This article basically just outlines regulatory capital and (I think) avoids economic capital. In very very shorthand - regulatory capital is the capital needed to comply with local regulations (with guidance from BASEL and BIS), while economic capital is the more nuanced calculation used to calculate the risk of capital using the bank's own deduction and modelling. A great metaphor for the actual difference is "Regulatory Capital is to Economic Capital as Road Test Is to Driving" (http://www.americanbanker.com/bankthink/regulatory-capital-r...). Good banks use both, alongside other metrics to evaluate deals.
Economic capital takes into account the particulars of individual companies, while regulatory capital takes a broad brush approach. In reality, using reg capital leads to set ratings without taking into account the actual risk of the asset to the company. I would argue that the best approach would be economic capital as the main capital calculation with review and monitoring by regulators of the model and its assumptions.
Economic capital takes into account the particulars of individual companies, while regulatory capital takes a broad brush approach. In reality, using reg capital leads to set ratings without taking into account the actual risk of the asset to the company. I would argue that the best approach would be economic capital as the main capital calculation with review and monitoring by regulators of the model and its assumptions.