Which of the following is true about economic capital?

• A. Regulator determines it.
• B. It is only used for marketing.
• C. An internal estimate of capital needed for risk exposures.
• D. It equals regulatory capital.

Answer: (C)

Economic capital is the internal estimate of the amount of capital a bank needs to cover all material risk exposures at a chosen confidence level, derived from the institution’s own risk models and data. This is an internal, decision-useful measure used for risk management, capital allocation, pricing, and performance evaluation.

It isn’t determined by regulators—that would be regulatory capital, the minimum required by supervisory rules. It isn’t solely for marketing, since it has real implications for how a bank allocates capital and manages risk. And it doesn’t equal regulatory capital; the internal economic capital is typically different (often larger) because it reflects the bank’s own view of risk across the entire portfolio and a higher confidence target.