Risk-Management Models Kept Even Keel in Topsy-Turvy Week

By Seiberg, Jaret | American Banker, October 31, 1997 | Go to article overview

Risk-Management Models Kept Even Keel in Topsy-Turvy Week


Seiberg, Jaret, American Banker


Banks successfully used computerized risk- management models to limit their losses in this week's turbulent stock and bond markets, according to regulators and bankers.

"There has been no material financial impact on any of the banks we regulate at this point," said Michael L. Brosnan, director of treasury and market risk at the Office of the Comptroller of the Currency. "That is an indicator that these models work."

"People know what their exposure is," a Federal Reserve official said. "The models have been very useful. We expect this to be a wash for most banks."

This month's 12% drop in the Dow Jones industrial average, capped off by Monday's 554-point loss, was the first major test for market-risk models, which more than 50 banks are using to manage their exposure to fluctuations in securities prices.

Kevin Blakely, executive vice president for risk management at KeyCorp, said the company's losses and gains always remained within the range the model predicted.

"So far, so good," Mr. Blakely said. "The model seems to be holding up and giving us the right kind of reads. There were no significant surprises."

"Our model has worked during this turbulent week," said Louis A. "Jerry" Schmidt Jr., managing director at First Union Capital Markets. "The value-at-risk methodology told us what our risk was, and we have had no reason to question it."

Mr. Schmidt, who uses the model to manage the fixed-income securities portfolio, said his unit is back-testing the program every night to ensure it works properly. …

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