Blast From The Past…

An interesting article in The Economist on Deutsche Bank’s travails. Got there through Sumit Dhar’s post on the Collaborative ISB blog .

“Its penchant for betting on markets shows up in the numbers it gives for value-at-risk (VAR)—the maximum it reckons that it could lose on a bad day. As a model, VAR depends crucially on volatility: the lower the volatility of financial markets, the greater the number of positions that a bank can have for a given amount of capital. As volatility has fallen sharply since the autumn of 2002, so positions have climbed. In addition, banks have devoted more money to trading. All in all, positions are many times what they were. Deutsche is an extreme example. Richard Evans, Deutsche’s head of market risk, says that the bank is very conservative about changes in volatility. Perhaps so, but it is still taking huge positions. In any case, VAR is flawed because it does not work when it is most needed: when markets fall apart. Like others, Deutsche therefore applies weekly “stress” tests to calculate how much “economic capital” it needs to buffer its risk positions under such conditions. But those tests are only as good as their designers’ imaginations.”

Ha, Ha…This is exactly what I was just about beginning to work on when I quit DSL. I had conducted a short training session on Risk where I had covered VAR and Economic Capital, and after the session, I privately mentioned to a few that everything I had said was crap. DB want’s to reduce EC to make sure they have more liquid money to play around with. As simple as that. I feel vindicated after reading this article.

Personally, I believe that concepts such as VaR and EC have done much damage, which, unfortunately, no one can pinpoint. But their effects are felt in myriad little ways that have changed the face of many banks from being financiers of local industry to bankrollers of speculators and bloated corporates.

As an aside, that was a surprisingly opinionated article from The Economist. Normally, these folks have a kind word to say about even the worst offender, but this one panned DB in no uncertain terms.


Posted on September 2, 2004, in Uncategorized. Bookmark the permalink. 3 Comments.

  1. Hi…

    It would be great if you could provide a link to the collaborative blog in your post…


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