Capital Allocation and RAPM
Aziz A., Rosen D., 2004, Chapter III.0 of Professional Risk Manager Handbook (C. Alexander and E. Sheedy eds.), Professional Risk Managers International Association (PRMIA), pp. 315-342.
Topics covered in this chapter include:
• the role of capital in financial institutions and the different types of capital;
• the key concepts and objectives behind regulatory capital, as well as the main calculations principles in the Basel I Accord and the current Basel II Accord;
• the definition and mechanics of economic capital as well as the methods to calculate it;
• the use of economic capital as a management tool for risk aggregation, risk-adjusted performance measurement and optimal decision making through capital allocation.