Value-at-risk regulation indirectly pressures banks into forced selling
Evidence
The freedom to use value-at-risk models in calculating capital requirements was attractive to banks because it generally reduced those requirements. However, it could have the consequence that as market prices move against a bank and become more volatile, they may eventually either have to liquidate positions or to raise more capital to preserve them, a slow and often unwelcome process. Even if banks were not close to being forced to make this choice, the increased prominence of value-at-risk may have contributed to pressure to liquidate positions in the face of adverse price movements and of increased volatility (Dunbar 2000; Meriwether interview). — Donald MacKenzie, An Engine, Not a Camera, 1050
Categorization
- XREF: This is the performativity thesis operating: a regulatory practice (VaR) shapes market behavior. Connects to the book’s central thesis and to Kindleberger’s financial-crisis literature. — connects to: High bank leverage turns small asset declines into instant illiquidity and insolvency. — Mark Blyth, Austerity: The History of a Dangerous…, 84; Regulatory AAA requirements forced funds to buy the very derivatives that collapsed. — Mark Blyth, Austerity: The History of a Dangerous…, 93; Value-at-risk limits force position liquidation once breached — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1048 (+4 more)
- SEED: Angle: ‘When risk models create the risk they measure’ — VaR as a self-fulfilling prophecy in liquidity crises.
Broader Connections
- Value-at-risk limits force position liquidation once breached
#expands(0.92) — Donald MacKenzie, An Engine, Not a Camera, 1048 - Basel regulations displaced bankers’ practical credit judgment with statistical risk models
#expands(0.75) — Ève Chiapello, Financialisation of Valuation, 63 - A small trigger can unravel large systems of overlapping arbitrage positions through forced selling
#exemplifies(0.72) — Donald MacKenzie, An Engine, Not a Camera, 156