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Risk Aggregation & Consolidation

ECONOMIC CAPITAL 

Economic capital is the financial buffer that financial institutions must hold based on the Basel Accord. It protects against potential losses from credit, market, and operational risks, calculated by considering the probability and magnitude of these risks. It represents a portion of a firm's risk capital and helps assess the level of risk the firm faces. Adequate provisions are essential to ensure the firm can continue operating. Every financial institution should have economic capital as part of its internal considerations to withstand unexpected losses and maintain operations beyond regulatory requirements.

Economic Capital - Application

Economic Capital (EC) is a model-based assessment of future risk for an entity. It differs from Regulatory Capital (RC) mandated by regulators and Finance Capital based on accounting principles. EC ensures sufficient financial resources to cover potential losses, aligning with Basel Accord Standards for regulatory compliance. It aids in identifying, measuring, and managing risks while ensuring overall financial health and regulatory monitoring.

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