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Economic Capital Formula

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Economic Capital refers to the amount of capital that a financial institution needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk,etc. Check FAQs

EC = \frac{EaR}{RR}

EC - Economic Capital?EaR - Earnings at Risk?RR - Required Rate of Return?

Economic Capital Example

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Here is how the Economic Capital equation looks like with Values.

Here is how the Economic Capital equation looks like with Units.

Here is how the Economic Capital equation looks like.

7750 = \frac{620}{0.08}

7750 = \frac{620}{0.08}

7750 = \frac{620}{0.08}

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Economic Capital Solution

Follow our step by step solution on how to calculate Economic Capital?

FIRST Step Consider the formula

EC = \frac{EaR}{RR}

Next Step Substitute values of Variables

∴

EC = \frac{620}{0.08}

Next Step Prepare to Evaluate

∴

EC = \frac{620}{0.08}

LAST Step Evaluate

∴

EC = 7750

Economic Capital Formula Elements

Variables

Economic Capital

Economic Capital refers to the amount of capital that a financial institution needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk,etc.

Symbol: EC

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Economic Capital

Earnings at Risk

Earnings at Risk (EaR) is a financial risk management metric that measures the potential impact of adverse events or fluctuations on an organization's earnings.

Symbol: EaR

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Earnings at Risk

Required Rate of Return

Required Rate of Return is the minimum return an investor expects for taking on the risk of investing in a particular asset, such as stocks or bonds.

Symbol: RR

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Required Rate of Return

Other formulas in Risk Management category

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S = \frac{R p - R f}{σ d}

Go Modigliani-Modigliani Measure

M 2 = R ap - R mkt

Go Maximum Drawdown

MDD = (\frac{V trough - V peak}{V peak}) \cdot 100

Go Upside/Downside Ratio

R up/down = \frac{AI}{DI}

How to Evaluate Economic Capital?

Economic Capital evaluator uses Economic Capital = Earnings at Risk/Required Rate of Return to evaluate the Economic Capital, Economic Capital refers to the amount of capital that a financial institution or company needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk, operational risk, and liquidity risk. Economic Capital is denoted by EC symbol.

How to evaluate Economic Capital using this online evaluator? To use this online evaluator for Economic Capital, enter Earnings at Risk (EaR) & Required Rate of Return (RR) and hit the calculate button.

FAQs on Economic Capital

What is the formula to find Economic Capital?

The formula of Economic Capital is expressed as Economic Capital = Earnings at Risk/Required Rate of Return. Here is an example- 7750 = 620/0.08.

How to calculate Economic Capital?

With Earnings at Risk (EaR) & Required Rate of Return (RR) we can find Economic Capital using the formula - Economic Capital = Earnings at Risk/Required Rate of Return.

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Economic Capital Formula

Economic Capital Example

Economic Capital Solution

Economic Capital Formula Elements

Other formulas in Risk Management category

How to Evaluate Economic Capital?

FAQs on Economic Capital

Variable Name