● The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis
By Pablo Triana
Excerpt via publisher, Wiley
In its very prominent role as market risk measure around trading floors and, especially, the tool behind the determination of bank regulatory capital requirements for trading positions, VaR [value at risk] decisively aided and abetted the massive buildup of high-stakes positions by investment banks. VaR said that those punts, together with many other trading plays, were negligibly risky thus excusing their accumulation (any skeptical voice inside the banks could be silenced by the very low loss estimates churned out from the glorified model) as well as making them permissibly affordable (as the model concluded that very little capital was needed to support those market plays). Without those unrealistically insignificant risk estimates, the securities that sank the banks and unleashed the crisis would most likely not have been accumulated in such a vicious fashion, as the gambles would not have been internally authorized and, most critically, would have been impossibly expensive capital-wise.
