The capital a firm judges it needs to absorb unexpected losses at a chosen confidence level, set by its own risk estimates. It differs from the capital regulators require.
Where you will meet it
Economic capital comes up in 26 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“Economic capital is the bank's own estimate of the capital needed to absorb unexpected losses over a horizon, usually one year.”
The Governance of Risk Management FRM Part I · Foundations of risk management
“A common risk-adjusted measure is RAROC = (revenue − costs − expected loss) ÷ economic capital.”
Measuring Credit Risk FRM Part I · Valuation and risk models
“Economic capital is the amount of equity a bank itself judges necessary to absorb unexpected losses over a horizon, normally one year, at a confidence level tied to its target credit rating.”
Capital Structure in Banks FRM Part II · Credit risk measurement and management
“A bank's economic capital is adequate when the capital it actually holds covers the unexpected credit loss at the confidence level management has chosen.”
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