What is the purpose of economic capital?

Economic capital is used for measuring and reporting market and operational risks across a financial organization. Economic capital measures risk using economic realities rather than accounting and regulatory rules, which can sometimes be misleading.

What is the difference between economic capital and financial capital?

Financial capital is a broad term, applying to anything relating to what is required in order to sell goods and services. Economic capital is more precise and refers to the capital needed to cover the company in case of unexpected loss. When referring broadly to "capital," almost everyone is referring to financial capital, not economic capital.

What risks are associated with economic capital?

The key contributors to economic capitalare: • Credit risk • Market risk • Operational risk • Insurance risk • Liquidity risk Risk is just one side of the triangle for any economic capital system. To compare the performance of different business units, a company also has to take into account capital requirements and returns.

What is economic capital?

Economic capital is typically defined as the difference between some given percentile of a loss distribution and the expected loss. It is sometimes referred to as "unexpected loss at the confidence level."