Financial Risk Manager Part 1
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A financial institution’s risk analyst is tasked with compiling a report to help senior management assess the organization's risk appetite. The report aims to provide a comparative analysis between regulatory capital requirements—mandated by financial authorities to ensure stability—and economic capital requirements, which are determined internally based on the institution’s own risk assessment and management strategies. Which of the following statements accurately reflects this distinction and should be included in the report?
A
The regulatory capital for credit risk is designed to be sufficient to cover a loss that is expected to be exceeded only once every ten years.
B
Regulatory capital is sometimes referred to as going concern capital because it absorbs losses incurred while the bank is still in business
C
The most important capital for a bank is regulatory capital, which equals the bank's estimate of its expected losses.
D
Economic capital is an internal risk measure that reflects the amount of capital needed to ensure a company remains solvent with a high level of confidence, given its risk profile.