Talk:Economic capital

Intro section

Is there a reason this page doesn't have an introductory section? I don't know the subject well enough to create one myself if there isn't a reason. Zfeinst (talk) 18:04, 10 October 2011 (UTC)

Very badly written article. — Preceding unsigned comment added by 12.46.106.77 (talk) 02:30, 21 February 2013 (UTC)

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Mikcob comment on this article

The article should be renamed insurance capital or some other less confusing moniker that does not offend "capital(economics)" -- classical definition of real capital as opposed to fiat currency. Even better the subject hoard of currency seems to be an identifiable asset class within "Financial Capital". — Preceding unsigned comment added by Mikcob (talk • contribs) 19:39, 28 February 2023 (UTC)

Dr. Faia's comment on this article

Dr. Faia has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

This article lacks any mention to the many theories on the optiaml determination of bank capital. Below is some of them:

1. Optimal bank capital is determined endogenously to discipline a moral hayard problem between banks and outside investors. Banks have an incentive to save on monitoring costs: the presence of some skin in the game (bank capital) reduces the incetnives to moral hayard. See Holmström, B. and J. Tirole, (1997). “Financ ial Intermediation, Loanable Funds and the Real Sector”. Quarterly Journal of Economics, 112, 663-691. 2. Elizalde and Repullo (Economic and Regulatory Capital in Banking: What is the Difference? International Journal of Central Banking 3 (2007), pp. 87-117) show how other factors such as the intermediation margins or the cost of capital determine the amount of optimal economic capital in the economy.

3. Diamond and Rajan ( "A Theory Of Bank Capital," Journal of Finance, 2000, v55(6,Dec), 2431-2465.) shows that bank capital is created to as a back stop to financial fragility. Banks can raise liquidity by offering demandable deposits, namely the possibility that deposits can be withdrawn at any time. This creates bank fragility which can be contained by bank capital. Angeloni, I. and E. Faia (Capital Regulation and Monetary Policy with Fragile Banks, with I. Angeloni. Journal of Monetary Economics, lead article, 60, 3, 311-382, April 2013) also examine the endogenous formation of economic capital: economic capital in their model serves the purpose of containing bank runs and is distinct from regulatory capital.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Faia has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.

ExpertIdeasBot (talk) 18:22, 27 June 2016 (UTC)

Dr. Angeloni's comment on this article

Dr. Angeloni has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The article does not mention that economic capital, contrary to regulatory capital, is determined optimally and endogenously by banks. Several authors have examined the determinants of economic bank capital. Repullo, R. and Elizalde, A. (conomic and Regulatory Capital in Banking: What is the Difference? International Journal of Central Banking 3 (2007), pp. 87-117) examine the role of intermediaitona margin and the cost of equity capital. Angeloni, I. and E. Faia (2013), Capital Regulation and Monetary Policy with Fragile Banks, with I. Angeloni. Journal of Monetary Economics, lead article, 60, 3, 311-382) examine the role of bank runs probability in determining optimal bank capital. Holmstrom, B. and J. Tirole, 1997, “Financial Intermediation, Loanable Funds and the Real Sector”. Quarterly Journal of Economics,112, 663-691 examine the role of banks# moral hazard incentives toward outside investors: in their case economic capital acts as a discipline devise toward banks# moral hazard.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Angeloni has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.

ExpertIdeasBot (talk) 18:32, 27 June 2016 (UTC)

Dr. Wall's comment on this article

Dr. Wall has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Comment 1

The article is good as far as it goes. My biggest suggestion would be note that the development of economic capital is closely related to its use in risk adjusted return on capital (RAROC)—economic capital was taken as the appropriate measure of capital in this calculation. Although there is a reference to RAROC in the “See Also” section, this issue is sufficiently important to merit at least a brief reference in the text of the article.

My other suggestion for expanding this discussion would be to take advantage of a paper by the Basel Committee on Banking Supervision titled “Range of practices and issues in economic capital Frameworks” which is available at http://www.bis.org/publ/bcbs152.pdf. This paper provides a nice survey of how banks were calculating and using economic capital. Doubtless there has been some change in the procedures for calculating economic capital since this was written in 2009. But the article has a nice discussion of how banks were using economic capital in their business processes and I doubt the range of potential uses has changed much since then.

Comment 2

FWIW, I looked at the comments by Dr. Faia and Dr. Angeloni in the “Talk” section of this article. I would not agree that “economic capital” is determined “optimally” by banks. Banks’ ability to measurement their risk has improved over time but it is still far from a precise science. Further, even if the measurement of risk was perfect, we have only a general idea how to determine the amount of capital that is optimal for maximizing the value of the bank. Although practitioners likely implicitly incorporate the general insights of the papers they reference (and some they do not reference), practitioners almost surely do not explicitly use the models in these academic papers to calculate their optimal capital levels. Thus, I see some small benefit in referencing some papers on optimal capital determination as giving some of the considerations that may influence how a bank determines its economic capital given its measure of the bank’s risk. However, I would not state in the article that banks use these models to endogenously determine their optimal level of capital.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Wall has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Wall, Larry D., 2013. "Measuring capital adequacy supervisory stress tests in a Basel world," Working Paper 2013-15, Federal Reserve Bank of Atlanta.

ExpertIdeasBot (talk) 18:54, 30 August 2016 (UTC)