Economic Capital (ECAP)
Economic Capital (ECap) is a risk metric designed to measure the riskiness of an entity’s (called ”Bank” in the sequel) business activities and quantify the level of capital commensurate to such risk. As such, it is the output of a mathematical model. Here, we restrict ourselves to the credit risk a Bank accepts as a result of its (contingent) investment activity: credit risk on loans, treasury holdings, counterparty credit risk from derivative activities etc. Market risk and operational risk, , legal risk and reputational risks, also contribute to a Bank’s overall ECap figure.