Economic capital models, while useful, have the following disadvantages:
Model Risk: These models may not accurately capture the complexities of financial systems, leading to significant model risk.
Estimation Errors: Potential errors in risk estimation can lead to either underestimation or overestimation of required capital.
Regulatory Differences: These models may not align with regulatory capital requirements, causing discrepancies.
Complexity: The complexity of these models makes them difficult to understand and manage.
References
Source: How Finance Works
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