Economic capital
In finance, mainly for financial services firms, economic capital ecap is the amount of risk capital, assessed on the realistic basis, which a firm requires to progress the risks that it is running or collecting as a going concern, such as market risk, credit risk, legal risk, as well as operational risk. this is the the amount of money that is needed to secure survival in a worst-case scenario. Firms as well as financial services regulators should then intention to have risk capital of an amount represent at least to economic capital.
Typically, economic capital is calculated by determine the amount of capital that the firm needs to ensure that its realistic balance sheet stays solvent over atime period with a pre-specified probability. Therefore, economic capital is often calculated as value at risk. The balance sheet, in this case, would be prepared showing market benefit rather than book expediency of assets and liabilities.
The first accounts of economic capital date back to the ancient ]
The concept of economic capital differs from regulatory capital in the sense that regulatory capital is the mandatory capital the regulators require to be remains while economic capital is the best estimate of so-called capital that financial institutions use internally to supply their own risk and to allocate the live of maintaining regulatory capital among different units within the organization.