1.9 History of Value-at-Risk
The term “value-at-risk” (VaR) did not enter the financial lexicon until the early 1990s, but the origins of value-at-risk measures go further back. These can be traced to capital requirements for US securities firms of the early 20th century, starting with an informal capital test the New York Stock Exchange (NYSE) first applied to member firms around 1922.
1.9.1 Regulatory Value-at-Risk Measures
The original NYSE rule required firms to hold capital equal to 10% of assets comprising proprietary positions and customer receivables. By 1929, this had developed into a requirement that firms hold capital equal to:
- 5% of customer debits;
- 10% (minimum) on proprietary holdings in government or municipal bonds;
- 30% on proprietary holdings in other liquid securities; and
- 100% on proprietary holdings in all other securities.
Later, additional regulatory value-at-risk measures were implemented for banks or securities firms, including:
- the UK Securities and Futures Authority 1992 “portfolio” value-at-risk measure;
- Europe’s 1993 Capital Adequacy Directive (CAD) “building-block” value-at-risk measure; and
- the Basel Committee’s 1996 value-at-risk measure based largely upon the CAD building-block measure.
In 1996; the Basel Committee approved the limited use of proprietary value-at-risk measures for calculating the market risk component of bank capital requirements. In this and other ways, regulatory initiatives helped motivate the development of proprietary value-at-risk measures.
- See Dale (1996) pp. 60 – 61 and Molinari and Kibler (1983) footnote 41.↵
- See Dale (1996), p. 78.↵
- The Basel Committee on Banking Supervision is a standing committee comprising representatives from central banks and regulatory authorities. Over time, the focus of the committee has evolved, embracing initiatives designed to define roles of regulators in cross-jurisdictional situations; ensure that international banks or bank holding companies do not escape comprehensive supervision by some “home” regulatory authority; and promote uniform capital requirements so banks from different countries may compete with one another on a “level playing field.” Although the Basel Committee’s recommendations do not themselves have force of law, G-10 countries have a generally good track record of implementing those recommendations as statutes or regulations.↵