Economic Capital Model Validation

The paper considers Economic Capital Model (ECM) validation from different viewpoints: regulators, management, rating agencies and parallel developments in the banking sector. Validation is a necessity, and yet standardized ECM validation processes are underdeveloped. This can lead to inefficient and person-dependent validations, which are certainly undesirable for both management and regulators. We outline explicit guidance for ECM validation to foster a more standardized, efficient process. Those involved in a model validation project are our intended audience; model developers may also benefit from the paper, but will have to translate the validation guidelines into development guidelines