- Our Economic Capital Framework allocates capital in proportion to the economic risk corresponding to individual risk forms
- To accurately estimate Economic Capital, we utilize the factor model approach, and the relationship between asset correlation and default correlation, as outlined by industry best practices
- Many Banks across the world also use regulatory capital as economic capital due to lack of information on risk parameters and correlation.
The total economic capital (for business unit profitability) includes a measure of inter-risk diversification benefits to account for the fact that all risks will not be realized simultaneously. Risk adjustments to the P&L include:
- Cost of funding adjustment to incorporate differences between accounting leverage and economic leverage
- Expected loss in place of credit provision.