Economic Capital

Economic Capital vs. Regulatory Capital The concept of economic capital differs from the “regulatory capital” in the sense that the “regulatory capital” is the required capital that regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally manage their own risk and allocate the cost of maintaining regulatory capital among different units within the organization. The regulatory and economic capital also differs in the calculation methods and procedures used, and that in the economic capital calculation quantifies the benefit of diversification (in the regulatory intentionally ignored to be more conservative). The progressive introduction of regulatory capital rules of “Basel II” throughout the world is allowing to unify criteria and calculation methods.

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