Economic Capital

Chapter 3. You Manage What You Measure - Defining Economic Capital

In Chapter 1, we introduced economic capital and defined it as an estimate of the worst possible decline in the amount of capital at a specified confidence level, within a chosen time horizon. In this chapter, we will discuss how we can make this definition operational, by considering how we can fill in the elements of this definition. In Section 3.1, we first address the issue of what value to assign to capital. As capital is the difference in value between assets and liabilities, this relates to how we value assets and liabilities. The value of capital will also be influenced by which assets and liabilities we choose to include. An important choice in this respect is whether ...