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Benefits of Implementing Economic Capital Software

ARTICLE| Wed Feb 12 2020

ECAP is the amount of capital required to protect the organization against economic insolvency over a one-year time-frame. For example, using a 99.70% Confidence Interval, we can say that the capital set aside is adequate to offset Unexpected Losses that have the frequency of occurrence once out of 666.6 years.

From stakeholders’ perspective there are three important factors to consider:

In nutshell, if the return delivered to members is below a benchmark hurdle rate, a lending institution can find itself trapped in capital dilution zone, i.e., if the rate of return is below the hurdle rate, then suppliers of capital end-up ‘bailing-out’ the borrowers, resulting into the dilution (as opposed to the accretion) of capital. From an industry standpoint, this is shown below:

For the reasons noted herein, Economic Capital (ECAP) is an extremely powerful tool for all constituencies interested in the financial health of a lending institution.

Many credit unions and small-midsized banks believe that the formulaic approach used by the supervisors does not appropriately reflect the processes and procedures for effectively managing risk; these credit unions feel confident that their risk management practices would be positively reflected in the determination of economic capital. For example, the credit unions may want to be able to benefit from the diversification of concentration risk and seek recognition of their superior credit management. Credit union management will also want to measure performance, taking account of the capital that is effectively being employed in different business areas.

As Canadian credit unions’ regulations converge with OSFI, formulaic approach to the assessment of solvency levels will also likely be phased-out. Formulaic approaches do not necessarily cope with changes in the operating environment or generally allow for the benefit of the various forms of diversification.

At BBA, we believe that ERM/ECAP implementation should be integrated with strategy-setting. ERM redefines the value proposition of risk management by elevating its focus from the tactical to the strategic. The greater the gaps in the current state and the desired future state of the organization’s risk management capabilities, the greater the need for ERM infrastructure to facilitate the advancement of risk management capabilities over time.

Using BBA’s ECAP software (ECAPLeader), credit unions/small-midsized banks will be able to address the above challenges and develop competitive advantage by:

BBA’s ECAPLeader checks all boxes of a best practice ERM system:

ECAPLeader is organized in two modules:


As part of the ICAAP requirement, a credit union’s management is required to identify the risks to which it is exposed to and also assess their risk profile. In our set-up phase, we work with the management to identify the material risks that the credit union/bank is exposed to, taxonomize those risks, assign ownership and develop risk-reduction controls to transform the risks from inherent to residual risks. BBA applies a best practice “risk materiality” framework to determine which risks are material and which risks are non-material.


Regulatory requirements to define and cascade risk profile with capital requirements under ICAAP have led to Economic Capital emerging as a standard industry-wide solution. ECAP framework’s appeal to regulators and financial services institutions is driven by several factors:

In conclusion, ECAP models are risk-sensitive and offer robust measures of the prioritized exposures, and hence are the most appropriate for use in internal capital calculations.