Economic capital is the amount of capital required to maintain solvency at a given risk tolerance level.

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Economic capital is the amount of capital a company needs to hold to stay solvent given its risk exposures and the level of risk it is willing to accept. It’s an internal, risk-adjusted measure that reflects the organization’s risk appetite and the horizon over which it wants to absorb losses. This differs from regulatory capital, which is the minimum required by authorities and may not align with the company’s own risk tolerance. It also differs from net worth (assets minus liabilities), which is an accounting measure of equity, not a buffer against unexpected losses. Money set aside for future dividends is about distributions, not the capital kept to withstand adverse scenarios. So the option describing capital required to maintain solvency at a given risk tolerance level best captures the concept of economic capital.