Economic capital

What it means

The capital a firm judges it needs to absorb unexpected losses at a chosen confidence level, computed internally.

The exam angle

Distinct from regulatory capital, which is prescribed. Where the two differ materially, that difference is itself a signal.

Where it appears in the syllabus

• Foundations of Risk ManagementFRM Part I · exam weight 20% · Risk taxonomy, governance, CAPM, multifactor models, financial disasters.
• Current Issues in Financial MarketsFRM Part II · exam weight 10% · This cycle's readings — AI in finance, climate risk, digital assets, bank stress.

Related terms

• Basel AccordsThe international framework for bank capital and liquidity regulation, issued by the Basel Committee on Banking…
• Moral hazardThe incentive to take more risk once someone else bears the consequences.
• RAROCRisk-adjusted return divided by economic capital, used to compare business lines on a like-for-like basis and to price…
• Stress testingRevaluing a portfolio under severe but plausible scenarios, rather than under the distribution of ordinary days.
• Systemic riskThe risk that the failure of one institution or market propagates through the system as a whole.
• Adverse selectionThe problem that arises when the party with better information self-selects into a transaction, leaving the…