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July 2, 2013

Tracking Risk Isn't So Easy

How risky do you want your bank investments to be? Don’t laugh, it is a serious question.

These days, investors can adopt a buffet-style approach to bank risk. To get a sense of what is on offer, take a look at the table accompanying this column.

It is an attempt by Fitch Ratings to get an apples-to-apples comparison of banks’ “value-at-risk,” or VAR, the most common yardstick of trading risk. VAR is designed to measure the maximum trading losses faced by a bank in a single day.

So if you fancy a bank that takes big bets on equities, Goldman Sachs Group Inc. was the one for you in the first quarter, according to Fitch. Want a Wall Street firm that swings big on commodities? Look no further than Morgan Stanley. If foreign exchange is more your thing, do consider Citigroup Inc. But if it is interest-rate and credit risk you crave, Bank of America Corp. could be an ideal choice.

Risk is inherent in any investment, and a high VAR needn’t be, in itself, a bad thing. It actually could signal that a bank is a better trader than its rivals. But the issue for investors, regulators and bank executives is whether they can properly monitor the risks large institutions take in the markets.”


Read full Wall Street Journal article here

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