Citibank 2013 Annual Report Download - page 134

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Value at Risk
Value at risk (VAR) estimates, at a 99% confidence level, the potential decline
in the value of a position or a portfolio under normal market conditions
assuming a one-day holding period. VAR statistics, which are based on
historical data, can be materially different across firms due to differences in
portfolio composition, differences in VAR methodologies, and differences in
model parameters. As a result, Citi believes VAR statistics can be used more
effectively as indicators of trends in risk taking within a firm, rather than as a
basis for inferring differences in risk-taking across firms.
Citi uses a single, independently approved Monte Carlo simulation VAR
model (see “VAR Model Review and Validation” below), which has been
designed to capture material risk sensitivities (such as first- and second-order
sensitivities of positions to changes in market prices) of various asset classes/
risk types (such as interest rate, foreign exchange, equity and commodity
risks). Citi’s VAR includes all positions, which are measured at fair value;
it does not include investment securities classified as available-for-sale or
held-to-maturity. For information on these securities, see Note 14 to the
Consolidated฀Financial฀Statements.
Citi believes its VAR model is conservatively calibrated to incorporate the
greater of short-term (most recent month) and long-term (three years)
market volatility. The Monte Carlo simulation involves approximately
300,000 market factors, making use of approximately 200,000 time series,
with sensitivities updated daily and model parameters updated weekly.
The conservative features of the VAR calibration contribute approximately
a 16% add-on to what would be a VAR estimated under the assumption of
stable and perfectly normally distributed markets.
As set forth in the table below, Citi’s total Trading and Credit Portfolios VAR
was $144 million at December 31, 2013 and $118 million at December 31,
2012. Daily total Trading and Credit Portfolios VAR averaged $121 million
in 2013 and ranged from $93 million to $175 million. The change in
total Trading and Credit Portfolios VAR was primarily driven by a loss of
diversification฀benefit฀due฀to฀a฀shift฀in฀asset฀class฀composition.฀Specifically,฀
there was an increase in risk to G10 interest rate exposures and a reduction in
commercial real estate exposures.
In millions of dollars
Dec. 31,
2013
2013
Average
Dec. 31,
2012
2012
Average
Interest rate $115 $114 $116 $122
Foreign exchange 34 35 33 38
Equity 26 27 32 29
Commodity 13 12 11 15
Covariance adjustment (1) (63) (75) (76) (82)
Total Trading VAR—all
market risk factors,
including general and
specific risk (excluding
credit portfolios) (2) $125 $113 $116 $122
Specific risk-only
component (3) $ 15 $ 14 $ 31 $ 24
Total Trading VAR—general
market risk factors only
(excluding credit portfolios) (2) $110 $ 99 $ 85 $ 98
Incremental Impact of the
Credit Portfolio (4) 19 8 $ 2 $ 26
Total Trading and
Credit Portfolios VAR $144 $121 $118 $148
(1) Covariance adjustment (also known as diversification benefit) equals the difference between the
total VAR and the sum of the VARs tied to each individual risk type. The benefit reflects the fact that
the risks within each and across risk types are not perfectly correlated and, consequently, the total
VAR on a given day will be lower than the sum of the VARs relating to each individual risk type.
The determination of the primary drivers of changes to the covariance adjustment is made by an
examination of the impact of both model parameter and position changes.
(2) The total Trading VAR includes mark-to-market and certain fair value option trading positions from
S&B and Citi Holdings, with the exception of hedges to the loan portfolio, fair value option loans, and
all CVA exposures. Available-for-sale and accrual exposures are not included.
(3) The specific risk-only component represents the level of equity and fixed income issuer-specific risk
embedded in VAR.
(4) The credit portfolio is composed of mark-to-market positions associated with non-trading business
units including Citi Treasury, the CVA relating to derivative counterparties and all associated CVA
hedges. DVA is not included. It also includes hedges to the loan portfolio, fair value option loans, and
tail hedges that are not explicitly hedging the trading book.
The table below provides the range of market factor VARs inclusive of
specific risk that was experienced during 2013 and 2012.
2013 2012
In millions of dollars Low High Low High
Interest rate $92 $142 $101 $149
Foreign exchange 21 66 25 53
Equity 18 60 17 59
Commodity 8 24 9 21