Explanation

Option C is incorrect because:

• Economic capital is actually designed to cover unexpected losses (losses beyond the expected level)
• Regulatory capital is the minimum capital required by regulators to cover various risks
• Expected losses are typically covered by provisions and reserves, not capital

Analysis of other options:

• Option A: Correct - Economic capital is typically calculated by summing capital for different risk types
• Option B: Correct - Economic capital is sensitive to changes in PD, while regulatory capital follows fixed formulas
• Option D: Correct - Economic capital models often incorporate correlations between different risk types

Key distinction: Economic capital is an internal measure for unexpected losses, while regulatory capital is an external requirement that may not perfectly align with economic reality.