Economic Capital is an internal assessment of required capital that is produced within the company (bank) for various internal management purposes. The calculated capital numbers may or may not be disclosed outside the firm. The input data and methodology for economic capital calculations are in general not public either. A core principle underpinning Economic Capital is that it is a risk based measure. Regulatory capital is an externally prescribed minimum required capital that is computed with public methodologies and it is legally binding for the firm. A subset of inputs into regulatory capital may in part be based on private (internal) data. Ever since Basel II, regulatory capital methodologies have adopted increasingly risk sensitive methodologies for the calculation of minimum capital requirements. This creates a basis for convergence with Economic Capital. But methodology and input data differences can create substantial divergence in practice.
Risk Management Q&A Forum
Why is regulatory capital different from economic capital?
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