Final Remarks
Value at risk is a risk management tool that is not exempt from limitations, including, for
instance, the fact that the size of losses beyond VaR is not taken into consideration, and
its nonsubadditivity, i.e., the fact that in certain circumstances the VaR of a portfolio can
be higher than the sum of the individual VaR values of its constituents. Nevertheless, VaR
can be an extremely important tool for improving the quality of a bank’s risk management
processes, since it is potentially able to compare different risks under a similar metric, to
support bank decisions concerning the optimal amount of capital the bank should hold,
and to help the bank understand better its profi tability in risk-adjusted terms.
Developing a risk management system is in any case a complex task that requires
coordinated investments in many different areas: methodologies, databases and informa-
tion technology infrastructure, internal processes, people, and risk management culture.
Developing state-of-the-art methodologies can, of course, be important, and efforts to
check and improve their effectiveness should be constant. At the same time, budget
constraints and data availability always require accepting some compromises. Databases
and IT infrastructure are particularly important since the former are a key condition
for developing and applying sophisticated methodologies, while the IT infrastructure
must ensure that data used by the risk management system are consistent, aligned
with front and middle offi ce data, and properly stored to allow subsequent analyses, while
risk management outputs must be readily available wherever necessary throughout
the bank.
Throughout the book we have stressed that efforts to improve risk measurement
methodologies have to be coupled with at least equal efforts to improve risk management
processes. Sophisticated measures and methodologies could have only a minor effect if
they are not properly translated into improved risk control policies, risk-adjusted evalua-
tion of the contribution of each business, and a careful capital allocation process supported
by a reliable picture of the risk–return impact of the potential alternative allocations.
Developing these processes requires having people who combine a clear understanding
of risk measurement methodologies with remarkable experience and an attention to orga-
nizational issues. Risk management teams of some large international banks apparently
try explicitly to merge people with very different expertise and skills.
Finally, it is important to invest in the risk management culture of the bank. A bank
in which most decision makers clearly understand the benefi ts and the contribution that
can derive from the bank’s efforts in developing the risk measurement system is the bank
most likely to obtain the highest return from its risk management investments. The current
widespread application of VaR-based measures makes them a key tool not only for risk
managers or a small group of specialists, but for most top managers, for external analysts,
and for many other people in different staff functions and business lines. Hence, a better
and more critical understanding of the benefi ts and potential limitations of VaR-based
risk management processes is a condition enabling a bank to improve over time not only
its measurement tools, but also the quality of its decisions.

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