The false promise of expected shortfall

The Basel Committee on Banking Supervision has proposed using expected shortfall instead of value-at-risk as the central metric for regulatory market risk capital. David Rowe argues this will be both ineffective and dangerous

So much ink has been spilled over the strengths and weaknesses of value-at-risk that it seems pointless to restate them at length here. In brief, my view is that VAR was a major advance over the disjointed framework of non-commensurable limits that preceded its introduction. It addressed the issue of exposure to short-term market fluctuations in a consistent way. What it did not do, and never claimed to do, was say anything about what “lurks beyond the 1% threshold”¹, and the unfortunate fact is