Most financial institutions and even banks are faced with very long uncertainties of their future that they do intend to be responsible or accountable for. When a bank may want to determine what amount of capital they need for them to remain solvent in a time horizon or at a certain confidence level, economic capital (EC) is that which is considered as the capacity of capital risk from the perspective of the bank. Economic capital (EC) aims at supporting the decisions of a business (Barrieu and Ravanelli, 13). The estimates of economic capital (EC) can also be covered by Tier 1, Tier 2 and Tier 3 elements, or the definitions used by agencies at a rating, and also other capital types such as profit unrealized, planned earning or the implicit government guarantee. Most banks may use developed internal models to estimate their economic capital. Value-at-risk (VaR) models are more of economic capital (EC) frameworks for credit risk, markets and other risks too.
Capital has become a very scarce resource in the credit crisis globally. The management of capital is foremost driven by some risks. Risks in an organization can trigger big losses that deplete the organization’s capital. Economic Capital Value.
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