Value-at-Risk in Banking (VaR)

Value-at-Risk (VaR) is a financial measure used by banks to estimate the potential loss they could face over a specific period, with a certain level of confidence. For example, a bank might say there’s a 95% chance it won’t lose more than $10 million in a month. VaR helps banks understand and manage their risk exposure by quantifying worst-case scenarios within typical market conditions, enabling better decision-making and capital allocation to cushion possible losses.