A case for convergence?
With Basel II regulatory capital becoming increasingly more risk-sensitive, the value of a separate economic capital system must be questioned. Christopher Hall of Risk Advisors considers the differences between economic capital and regulatory capital, and asks whether they will ever converge
Economic capital was born about 15 years ago out of the desire to reflect risk in the decision-making processes of a bank. The two key questions an economic capital system was designed to answer were: how much shareholders' funds should the bank hold to achieve its desired credit rating, and how should the cost of capital be allocated to create appropriate risk-adjusted measures for strategic and tactical business decisions?
Basel II reflects these developments in banks by making regulatory
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