Deutsche Bank Sets New Record For Worst Financial Model Ever

Bloomberg reports that in the first quarter of 2018 Deutsche Bank had a single day in which they suffered losses of nearly 12 times VaR:

VaR stands for Value at Risk, and it’s a measure of the maximum loss a portfolio is likely to sustain under normal circumstances. Exceeding VaR moderately once a quarter is not too unusual. Nearly everyone probably does it once a year. But:

The extreme day was one of four in the first quarter in which Deutsche Bank’s U.S. traders had a loss that surpassed the firm’s regulatory VaR estimate. No other bank required to file quarterly reports with the Fed detailing significant trading activities had more than two such days, and none had a daily loss that even doubled its estimate, according to a review of the 33 filings from U.S. lenders and the local units of foreign firms.

How unlikely is this? VaR is typically not a bell curve, but we can start there. As near as I can tell, VaR is normally two standard deviations, meaning you’d expect to exceed VaR—by a little bit—perhaps 2 percent of the time, or maybe a few days per year. Deutsche Bank’s bad day was 12x VaR, which is 24 standard deviations. That’s like having an IQ of 500. You’d expect to it to happen…

…well, if my calculation is correct, you’d expect it to happen once every 10127 days. Just for reference, the universe is a piddling 1010 days old. But we’re not dealing with a bell curve, so let’s divide by a bazillion, which gets us back to, oh, let’s be generous and say 1050 days. That’s still a billion trillion quadrillion gazillion times the age of the universe. So this leaves us with two possibilities:

  • Holy cow, Deutsche Bank got really unlucky.
  • Deutsche Bank’s VaR model is really, really bad.

I’m going with Door #2. That said, even a bad model shouldn’t be off by this much. It’s possible that Deutsche Bank’s VaR model might now hold the record for worst financial model in the history of the world. They should be proud.

IT'S NOT THAT WE'RE SCREWED WITHOUT TRUMP:

"It's that we're screwed with or without him if we can't show the public that what we do matters for the long term," writes Mother Jones CEO Monika Bauerlein as she kicks off our drive to raise $350,000 in donations from readers by July 17.

This is a big one for us. It's our first time asking for an outpouring of support since screams of FAKE NEWS and so much of what Trump stood for made everything we do so visceral. Like most newsrooms, we face incredibly hard budget realities, and it's unnerving needing to raise big money when traffic is down.

So, as we ask you to consider supporting our team's journalism, we thought we'd slow down and check in about where Mother Jones is and where we're going after the chaotic last several years. This comparatively slow moment is also an urgent one for Mother Jones: You can read more in "Slow News Is Good News," and if you're able to, please support our team's hard-hitting journalism and help us reach our big $350,000 goal with a donation today.

payment methods

IT'S NOT THAT WE'RE SCREWED WITHOUT TRUMP:

"It's that we're screwed with or without him if we can't show the public that what we do matters for the long term," writes Mother Jones CEO Monika Bauerlein as she kicks off our drive to raise $350,000 in donations from readers by July 17.

This is a big one for us. So, as we ask you to consider supporting our team's journalism, we thought we'd slow down and check in about where Mother Jones is and where we're going after the chaotic last several years. This comparatively slow moment is also an urgent one for Mother Jones: You can read more in "Slow News Is Good News," and if you're able to, please support our team's hard-hitting journalism and help us reach our big $350,000 goal with a donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate