Economic Capital

The Bank for International Settlements has defined economic capital (EC) as “the methods or practices that allow banks to consistently assess risk and attribute capital to cover the economic effects of their risk-taking activities”. Rather than a capital buffer per se, EC is a tool to measure how much capital a bank’s internal models say it needs to continue operating in a business-as-usual context and variables around it, EC contrasts with regulatory capital, which sets out the minimum capital levels and types of capital required by regulators.