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Economic capital
From Wikipedia, the free encyclopedia
In finance, mainly for financial services firms, economic capital has the following meaning:
The amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting. Typically this is calculated by determining the amount of capital that the firm needs to ensure that its realistic balance sheet stays solvent, over a certain time period, with a pre-specified probability. Firms and financial services regulators should then aim to hold risk capital of an amount equal at least to economic capital.
The concept of economic capital differs from "Regulatory Capital" in the sense that "Regulatory Capital" is the mandatory capital the regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally to manage their own risk and to allocate the cost of maintaining regulatory capital among different units within the organization.
See also financial services conglomerate and financial risk management.
Porteous, Bruce T.; Pradip Tapadar (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave Macmillan. ISBN 1-4039-3608-0.