Economic capital models have recently come into vogue as a tool to measure risk and return on a firm-wide basis and to allocate capital accordingly. Further research into this subject was deemed of common interest to both the financial industry and financial supervisors, as the regulatory regime is increasingly shifting toward reliance on internal models. This paper is meant to be the first of a sequence that, together, should provide an overview of the status and usefulness of economic capital models for supervisory purposes. Aim of the first paper is to achieve a common risk language for the various stakeholders, each having their specific background.
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