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Credit Suisse USA posts trading loss for 288% of VAR
Swiss bank’s subsidiary one of only three US dealers to incur backtesting exception in Q1
Credit Suisse’s US unit incurred a trading loss of almost three times its modelled forecast in the three months to end-March, in what was otherwise a comparatively uneventful first quarter for rival dealers.
The Swiss bank’s stateside intermediate holding company reported a one-day loss for 288% of value-at-risk at an unspecified point in the quarter, the only major Wall Street dealer to lowball its forecast in the period.
It followed one breach in Q3 2023 for 364% of VAR, and two in Q4, for 138% and 104%.
The dealer nevertheless managed to bring down the multiplier translating VAR readings into capital requirements – from 3.4x in Q4 2023 to 3x – as two excesses incurred in Q1 2023 fell out of the four-quarter observation window. This left the trailing count at four, the most allowed before the multiplier ratchets up.
Two of the other 34 banks subject to the US’s market risk framework incurred backtesting excesses during the quarter, albeit by far tamer proportions. KeyCorp posted a loss for 108% of VAR, while Raymond James breached the gauge for 131%.
Stifel, State Street and Canadian Imperial Bank of Commerce’s US unit nearly committed a breach, with daily loss-to-VAR ratios topping 95%, 90.9% and 89.6%, respectively.
What is it?
US prudential regulators – the US 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- and SVAR-based capital requirements, any mandatory add-ons, as well as their VAR backtesting results. The disclosures also cover the three largest trading losses incurred each quarter as a proportion of VAR, although their value and the date they were incurred are not disclosed.
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.
VAR- and SVAR-based capital requirements are pinned to the greater of the previous three months’ average reading, multiplied by a factor of three or higher, or the previous day’s measure.
If a bank incurs more than four VAR breaches over a rolling 250-day period, the multiplier applied to the average-based requirement increases. This multiplier climbs in increments from three to a maximum of four with every additional breach above the threshold.
Regulatory VAR differs from management VAR, which is not connected to capital requirements and can have a different perimeter and lower confidence level.
Why it matters
Only one of the last nine quarters – Q2 2023 – went by without Credit Suisse notching a VAR overshoot on its Wall Street trading floor. It’s a dramatic decline in risk performance for a unit that, between April 2020 and the end of 2021, had maintained a clean backtesting record.
While the bank’s competitors have hardly been immune from slip-ups over the past few quarters, Credit Suisse USA has lagged in terms of trading performance generally. Over the past four quarters, it closed trading books at loss on 65% of days – the worst of any bank subject to market risk disclosures.
A spokesperson for UBS – whose trading perimeter, for capital-requirement purposes, remains separate from Credit Suisse’s a year on from the latter’s rescue – declined to comment on what caused the latest backtesting exceptions, or on whether the bank also recorded an exception at the highest consolidation level.
In previous quarters’ disclosures, UBS attributed VAR excesses at Credit Suisse’s consolidated level to reevaluation effects in the context of the takeover, and to higher-than-expected costs of funding exits of positions.
UBS said it will consolidate US operations under a single intermediate holding company by the second quarter. Once that happens, and the post-merger restructuring is complete, the new unit may be able to put a halt to its running streak of backtesting exceptions.
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Credit Suisse USA rounds 2023 with fifth VAR breach
Citi, JP Morgan incurred record VAR overshoots in Q4
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