Chapter 2. Show Me the Money - The Purpose of Economic Capital

To establish an economic capital framework, which encompasses the total of models, systems, data, policies, knowledge, and applications related to economic capital, takes a significant investment. Hence, the natural question is what the return on the investment will be. Is investing in an economic capital framework a good investment?

The simplest answer would be that it is an accepted way to meet a regulatory requirement, whatever the other merits and costs may be. Under the Basel II Accord, regulators require banks to assess their capital position in relation to the risks to which they are exposed. This is referred to as the Internal Capital Adequacy Assessment Process, or ICAAP. ...

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