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

A bank's economic capital model shows internal capital need of 900 million, while available capital resources are 1,000 million and regulatory minimum capital is 800 million. How should the bank interpret this when assessing capital adequacy?

The bank is adequately capitalised on both measures. Available resources of 1,000 million exceed economic capital of 900 million by 100 million and regulatory capital of 800 million by 200 million, so the internal and regulatory assessments are both satisfied.

  1. AIt meets both measures; surplus is 100 million over economic capital and 200 million over regulatory capitalCorrect
  2. BIt is deficient because economic capital must exceed regulatory capital
  3. CIt has a surplus of 200 million, since economic capital is not relevant
  4. DIt has a surplus of 100 million over regulatory capital and is deficient on economic capital

Explanation

Compare available capital to each requirement: 1,000 - 900 = 100 over economic capital; 1,000 - 800 = 200 over regulatory capital. Economic capital need need not be lower than regulatory capital, and it remains relevant for internal adequacy.

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