March 1, 2013 / 1:33 PM / 5 years ago

Goldman trims risk-taking to lowest level in 7 years

(Reuters) - Goldman Sachs Group Inc (GS.N) reduced its risk-taking for a third straight year, with potential losses from trading positions dropping to the lowest level in seven years, reflecting a more cautious stance towards markets.

The Wall Street bank’s average daily value at risk last year was $86 million, down 24 percent from the preceding year, according to a filing with the U.S. Securities and Exchange Commission on Friday.

The measure shows how much money Goldman estimates it could lose on an average day, with 95 percent confidence.

Goldman was not alone in reporting lower risk-taking. On average, its four biggest Wall Street rivals - Morgan Stanley (MS.N) and the trading businesses of JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N) and Citigroup Inc (C.N) - reported an average decline of 21 percent in comparable average daily value-at-risk.

Lower risk-taking shows that these firms are taking to heart at least some of the lessons from the financial crisis and its aftermath. But it is unclear how much of the reduction in risk-taking comes from market conditions and exposure, and how much of it comes from changes in models to calculate risk.

Regulators, for example, approved a new model for Morgan Stanley last year that increased emphasis on short-term volatility. As a result, losses that occurred in 2007 and 2008 had less of an impact on value-at-risk. Its figures are also now more comparable to competitors, Morgan Stanley said in a filing this week.

Goldman’s risk-taking in 2012 was at the lowest level since 2005, when it reported an average daily value-at-risk of $70 million. It was less than half the $218 million of average daily value-at-risk Goldman reported at its 2009 peak.

Declines in risk-taking were broad across Goldman’s positions in interest rates, equities, currencies and commodities. Goldman attributed the changes to lower volatility and reduced market exposure.

Goldman said its value-at-risk model is “regularly reviewed and enhanced in order to incorporate changes in the composition of inventory positions, as well as variations in market conditions.”

    For Goldman, less risk-taking also meant fewer days with big losses or gains.

    Goldman lost money on 16 trading days in 2012, compared with 54 days in 2011. It did not lose more than $75 million on a single day, whereas the previous year it lost at least $100 million on four days. Likewise, the bank earned at least $100 million on 41 days in 2012, compared with 54 days in 2011.

    Overall, Goldman’s trading and investing businesses were more profitable last year than in 2011.

    Goldman reported $5.6 billion in pretax earnings from its client trading business and $3.2 billion in pretax earnings from its investing and lending division, which puts Goldman’s own money to work. In 2011, those businesses reported earnings of $4.4 billion and a loss of $531 million, respectively.

    In a separate filing, Citigroup reported a new 2011 value-at-risk of $176 million in a regulatory filing on Friday. The figure is 17 percent less than the original $213 million figure it reported a year ago.

    Citigroup said the change was partly due to the fact that its three-year volatility time frame no longer includes market swings from 2008 and 2009.

    Editing by Bernadette Baum and Jim Marshall

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