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FRM Part II · FRM Exam Part II · Range of Practices and Issues in Economic Capital Frameworks

A bank's CFO wants to use economic capital for several purposes. Which use is most consistent with the purposes of economic capital frameworks described in the range-of-practices report?

Economic capital is used to allocate capital to business lines for risk-adjusted performance measurement and pricing, alongside capital adequacy assessment and limit setting. It does not replace regulatory minimums or stress testing, nor does it determine accounting provisions for expected losses.

  1. AAllocating capital to business lines to support risk-adjusted performance measurement and pricingCorrect
  2. BReplacing the supervisor's minimum regulatory capital requirement
  3. CEliminating the need for stress testing because the confidence level is high
  4. DSetting provisions for expected loan losses in the financial statements

Explanation

Common uses of economic capital include capital adequacy assessment, risk-adjusted performance measurement, limit setting, pricing and strategic decisions. It does not replace regulatory minimums, does not remove stress testing needs, and does not set accounting provisions.

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