In the 1990s regulators and policy makers worried about the risk that financial institutions were carrying. Once the walls between investment and commercial banking came down with the repeal of Glass-Steagall, both trading and lending (and everything in between) were now housed under one roof with institutions freely accessing funds from one part of the institution to the other. But Glass-Steagall had just been repealed so how to fix the risk problem? Where there is a problem, there can usually be found an entrepreneur to give the market the product they want. And thus VAR was born and quickly embraced by financial institutions and regulators as the answer to managing risk. As long as an institutions VAR number was in an acceptable range, it could do what it wanted. Werent we all safer now? As it turns out, the answer was No. The metric not only hid the iceberg lurking beneath the surface but allowed banks to pile on more and greater risk. Each bubble, mania, and crash that em
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