Do banks overstate their Value-at-Risk?

This paper is the first empirical study of banks’ risk management systems based on non-anonymous daily Value-at-Risk (VaR) and profit-and-loss data. Using actual data from the six largest Canadian commercial banks, we uncover evidence that banks exhibit a systematic excess of conservatism in their V...

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Bibliographic Details
Published in:Journal of banking & finance 2008-05, Vol.32 (5), p.783-794
Main Authors: Pérignon, Christophe, Deng, Zi Yin, Wang, Zhi Jun
Format: Article
Language:English
Subjects:
Annual reports
Backtesting
Bank management
Business administration
Capital requirement
Capital structure
Commercial banks
domain_shs.gestion.fin
Financial management
Humanities and Social Sciences
Income statements
Risk assessment
Risk management
Studies
Value-at-Risk (VaR)
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Summary:This paper is the first empirical study of banks’ risk management systems based on non-anonymous daily Value-at-Risk (VaR) and profit-and-loss data. Using actual data from the six largest Canadian commercial banks, we uncover evidence that banks exhibit a systematic excess of conservatism in their VaR estimates. The data used in this paper have been extracted from the banks’ annual reports using an innovative Matlab-based data extraction method. Out of the 7354 trading days analyzed in this study, there are only two exceptions, i.e. days when the actual loss exceeds the disclosed VaR, whereas the expected number of exceptions with a 99% VaR is 74. For each sample bank, we extract from historical VaRs a risk-overstatement coefficient, ranging between 19 and 79%. We attribute VaR overstatement to several factors, including extreme cautiousness and underestimation of diversification effects when aggregating VaRs across business lines and/or risk categories. We also discuss the economic and social cost of reporting inflated VaRs.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2007.05.014