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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.”

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Read full Wall Street Journal article here

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