HSBC, BNP Repeatedly Breached Trading Limits in Market Chaos

(Bloomberg) -- HSBC Holdings Plc and BNP Paribas SA‘s risk limits were repeatedly breached in March after unprecedented market volatility blew out estimates on how much they could lose or gain on their trading desks.

Europe's two biggest banks exceeded their value-at-risk limits -- a measure of risk used to calculate how much capital they need to hold against potential losses -- more times in March than over several years during calmer times, according to first-quarter filings.

In March alone, HSBC's trading models breached the daily expected profit-and-loss threshold 12 times. BNP Paribas reported nine such incidents during the quarter, close to a third of all such instances reported since 2007. London-based HSBC and French lender BNP have almost $6 trillion in combined assets.

Regulators have closely scrutinized banks that have problems gauging the risks their traders are taking ever since the huge losses racked up during the last financial crisis. While significant breaches usually lead to automatic penalties, regulators have eased off given how quickly trading models can become obsolete during such a virus pandemic.

HSBC said it would normally only expect to record two to three breaches in an entire year. The pandemic “caused price disruptions that have not been observed in the past two years,” according to a filing last week from the bank's U.S. arm.

VAR “modelling forms just one part of our market risk management toolkit,” HSBC said in an separate e-mailed statement to Bloomberg. BNP Paribas declined to comment further beyond its filings.

Other firms including Germany's Deutsche Bank AG reported such “backtesting outliers” as well. UBS Group AG, the biggest Swiss bank, reported three “negative backtesting exceptions” in the quarter because of “unprecedented price moves in various asset classes,” filings show.

The Bank of England said in March that it would temporarily allow banks to offset increases in value-at-risk calculations “through a commensurate reduction” in other risks they take.

HSBC had 15 “back-testing exceptions” in January and March, when the firm was caught out by moves in the prices of precious metals. Europe's biggest bank said it made two outsized profits and one loss in January that were driven largely by palladium volatility; later problems were caused in part by “delivery disruptions in the gold market” as well as interest rates volatility.

At BNP Paribas, the average daily value at risk soared to 35 million euros ($38 million) because of “the shock of volatility on equity markets,” mostly from mid-March onwards, according to a presentation Tuesday. That was the highest level in four years, and 49% above its quarterly average last year.

The wild gyrations were reflected in BNP Paribas' results. Its stock-trading business swung to a loss in the quarter; fixed-income trading, meanwhile, climbed 35% as investors rushed to wager on interest rates, foreign exchange and corporate debt.

Deutsche Bank has said the impact of the modeling breaches was mitigated because the European Central Bank relaxed its rules, and there was no overall impact on its capital requirements as a result.