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TEXT-Fitch expects bank trading risks to remain low in 2012
April 5, 2012 / 8:14 AM / 6 years ago

TEXT-Fitch expects bank trading risks to remain low in 2012

(The following statement was released by the rating agency)

Apr 05 - Fitch Ratings says in a new report that it expects global trading and universal banks’ (GTUBs) market risk exposure in their trading books to remain at low levels in 2012, given the implementation of the Volcker Rule and Basel III’s prohibitive treatment of trading book risk, as well as the generally lower risk appetite currently in the industry.

However, once market activity starts to pick up and the new regulations are bedded down, Fitch anticipates that risk appetite will increase again, tempted by the upside potential for earnings.

In the report, Fitch comments on developments in Value-at-Risk (VaR) measures in the GTUBs. Fitch uses VaR and its calculation of “stressed VaR” as some of the key measurements to analyse and compare GTUBs’ market risk profiles. The report examines how VaRs are amplified under severely stressed market conditions, while noting the limitations in the VaR models.

Fitch’s analysis shows the long-run average 99%, 10-day volatility for the major trading book asset classes can increase by a factor of 3.5 during market turbulence. The agency has reviewed its own stressed VaR measurements and decided to multiply the aggregated 10-day, 99% level maximum VaR by a factor of five to estimate potential trading losses for GTUBs. This differs from Basel III’s stressed VaR, although Fitch expects both measures to show broadly similar trends.

Fitch understands there are various constraints on VaR’s estimation of future losses, and VaR figures are not necessary comparable across firms. When analysing financial institutions’ market risk profiles in general, the agency also uses other measures such as portfolio volumes and turnover, daily loss and periodic trading profit and loss trends.

The report, entitled ‘Stressed VaR: Helping To Monitor Trading Risks’ is available at

Link to Fitch Ratings’ Report: Stressed VaR: Helping To Monitor Trading Risks


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