8/16/2019 8. Economic Capital

1/5

Economic capital Vs

regulatory capital

8/16/2019 8. Economic Capital

2/5

Regulatory capital

• Capital required to meet minimumregulatory standards

• Actual capital to be maintained

• Capital under Pillar I

•  Three primary risks covered –credit

market and operational and capitalto be provided

• Computation based on regulatoryprescription

8/16/2019 8. Economic Capital

3/5

•  The expected loss !E"# represents the loss that

may be anticipated based on historicale$perience and isstatistically the average loss o% the distribution& Itserves as the basis %or general provisioning&

' The unexpected loss !("# represents deviationo% actual losses %rom the predicted e$pectedlosses& I% the actual loss is larger than the E" thegeneral provisions are inadequate and suche$cess needs to be absorbed by the available

capital& I% the loss is so high that the availablecapital is insu)cientthe result is the bankruptcy o% the institution& Thelikelihood o% such an e$treme loss directly

corresponds to the credit rating o% the bank !AA#**&*+, in the - ure

8/16/2019 8. Economic Capital

4/5

Economic capital

• Amount o% capital that the bank needs tohold to achieve a target solvency standardor su)cient level o% protection against

une$pected losses over a particular timeperiod

• All signi-cant risks to be covered inaddition to the primary risks

• Computation based on internal modelsstress testing

• Pillar II capital

8/16/2019 8. Economic Capital

5/5

Probability .istribution o% Potential Credit "oss

 %or a Port%olio o% /any 0bligors

1&1,

1&+,

2&1,

2&+,

3&1,

3&+,

4&1,

251261231211715161311

Potential Credit "oss !8mm#

   P  r  o   b  a   b   i   l   i   t  y

  o   %   C  r  e   d   i   t   "  o  s  s

E$pected"oss

Economic Capital!9(" $ :#

**&*5,Con-dencelevel

(ne$pected

"oss

;