Economic Capital

Economic capital is the amount of financial resources an organization needs to cover unexpected risks or losses, ensuring it remains solvent under adverse conditions. It acts as a cushion, calculated based on the organization’s specific risk profile, including factors like credit, market, or operational risks. By determining this reserve, companies can better manage uncertainties and maintain stability, even during unforeseen events. Essentially, economic capital is an internal measure of resilience, helping firms allocate sufficient resources to protect against potential financial setbacks while supporting ongoing growth and reliability.