Understanding Economic Capital

Economic capital is a measure of risk, not of capital held. As such, it is distinct from familiar accounting and regulatory capital measures.

Conceptually, economic capital can be expressed as protection against unexpected future losses at a selected confidence level. It is defined as a capital required to absorb the impact of unexpected losses during a time horizon at a certain level of confidence.

The below presentation on Economic Capital by Jennifer Lang summarizes the concept of economic capital.

Economic Capital – a Common Currency for Risk?