Economic/Regulatory Capital Modelling (Basel III)

Basel 2.5 and 3 will have a large impact on the Capital Exposure for the Banks.

Economic Capital is the amount of risk capital that a company must have to cover any risks it is facing. The amount held is that needed to ensure the business could overcome a worst-case scenario and still survive.

Economic Capital must be realistically estimated to manage the risks and to budget the costs of regulatory capital that needs to be maintained across the different divisions of the company. It is not the same as regulatory capital, which is a mandatory sum that a company must hold. The sum is determined by the regulators. Financial services should aspire to ensure the amount of risk capital they hold is at least equal to their economic capital.

There is no universally accepted method for calculating economic capital so many banks develop their own methodology