Economic Capital Solution

The Economic Capital application calculates both allowance for loan and lease losses and economic capital requirements.

Through the set up process, the probability of default (PD) and deviations of the default probabilities by the customer PD ratings, and loss given default (LGD) probabilities by the LGD ratings are entered. Industry correlations, risk migrations, various stress scenarios, and projected portfolio growth can be included in the economic capital calculation.

The application summarizes required total risk funds (allowance for loss and economic capital) at differing loss percentiles. The empirically and statistically derived risk funds may be less than current allowance for loss and book capital.
The application quantifies the risk at the portfolio level, subportfolio level, and individual debt exposures. Debt exposures requiring a high amount of economic capital can easily be identified.

Portfolio managers can identify economic capital requirements of sub-portfolio segments (such as industry and loan type) to manage concentrations and set credit limits.

Besides evaluating capital adequacy, the application allows lenders to monitor portfolio risk over time, analyze concentration levels, and quantify the effects of changes in portfolio composition on the portfolio risk. It also provides the data for Risk-Adjusted Return on Capital profitability analysis.