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Regulatory Capital in theory

Tuesday, July 26, 2011

With the reform of the Cooke ratio implementation through the Basel II regulations, the calculation of regulatory capital tends to approach the method highly economical. Based on a finer appreciation of risk capital. Regulatory and would achieve the same objectives as economic capital.

The economic capital of a financial institution, amount of capital required to meet unexpected losses (unexpected loss) is defined using internal models for each activity. The Cooke ratio in turn was based on a more comprehensive approach to risk, not broken down by activity. Conversely, regulatory capital as defined by Basel II is characterized by a measure of individual risk, including segmentation between risk classes, which brings them closer to an economic vision.

However, despite these similarities, a fundamental difference between the two methods is the notion of risk considered. Indeed, the risk of "outstanding" included in the internal economic capital model is wider than the risks involved in the Basel II regulations, and cover the face of unexpected losses does not necessarily require an increase in equity . Indeed, the economic capital includes the entire system set up on the line of activity.
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