FAQ Before Exam From FRM context, is Value-at-Risk and Economic Capital both one and the same?

[bharatn]

From FRM context, is Value-at-Risk and Economic Capital both one and the same? Or are there any differences?

 

[ShaktiRathore]

Hi,
there are differences while Var is the maximum loss that can happen at a given confidence level while the economic capital is the capital that the bank keeps to face unexpected losses. The difference between the Credit Var and the expected loss is the economic capital. The bank can face the expected loss and the unexpected loss from the loan portfolio, the bank based on the history of portfolio returns draws profit/loss distribution for the portfolio and find a Var called credit Var with mean of distribution as expected loss we obtain the economic capital as difference credit Var-economic capital.
thanks