Meaning
Economic Capital refers to the capital a firm needs to absorb potential unexpected losses. It is distinct from regulatory capital and is an internal measure.Definition
It’s the amount of risk capital, calculated internally by financial institutions, to cover losses from unexpected events over a specific timeframe and confidence level.Purpose
Its primary purpose is to ensure the solvency of the institution against adverse financial scenarios. It helps in robust risk management and strategic decision-making.Key Components
Key components include credit risk, market risk, operational risk, and other specific risks. It is a crucial measure for assessing financial stability.Author
