Economic Capital vs Regulatory Capital
Explain how internal capital assessment differs from minimum capital rules and why the distinction matters.
Two capital views with different jobs
Regulatory capital provides a minimum external constraint. Economic capital is an internal lens that asks how much capital the institution believes it needs for its own risk profile, confidence level, and planning horizon.
The distinction matters because ICAAP is not persuasive if it merely restates Pillar 1 outputs. A mature ICAAP explains where management overlays, Pillar 2 considerations, and institution-specific vulnerabilities create a different internal capital view.
Questions the board should be able to answer
- Which risks are fully captured by regulation and which are not?
- How does management determine conservatism in areas with weak data?
- Where does stress testing alter the view of adequate capital?
- Which assumptions have the largest effect on the capital result?
A defensible methodology stance
The best presentation is rarely to declare one capital measure "correct." Instead, the document should show how regulatory capital, economic capital, and planning buffers interact in a coherent decision framework.