Hello, in the notes it talks about the economic balance sheet and the use of an internal model to calculate the economic capital requirement. My question is, is an economic balance sheet required for the standard formula approach? If not, could someone please explain the difference in balance sheets for the two different approaches? Thanks, Nick
As far as I know: Yes - you always need a balance sheet!! Economic = market consistent. Internal model or standard formula are ways of determining the extra capital required (in addition to the economic value of liabs).
Thank you for your reply, Muppet, but the question I am asking is, when using the standard formula approach, does the balance sheet necessarily have to be an economic balance sheet? Why I ask is that the chapter talks about a supervisory balance sheet where the value of the liabilities are not always market-consistent, although it is not clear whether that applies to the standard formula approach. Thanks.
From what I understand from Capital Management. That's the internal requirements to measure economic balance sheet by any model. Regulator demands standard model(internal model if the regulator is satisfied with quality. ), but not Economic Balance Sheet. Ultimately, Economic balance sheet is not regulatory requirement for the standard model. Meaurement difference occurs becuase Standard Model uses prudent or approximate basis by the regulator, and internal model uses statistical-management approach.
