Economic capital ideas

Class Notes

Economic capital is a measure of the amount of equity capital an enterprise needs to support a risk. More specifically, it is the amount of equity capital necessary to cover losses arising from that risk to some confidence level.1 For example, many of the large international banks define economic capital as the amount of equity capital needed to cover losses 99.97% of the time.

In contrast with an accounting view, where capital could be viewed on the right-hand side of the balance sheet, economic

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