Is economic capital value an appropriate indicator for risk managementf

Economic capital might also be used in the reporting and measuring operational market risks that occur may be in a financial organization. Economic capital value is very important especially in a financial organization through the following ways that help it to manage rising risks in the organization. The management of a bank can use the estimates of economic capital (EC) to allocate or distribute capital across their stream of businesses, and also to promote the units that provide good desired profits per unit of risk. Most financial institutions and even banks are faced with very long uncertainties of their future that they do intend to be responsible or accountable for. When a bank may want to determine what amount of capital they need for them to remain solvent in a time horizon or at a certain confidence level, economic capital (EC) is that which is considered as the capacity of capital risk from the perspective of the bank.

Economic value added (EVA) is the measure of absolute profit amount that an institution earns over its equity cost. Economic capital (EC) models are used to varying degrees with approximately half of the respondents having or owing to an economic-capital model of the bank fully. The role of an economic-capital (EC) is to watch over the unit performance of a business and to ensure that bondholders are safe (ensure their safety). This reduces economic capital by providing a way to overcome or absorb any evident losses. A financial institution that allocates economic capital in its decision making is very much limited by risk management precision. Embedded value is driven off the balance sheet regulatory, with the value of the shareholder contained between the assets that back the regulatory liabilities (Scanlon 6).

The value of liabilities is at most times derived using estimates of best assumptions, by removing all the margins, using consistent discount rates with the risk in the market inherent in the cash flows projected. Distortions are not introduced into a sheet balance by the valuation of regulatory requirements or accounting. Available capital risks are the difference found between liabilities and assets in the economic sheet balance. Under the approach of a consistent market, all associated costs with capital holding are fractional. Economic capital is very important because it provides answers to key concerns to specific decisions of businesses and also by evaluating the different units of a business or a bank. Economic capital also provides the comparison with regulatory capital.