VALUE AT RISK - NEW APPROACHES TO RISK MANAGEMENT

Managing risk has always been an integral part of banking. In the past two years an approach to risk management called ''Value at Risk'' has been accepted by both practitioners and regulators as the ''right'' w ay to measure risk, becoming a de facto industry standard. Yet, the da nger is that overreliance on value at risk can give risk managers a fa lse sense of security or lull them into complacency. Value at risk is only one of many tools of managing risk, and it is based on a number o f unrealistic assumptions. There is no generally accepted way to calcu late it, and various methods can yield widely different results.This a rticle describes several common methods for calculating value at risk and highlights important assumptions and methodological issues. The au thor discusses the strengths and weaknesses of value at risk, pointing out that its use has created a common language for discussions about risk and prompted more dialogue about risk issues. She cautions, howev er, that successful risk management is a much broader task, which depe nds crucially on appropriate incentives and internal controls.