A unifying approach
Economic capital has the potential to make financial services firms more risk-aware in their capital management, enabling investors and regulators to easily compare financial strength and profitability across business lines and sectors. By Vaishnavi Srinivasan and Pradip Tapadar
Financial services firms are in the business of accepting risk. To be able to fulfil this role, they must understand the risks involved and put in place adequate measures to mitigate them. Traditionally, the amount of capital has been prescriptive in nature and set out by the regulators. With the advent of modern risk management techniques, regulators are moving towards a risk-based capital approach, with different regulations for banks (Basel II) and insurance firms (Solvency II).
However, to
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