Infinance, mainly for financial services firms,economic capital (ecap) is the amount ofrisk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as agoing concern, such asmarket risk,credit risk,legal risk, andoperational risk. It is the amount of money that is needed to secure survival in a worst-case scenario. Firms and financial services regulators should then aim to hold risk capital of an amount equal at least to economic capital.
Typically, economic capital is calculated by determining the amount of capital that the firm needs to ensure that its realisticbalance sheet stays solvent over a certain time period with a pre-specified probability. Therefore, economic capital is often calculated asvalue at risk. The balance sheet, in this case, would be prepared showing market value (rather than book value) of assets and liabilities.
The first accounts of economic capital date back to the ancientPhoenicians, who took rudimentary tallies of frequency and severity of illnesses among rural farmers to gain an intuition of expected losses in productivity. These calculations were advanced by correlations to climate change, political outbreaks, and birth rate change.[citation needed]
The concept of economic capital differs fromregulatory capital in the sense that regulatory capital is the mandatory capital the regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally to manage their own risk and to allocate the cost of maintaining regulatory capital among different units within the organization.
Insocial science,economic capital is distinguished in relation to other types of capital which may not necessarily reflect amonetary orexchange-value. These forms of capital includenatural capital,cultural capital andsocial capital; the latter two represent a type of power or status that an individual can attain in acapitalistsociety via formal education or through social ties. Non-economic forms of capital have been variously discussed most famously by sociologistPierre Bourdieu.
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