Confidence crunch


The term ‘economic capital’ describes the collection of practices used to measure the economic effects of risk-taking activities that give rise to losses. One of the central challenges in translating this simple conceptual definition into a practical measure of risk is to determine exactly how much uncertainty the bank should be able to absorb. It is clearly not possible to cover every single combination of unexpected loss, so the level of capital held must be set by reference to a chosen risk

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