Risk Economic Capital Setup
Risk & Compliance
Giving Technical Insight To Financial Institutions for Risk Management.

Risk Economic Capital Setup

Economic capital is the amount of risk capital, assessed on a realistic basis, needed by a financial firm to cover all the current risks. Typically this is calculated by determining the amount of capital needed by the firm to ensure that it’s realistic balance sheet stays solvent, over a certain time period, with a pre-specified probability. Firms and financial services Regulators should then aim to hold risk capital of an amount equal to at least the economic capital.

The concept of Economic capital differs from "Regulatory capital" in the sense that "Regulatory Capital" is the mandatory capital the regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally to manage their own risk and to allocate the cost of maintaining Regulatory Capital among different units within the organization.

Economic Capital has received increased attention within the financial services industry. The introduction of Basel II has provided an extra incentive for banks to regulate their internal capital. Regulatory pressures and its use as a key business tool have seen many organizations implementing economic capital models into their overall business framework.

Economic Capital represents the emerging best practice for measuring and reporting all kinds of risk across a financial organization. It is called "economic" capital because it measures risk in terms of economic realities rather than potentially misleading regulatory or accounting rules. It is called economic "capital" because part of the measurement process involves converting a risk distribution to the amount of capital required to support the risk, in line with the institutions target financial strength.

Economic capital offers an enterprise-wide language for discussing and pricing risk that is related directly to the principal concerns of management and other key stakeholders which is institutional solvency and profitability.

Our Risk Economic Capital Setup solution will tend to make your Business manage your risks efficiently and effectively by :
  • Ensuring a safe level of capital to guard against disasters and meeting regulatory reporting requirements.
  • Ensuring that risks are being managed appropriately and insurance policies, reinsurance programmers or risk controls are cost-effective.
  • Ensuring that the firm is not over-capitalized.
  • Ensuring that capital is being used efficiently to produce the best returns and assessment of strategy and decision-making.
Z &As Unique Differentiator :
  • Creates a standard of consistent measurement across the organization.
  • Reflects the economic realities of the business (measures the true risks)
  • Focuses on changes in true fair-market economic value (not earnings or any other accounting-based measure)
  • Covers all forms of risk (credit, market, operational and other forms)
  • Relates strictly to a corporate goal or standard (such as target debt rating)
  • Forward looking with a standard time horizon and a confidence level
  • High degree of accuracy (tailored to the bank’s unique risk profile and goals)