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Capital Economics
Economics is the very basic term which is used to define the wealth and resources of a country or region in terms of the production, consumption, and distribution of goods and services along with the management.
Economics is classified as Macroeconomics and Microeconomics. Macroeconomics is defined as the study which deals with the behavior of the individual households and firms in making decisions on the allocation of the limited resources.
Macroeconomics is defined as the study which deals with the entire economy of the country and issues affecting it, which includes interest rates, national productivity, unemployment, fiscal and monetary policies and economic growth of the country.
Capital is a very vast term and it has different definitions depending on different contexts. The meaning of Capital in financial terms is that it is the wealth in form of money or other financial assets which are owned by an individual or organization which is available or contributed for a particular reason such as for starting a company or to make any investment. Capital goods may be realized with money, wealth or financial capital.
Economic Capital is the amount of the wealth or capital that a firm, basically in financial services, needs to ensure that the company remains stable.
Economic capital is calculated internally and it is the amount which is required by the company to support any risks which it takes on. The calculation process includes the conversion of the risk to the amount of capital. The calculations are based on the company’s financial position like its credit rating and the expected losses if any.
In capital economics, there are three basic factors of production which are Land, Labour, and Capital goods. Economic capital is used for measuring, reporting market and operational risks across the financial organization. It measures risk.
The financial position of any firm is reflected by the probability of the firm not becoming solvent over the measurement period and is the confidence level in the statistical calculations. Most of the banks use the confidence measurement ranging between 99.96% to 99.98%, which is the insolvency rate need to be maintained by any firm with an AAA or AA credit rating.
