Successfully managing economiccapital in a Basel II environment

Most banks are evaluating the risks of their portfolios by applying the concept of economic capital.Dr Dean Jovic, group managing director, risk management/Basel II at SunGard, looks at howthis fits in with initiatives to implement Basel II.

To assess and manage risk, a bank must have effective ways to determine the appropriate amount of capital necessary to absorb unexpected losses arising from market, credit and operational risk exposures. Profits that arise from business activities need to be evaluated relative to the capital necessary to cover the associated risks. These two major concepts –risk as the basis to determine appropriate capital levels and the measurement of profitability against risk-based capital