Economic capital / Other risks [13]

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Bullet points include: Firms employ models to generate not just total portfolio risk measures but also risk measures for individual positions And use them to influence product pricing and hence new business E.g. hurdle rates for loans, common since at least 1970s in banking Typically, managers in divisions of the banks required to reject new loan applications unless expected returns exceeded relevant hurdle rate Based on internal cost of capital, i.e. cost that the bank will face when it acquires the new exposure arising from extra equity capital it will need to back the exposure

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