billion ($31 billion) at end-March, up 16% from three months prior. Counterparty credit RWAs – which are also affected by VAR and the VAR multiplier through a credit valuation adjustment (CVA) charge – rose 18% to €47 billion over the period.



What is it?

VAR measures the potential loss due to adverse market movements over a defined time horizon to a specified confidence level. BNP Paribas’ VAR is calculated over a one-day horizon and calibrated to a 99% confidence interval. This means underestimations of actual trading profit and loss would be expected to exceed modelled estimates one day out of every 100.

The VAR model is backtested daily against trading results, both before – hypothetical – and after – actual – P&L intraday position changes are taken into account. When losses exceed what was forecast by VAR, a backtesting exception is recorded.

Under EU rules, a bank can incur up to four exceptions in 250 trading days – all on either a hypothetical or actual P&L basis – before seeing a hike in the multiplier that translates VAR into capital requirements, by between 0.40x and 1x.



CVA is an adjustment to the market value of derivatives instruments to account for counterparty credit risk. It represents the discount to a derivatives’ value that a buyer would demand after taking into account the possibility of a counterparty’s default.

EU rules require banks to set aside an amount of capital to shield against CVA losses, calculated using a regulator-set standardised approach or an internal advanced approach. BNP Paribas’ CVA RWAs are mostly computed through the latter.

What is it?

The flurry of VAR breaches at BNP Paribas doesn’t bode well for other EU banks expected to publish their Pillar 3 reports in the coming weeks. The French lender had actually been among the best performers in Q4, when several of its peers were repeatedly tripped up by market volatility.

If those banks also notched new breaches in Q1, their multipliers may now be at painful levels. And with the backtesting exceptions concentrated in just one or two quarters, it will take at least another six to nine months for a sufficient number of them to roll off and the multiplier to decrease.

But even if the number of breaches remains below the regulatory limit, the occurrence of several excesses in quick succession – a far higher frequency than the one-in-100 days the 99% confidence level would imply – may force banks to reconsider how much they are actually at risk of losing at any given day. Trading activities may be about to become much more capital-intensive.

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