Economic capital is defined as

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Economic capital is defined as

Economic capital is the amount of capital a firm needs to hold to absorb the potential losses from its risk exposures and stay solvent at a specified level of risk tolerance. It’s an internal, risk-based measure that reflects how much cushion the company requires to withstand adverse outcomes over a defined horizon, given its risk appetite. This differs from regulatory capital, which is a mandatory minimum set by regulators, and from accounting capital (assets minus liabilities), which is an accounting measure of net worth. It’s also not money reserved for dividends; it’s the risk-adjusted buffer used to ensure solvency under unlikely but plausible scenarios.

Economic capital is the amount of capital a firm needs to hold to absorb the potential losses from its risk exposures and stay solvent at a specified level of risk tolerance. It’s an internal, risk-based measure that reflects how much cushion the company requires to withstand adverse outcomes over a defined horizon, given its risk appetite. This differs from regulatory capital, which is a mandatory minimum set by regulators, and from accounting capital (assets minus liabilities), which is an accounting measure of net worth. It’s also not money reserved for dividends; it’s the risk-adjusted buffer used to ensure solvency under unlikely but plausible scenarios.

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