What we see on a company or bank’s balance sheet is its capital level as defined by accounting standards. In the case of a company, the accounting capital level is theoretically the same as the economic capital level, the latter being the level chosen by shareholders (i.e., the level they deem appropriate).
However, the difference exists in the case of a bank, since regulation (Basel) requires a certain level of capital: this is known as regulatory capital.
In the case of a bank, regulatory capital is therefore that set by Basel III standards (if applicable), the level of economic capital is that which shareholders would decide to hold without regulation, and the level of effective (accounting) capital is that observed on the bank’s balance sheet (equal to the level of regulatory capital if the regulation is more demanding than the market, or to the level of economic capital if the opposite is true).
Julien P.
