Economic Capital planning has become the key area for integrating the risk and return perspective to the overall competitiveness of financial services companies. Therefore, it features as a top priority in the regulatory mandates of the Basel II Capital Accord.

Measuring Economic Capital has many business benefits, as it enables management to quantify risks, to link those risks to particular business activities, to calculate the capital needed to cover them and the real returns being made and to incorporate unexpected losses into pricing.

KPMG's Financial Risk Management Services practice offers the following Economic Capital services:

Pillar II compliance
KPMG can increase awareness on the requirements of the Internal Capital Adequacy Assessment Process (ICAAP) across financial services companies and, especially, at senior management level. Additionally, it can provide a framework for ICAAP that builds on the existing risk measurement infrastructure of the financial institution.

Risk adjusted returns
KPMG can recommend a simple, but thorough approach to link capital to the financial institution’s strategic goals and objectives. After conducting a risk assessment, frameworks that define roles, responsibilities and ways of measuring risk can be developed.

Finally, the link between risk and reward can be established and this will form the basis for the measurement of risk-adjusted returns. For financial institutions already measuring on a risk-adjusted return basis, this can lead to an enhancement of the measurement techniques and integration with capital adequacy considerations.