Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby » Thu Oct 02, 2014 7:42 am

Which of the following statements does NOT adequately describe economic capital?
I. It is always less than regulatory capital.
II. It differs depending on the type of borrower, independent of borrower risk.
III. It must be considered along with regulatory capital when making allocation decisions.
IV. It is the amount of capital that management determines to be necessary to cushion losses from an asset
or business line.
A) II only.
B) I and III.
C) I and II.
D) IV only.
Your answer: B was incorrect. The correct answer was C) I and II.
Economic capital is a risk-based capital amount that is deemed necessary to cushion losses. Regulatory capital
is based on loan value (not risk), so for high-risk loans, economic capital may exceed regulatory capital.
Regulatory capital differs depending upon the type of borrower, independent of borrower risk.

My question is weather Economic capital will not change then

Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am


Postby edupristine » Mon Oct 06, 2014 4:17 am

The correct answer indeed is option C (I & II).
Statement I is incorrect because of the keyword "always". It is not a hard and fast rule that Economic capital will always be less than regulatory capital.
Statement II is also incorrect because risk of the borrower is always taken into account while calculation of economic capital. So, if there are two corporate borrowers then more economic capital will be allocated for riskier borrower and relatively less economic capital for the other less risky borrower.
While in case of calculating regulatory capital, only the type of borrowers are concerned independent of the risk they carry.

Return to “FRM Part II”



Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.