Economic Capital

Chapter 6. Team Play - The Context of Economic Capital

In the previous chapters, we have discussed in detail how economic capital works. No single risk measure can capture all aspects of risk, however. In this chapter we consider how other risk management tools complement economic capital. Although economic capital can help to identify exposures that may give rise to large unexpected losses, it does not provide insight into the expected or potential loss if a specific event would occur. Stress testing can complement economic capital in this respect, as we will discuss in Section 6.1. Enterprise risk management (ERM) provides a wider risk management framework, in which economic capital has its place. We will discuss ERM in Section 6.2.

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