Risk adjusted return on capital (RAROC) and related methodologies have been around for 20 years. Development of the new Basle II guidelines for regulatory bank capital have spurred new interest in such techniques. The new catchword for all this is economic capital. The thinking is that new regulations are going to force managers to focus on capital, so they might as well base decisions on economic as opposed to the more crude regulatory metrics of capital. Besides, if banks are making the significant technology investments necessary to support Basle II, they might as well make the slight additional investment necessary to extend the same technology to support economic capital calculations as well.

This edited collection comprises fifteen chapters written by twenty authors. Together, they offer a broad survey of topics related to economic capital. Chapters are divided into three sections:

Economic Capital: Concepts and Applications

Economic Capital for Specific Risks

Economic Capital Methodologies: Mathematical Treatment

Chapters of the first section motivate the purpose of economic capital calculations and describe in a non-technical manner some challenges and possible solutions.

Chapters of the second section describe how to assign economic capital to specific risks. I doubt readers need a high-level overview of credit scoring, portfolio credit risk modeling or value-at-risk. There are excellent books on each of these subjects, so these chapters are probably the weakest contributions to the book.