Economic versus Regulatory Capital

Economic versus Regulatory Capital

Economic Capital denotes the assessment of required Risk Capital on the basis of pure economic grounds, taking into account all available information and the best possible methodolgy. Regulatory Capital denotes instead the assessment of the same requirement under prevailing prudential rules and laws (such as Basel II/Basel III) regulations. While the two should in principle converge, a variety of reasons may create a divervenge

• Simplifications inherent in the regulatory framework
• Margin of Conservatism