Volcker Sunlight Should be the Best Disinfectant

25 July 2014Banks, Financialsbanking, JP Morgan, regulation, regulatory VaR, risk models, stress VaRNick Dunbar

On the fourth anniversary of the Dodd-Frank Act, the big US banks are still black boxes in terms of their trading activity. However regulators are now getting a bit more information. Over the last month, the big banks have started providing them with so-called reporting metrics under the Volcker Rule, so that the rule’s curbs on proprietary trading can be enforced.

Of Fear and Models

22 July 2013BanksBasel rules, BNP Paribas, leverage ratios, risk models, sovereignNick Dunbar

My last post on Anglo-Irish Bank got me thinking some more about the question of trust and banking. The subject came up in conversations I recently had with senior bankers - BNP Paribas co-chief operating officer Philippe Bordenave and Deutsche Bank CFO Stefan Krause. I asked them about the declining trust in bank risk models,…

What JP Morgan’s release of VaR has in common with sex and computer viruses

15 October 2012ArticlesBasel rules, JP Morgan, regulatory VaR, risk models, technologyNick Dunbar

In The Devil’s Derivatives, I tried to answer two questions at the heart of the financial crisis. Why did the trading aspect of banking (the ‘casino’) get to grow so big? And why did regulators allow that to happen? My answer hinged upon something called Value-at-Risk that gave bankers and regulators confidence that risks were measurable, were small compared to trading positions and could be controlled.

It’s now the twentieth anniversary of the invention of VaR at JP Morgan in the early 1990s, and I recently had the opportunity to speak with Jacques Longerstaey, who was one of its principal inventors.

The basic story has been told many times. Dennis Weatherstone, the English-born chairman of JP Morgan wanted to understand the risks of the bank’s fast-growing trading business. “At the end of the day, I want one number”, Weatherstone told Longerstaey and the risk team. The result was VaR.

What fascinated me was that in the fullness of time, Longerstaey was prepared to speak frankly about the real business context behind VaR. An explanation was needed because having invented what was seen as a sophisticated risk management tool putting it light years ahead of other trading firms, JP Morgan decided in 1994 to do something surprising. The bank put this valuable intellectual property in the public domain, publishing what it called the Riskmetrics technical document, which Longerstaey co-authored.

Nature Bites Back In New, Messy World of Derivatives

4 May 2012Bankscredit valuation adjustment, derivatives, physics, risk modelsNick Dunbar

Twelve years ago, in 'Inventing Money' I explained the principles of option pricing to a general audience. Although the maths looked complicated, the financial market that Fischer Black, Robert Merton and Myron Scholes modeled in the early 1970s was really quite simple. You bought and sold derivatives, such as options or forward contracts, and traded…