Risk Mangment in the Chilean Financial Market : The VaR Revolution
José Miguel Cruz

Almost a decade ago a major change in the risk management industry was in its way: the well known international bank J.P. Morgan was about to release for the general public through the internet a full technical document describing with great detail a simple technique to measure market risks for trading portfolios: the Value at Risk (VaR) technique (JP Morgan, 1995). The document soon became an industry standard, and the techniques described on it fully addressed the quantitative recommendations issued by the group of thirty (Group of Thirty, 1993). These recommendations were trying to protect an industry that was being challenged by major financial scandals most of them involving derivatives. Most of the financial problems that some very reputable institutions experienced during these years were related to lack of appropriate risk disclosures, lack of involvement of senior management, and poor internal procedures and risk management controls.

The Basle reform of January 1996 (Basle 1996) captured the major concerns of regulators and senior management, and introduced the VaR technique to measure market risk and established regulatory capital to be allocated based on this calculation.

Seven years after what has happened in Chile? How is the actual level of risk management techniques in the Chilean financial sector, and what is the level of compliance with the best practices recommended by regulators and international practitioners?

The main goal of this document is to provide a general overview of the Chilean banking industry in terms of its risk management practices.

República 701, Santiago, Chile. Teléfono: (+562) 2978 4054 / (+562) 2978 4914

E-Mail: cf@dii.uchile.cl

El Centro de Finanzas agradece el significativo aporte del Banco de Crédito e Inversiones, BCI, a esta iniciativa