The sum of the stand alone economic capital of all the business units of a bank is:

The sum of the stand alone economic capital of all the business units of a bank is:
A . less than the economic capital for the firm as a whole
B . more than the economic capital for the firm as a whole
C . equalto the economic capital for the firm as a whole
D . unrelated to the economic capital for the firm as a whole

Answer: B

Explanation:

Economic capital is sub-additive, ie, because of the correlation being less than perfect between the risks of the different business units, the total economic capital for the firm will be less than the sum of the EC for the individual business units. Therefore Choice ‘b’ is the correct answer.

In practice, correlations are difficult to estimate reliably, and banks often use estimates and corroborate their capital calculations with reference to a number of data points.