Explanation:
Regulatory capital and economic capital are two different concepts in banking. Regulatory capital refers to the minimum amount of capital that a bank is required to hold by regulatory authorities. This is to ensure that the bank has enough capital to absorb a reasonable amount of loss and mitigates the risk of failure.
Economic capital, on the other hand, is the amount of capital a bank estimates it needs based on its own internal risk models. It represents the capital required to support the risks the bank has taken on, and it often exceeds the regulatory minimum because it is based on the bank's own assessment of its risk profile.
Option B is incorrect because it reverses the definitions. Option C incorrectly states that economic capital must be deposited at the Federal Reserve Bank. Option D mischaracterizes regulatory capital as only cash holdings and incorrectly defines economic capital.
Q.1095 Distinguish between regulatory capital and economic capital.
A
Regulatory capital is the amount of capital a bank is required to hold in accordance with regulatory guidance to sufficiently mitigate the risk of failure, whereas economic capital is the amount of capital a bank needs as prescribed by its own (risk) models.
B
Regulatory capital is the amount of capital a bank needs as prescribed by its own (risk) models, whereas economic capital is the amount of capital a bank is required to hold to sufficiently mitigate the risk of failure.
C
Regulatory capital is the amount of capital a bank needs to hold in accordance with stipulated rules and regulations while economic capital is the amount of capital every bank needs to deposit at the Federal Reserve Bank.
D
Regulatory capital is the amount of capital a bank needs to hold in cash at any given time. In contrast, economic is the total amount of capital held, including cash deposits and tangible/intangible financial assets.
No comments yet.