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A group of credit risk analysts at a large bank is discussing regulatory capital and economic capital in relation to different types of risk exposures. The analysts evaluate differences in the approach to calculating these measures and in their use. In comparing the two types of capital, which of the following statements would the analysts be correct to make?
A
Firm-wide economic capital is typically equal to the sum of the separately calculated capital amounts for credit risk, market risk, and operational risk.
B
An increase in the probability of default of a loan portfolio increases economic capital, while leaving regulatory capital unchanged.
C
Economic capital is the amount of capital a bank needs to cover its expected losses, while regulatory capital is the amount of capital a bank needs to cover its unexpected losses.
D
Firm-wide economic capital typically considers correlations between credit risk, market risk, and operational risk.