I don’t think I am grasping this concept. When we carry out the example in chapter 15 and don’t consider the possibility of default, then the amount of total assets comes out to 100, which is the maximum possible loss of the distribution.
If the amount of total assets came from some external source, and it is more than 100, would the SRM method allocate the “so-called excess capital”? I don’t see how it would.
The capital above 100 would essentially be risk free, so it wouldn’t require any return on risk, but how could this be allocated to unit? Does it produce a lower average CoC?
The other writes, “The question of so-called excess capital often comes up when performing capital allocation.” But does he ever provide an answer to the question? Am I missing it?