Proposed new capital standards for large banks (Basel Endgame) include some fundamental changes in measuring market risk. The new standards would replace the current value-at-risk (VaR) approach with the expected shortfall approach. The market risk proposal is exceptionally complex, and I don’t intend to get into the gory details. Instead, I’ll focus on broad conceptual…

The Basel Endgame proposal would ditch the AA’s models-based approach to credit and operational risk and replace it with an amped-up version of the SA. By moving credit risk weightings under the AA closer to what already exists under the SA, the proposal would result in a real capital charge for operational risk.