A recent article, "Taking the angst out of taking a gamble" (Finance, July 14) provides a useful discussion of the risk-management technique called "value at risk" (VAR), in which information about past market volatility is used to quantify an institution's exposure to future market movements and gain insights into a portfolio's risk. This measurement approach represents an important effort by the financial community to improve its management of risk and is one that the Federal Reserve fully supports.

Moreover, contrary to the author's depiction, the Federal Reserve also endorses the decision by the Bank for International Settlements to build upon VAR results in setting bank regulatory capital requirements. Indeed, we worked to bring that standard to fruition and will enforce it as scheduled in 1998, along with our foreign counterparts.

The Federal Reserve's interest in an alternative "precommitment" approach, referred to in the article, reflects the Board's desire to find future ways of promoting market discipline and reducing regulatory intrusion, while constantly improving its supervisory and regulatory process. However, until better tools are found, basing market risk capital requirements on VAR is a big step forward and one that the Board supports.

Richard Spillenkothen

Director

Division of Banking Supervision & Regulation

Federal Reserve System

Washington

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