Which of the following models of capital allocation estimates the economic capital for a bank and then estimates the economic capital that would be needed without a particular business unit?
A. RAROC-based proportional scaling rule
B. Fair value allocation rule
C. Incremental capital allocation rule
D. Stand-alone method
Answer:C
The incremental capital allocation rule attempts to assess the economic capital required for a bank and then estimate what the economic capital that would be needed without one of the business units. The ratio of each business unit's marginal capital divided by the aggregate marginal capital gives an estimate of the fraction of economic capiLal to assign to the business unit.