It stands for economic capital; an internal measure of the capital (risk capital) that an entity is required to maintain to ensure that it remains solvent, as a going concern, in the face of the risks to which it is exposed. The capital is assessed to correspond to the risks being covered such as market risk, credit risk, legal risk, and operational risk. It is a forward-looking measure of capital adequacy based on a probabilistic assessment of potential future losses.
Economic capital (EC or ecap) represents the methods or practices banks and financial institutions (broadly financial service entities) apply to consistently assess their risks and accordingly apportion capital to account for the economic effects of their risky activities and operations.
The concept of economic capital was introduced by banks as an internal technique for capital allocation and performance assessment. However, the use of economic capital has been developed further to encompass applications for accurate calculation of the level of capital (or risk), including absolute level of internal capital a bank is required to maintain (risk quantification methodologies).
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