ERM Glossary: Economic capital

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Economic capital is the amount of capital that an enterprise considers that it intrinsically needs to hold to function as a going concern business. By ‘intrinsic’ we mean not directly imposed on the business by outside stakeholders such as regulators (or ratings agencies).

Some commentators argue that capital for financial firms like banks and insurance companies is largely determined by regulatory or rating agency requirements. In this case, an economic capital level that is typically higher than required by these external stakeholders can be viewed as involving the firm aiming to hold a buffer to guard against hitting the regulatory minimum.

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