FRM Part II · FRM Exam Part II · Range of Practices and Issues in Economic Capital Frameworks
A bank's risk committee is asked to explain how economic capital differs from regulatory capital. Which statement best describes economic capital as discussed in the BCBS range-of-practices paper?
Economic capital is the bank's own estimate of the capital required to absorb unexpected losses at a confidence level consistent with its target solvency or credit rating. It differs from prescribed regulatory minimums and from accounting equity, and expected losses are handled through pricing and provisions.
- AAn internally estimated amount of capital needed to cover unexpected losses at a chosen confidence level consistent with the bank's target solvency standardCorrect
- BThe minimum capital ratio prescribed by the supervisor, applied uniformly to all banks
- CThe accounting book value of shareholders' equity reported in the financial statements
- DThe amount of capital needed to cover expected losses over the next year
Explanation
Economic capital is an internal estimate of the capital needed to absorb unexpected losses at a confidence level tied to the bank's target rating or solvency standard. Regulatory capital is prescribed by supervisors, and expected losses are covered by pricing and provisions rather than capital.
Did you get it right without looking?
One question tells you little. A timed set on Range of Practices and Issues in Economic Capital Frameworks shows your real accuracy, how long you take and where you lose marks.
More Range of Practices and Issues in Economic Capital Frameworks questions
- A bank's economic capital model uses a single set of correlation parameters estimated during a calm period. Which model risk is most clearly…
- A bank sets its economic capital at the 99.97% one-year confidence level, whereas a peer sets it at 99.90%. Which statement best describes t…
- A bank's EC framework is built by a central risk team. Business-line heads complain that the numbers are a 'black box' and ignore them when …
- A bank computes economic capital for credit, market and operational risk separately and then adds the three figures to obtain total capital,…
- A bank's economic capital model uses a 99.9% one-year VaR, but management notes that internal capital seems far more sensitive to the confid…
- A bank's economic capital framework (BIS range-of-practices report) must express capital for credit, market and operational risk on a common…