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TheStreet Open House

Morgan Stanley Risk Change Raises Eyebrows

Stocks in this article: MSJPM

NEW YORK ( TheStreet) -- Morgan Stanley (MS) modified its risk model in the third quarter to be "more responsive to market conditions," while also cutting the firm's overall risk profile.

The change, CFO Ruth Porat said, incorporates a look-back period of one year from a four-year horizon. That could help take into account more recent market volatility, though some would argue that it avoids accounting for the recession years of 2008 and 2009.

Porat also added that the changes to the model had been approved by regulators.

The sudden switch has, however, raised a few eyebrows. For one thing, with the change, the value at risk- a measure of the amount of money the firm expects it stands to lose on a given day - is lower than that estimated by the old model.

According to the financial supplement, total trading VaR in the third quarter comes in at $63 million compared to $82 million under the prior methodology.

This raises some concern, in the wake of the JPMorgan Chase (JPM) trading debacle.

Recall that the bank said that a change to its risk model in early 2012 may have unwittingly understated their actual exposure. Reports that the firm followed different risk models for different businesses also incensed critics of the bank's risk management practices.

However in the analyst call, Porat noted that under both models, the trend was the same. The overall risk levels were down quarter-on-quarter under both models.

She also said that the investment bank had a central risk management committee that ran both the risk models in parallel in recent quarters. She also stressed that VaR was just one risk measure and that the firm had "multiple tools" for risk management.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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