Economic capital

The capital that a financial institution bank holds and allocates internally as a result of its own assessment of risk. It is the amount of available resources needed to absorb unexpected losses with a reasonable degree of confidence over a specified time horizon. These resources are carefully defined by the regulators, but basically include shareholder capital, accumulated earnings, and long-term subordinated debt. Economic capital differs from the regulatory capital because the confidence level and the time horizon chosen are different. It is neither identical to equity as shown in the balance sheet.