Economic Capital

    graph TB
	    A[Risk Retained] -- Determines --> B[Economic Capital Needed]
	    B -- Equals --> C[Total Risk + Buffer]

## What is economic capital primarily used for? - [x] To ensure that a company can remain solvent considering its risks - [ ] To pay dividends to shareholders - [ ] To buy new office chairs for employees - [ ] To hire a magician for corporate events > **Explanation:** Economic capital is all about safeguarding against risks, not ensuring armchairs are plush or fun illusions are pulled off! ## How do companies typically calculate economic capital? - [ ] By rolling dice - [ ] Using intuition and gut feeling - [x] Through proprietary models - [ ] Asking their fortunes at the local fair > **Explanation:** Companies leverage their own bespoke models rather than relying on random luck. Dice are great for games, but not for capital! ## What significantly contrasts economic capital from regulatory capital? - [x] Economic capital is ready for internal use, while regulatory capital is mandated externally. - [ ] Economic capital cannot fluctuate, whereas regulatory capital can. - [ ] They are both calculated in exactly the same way. - [ ] They refer to the same financial rules applied within organizations. > **Explanation:** Economic capital is about tailoring to internal risks, while regulatory capital is dictated from outside. Talk about a difference in personal space! ## If a bank bets big on high-risk investments, what happens to its economic capital need? - [x] It increases - [ ] It decreases - [ ] It stays the same - [ ] Economic capital doesn’t exist for banks > **Explanation:** More risk requires a larger cushion of capital—no one wants to play tightrope with low funds! ## Why can economic capital be described as a type of "safety net"? - [x] It protects against unforeseen financial troubles - [ ] It allows for gala pizzas on Friday night - [ ] It serves as a loan to investors - [ ] It’s a nifty term in circus vocabulary > **Explanation:** Economic capital acts as a protective measure against risk—way more serious than a little pizza party! ## Can economic capital decrease over time? - [x] Yes, if a company's risk decreases - [ ] No, it always waxes – like the moon! - [ ] It can only grow if the company's profits increase - [ ] Economic capital is predetermined from the start > **Explanation:** Just like your resolution to exercise can falter, so too can economic capital fluctuate based on risk profile changes. 🙃 ## Is maintaining adequate economic capital essential for a business's health? - [x] Absolutely, it’s critical! - [ ] Only if the business sells donuts - [ ] No, cake is more important - [ ] Only for companies with more than 50 employees > **Explanation:** Just like carbs in donuts, economic capital isn’t to be neglected—it’s essential for firm longevity! ## What happens if economic capital is insufficient? - [x] The company may become insolvent - [ ] They might open a candy store - [ ] Employees will be assigned spell-check duties - [ ] Risk managers will quit > **Explanation:** Insufficient economic capital creates a perilous cliff that companies might tumble over—no Monty Python figures wanted here! ## In the realm of finance, what does proprietary mean? - [x] Something unique to a specific institution - [ ] It’s a new type of sushi - [ ] A common method everyone uses - [ ] A word that sounds nice at dinner > **Explanation:** When speaking of proprietary models, think bespoke suits, not take-out menus! 🤓 ## What do financial institutions do if their economic capital is threatened? - [x] Assess and adjust their risk profile - [ ] Pray for good market outcomes - [ ] Fire employees until they have more funds - [ ] Write a strongly worded letter to the government > **Explanation:** Monitoring and adjusting risk are proactive measures—none of that "let’s just hope for the best" nonsense here!