An international airline company is considering taking over a small bank that has developed a range of innovative online banking services that it offers to retail customers. These services include foreign currency payment services and a platform offering a range of "feeder funds" that allow customers to gain exposure to investment funds provided by selected third-party fund managers. The strategic rationale for the proposed take-over is that the airline can introduce its customers to the bank and vice-versa.

The bank is just about to add to this platform a range of investment funds that it will manage itself (through a newly established asset management subsidiary).

(1) Assess the risks that such a business expansion might introduce to the airline.

(2) Discuss:
• The typical components of an economic capital model

• How such a model might be used by an airline or by a bank

• How the output of economic capital models might help either or both of these parties when negotiating the terms of such a transaction