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1. © 2012 vertiv
A Risk and Finance Business and Technology
Solutions Company
Economic Capital

2. © 2012 vertiv
CONFIDENTIAL
2
vertivEconomic Capital
Overview
Economic capital measures risks in terms of economic realities i.e. in terms of the potential loss in
economic value terms. It is the amount of capital that a firm needs to stay solvent, is calculated
internally and represents the risks of the firm.
It’s main value lies in its unique ability to address risks with high severity levels, hence going concern
value of business while addressing gone concern implications.
Vision
Accurate and complete internal judgment of capital adequacy for capital erosion including unexpected
losses including short and long term tail risk events , at an aggregated level and business execution
level to be used as both as a risk and capital measure.
Calculations
Going Concern ERC will be calculated daily with limits allocated to business unit level , and Gone
Concern ERC calculated quarterly at legal entity level triggered at point of non viability (PONV) or when
resolution plan is invoked. The resolution plan addresses transition between going and gone concern.
Control
ERC Risk control measure is used as a indicator of viability as to the position of the viability as to the
position of the bank at a given point in time.

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vertivEconomic Capital
Role and Applications
ERC is applied as a common currency to measure and control different risks types and risk of different
businesses.
Risk and capital processes are ERC enabled processes embedded into business and integrated into
decision making via Strategic business planning , risk appetite and management , capital adequacy
and management and business Performance management.
ERC will be deployed at business unit level including business lines across investment banking and
private wealth management and aggregated up to group level.
ERC is applied in conjunction wit regulatory capital to compromise the overall capital management
strategy of the Bank, and is applied “through the cycle” for business planning , capital allocation ,
performance management and incentives.

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vertivRWA Optimization
Background
Capital efficiency and resultant profitability depends upon the RWA model.
RWA model must be sensitive to market values and hence periodically must update risk
weights to truly reflect economic risks of the bank.
Key Focus Areas & Recommendations
Portfolio AdjustmentsRWA calculations Capital Usage

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vertivIntegrated Stress Testing
•Vertiv was engaged to develop an integrated stress testing solution for a Tier 1
global retail and wholesale bank.
•Consideration
•Centrally administered stress testing function.
•Stress tests aligned with Bank’s risk policy and regulatory requirement.
•Top Down stress test model to be available for business operations decisions.
•Integrate various stress tests across risk types.
•Availability of accepted and agreed common data used for stress tests.
•Solution Design
•The approach was to organise the stress testing effort so as to require minimum
overlap with other risk functions, be centrally administered and comply with the
Bank’s risk policy.
•Develop a stress test policy for the Bank comprising the sum of its retail and
wholesale operations.
•Define integrated stress testing to include top down, bottom up, enterprise wide,
across all major risk types and embedded in business operations.
•Develop a central stress test engine to run tests which consolidated financial
measures and business scenarios.
•Define data to be used for stress testing and usage policies including creation of
a specific reconciled data warehouse.
•Define finance infrastructure to support the data required – transactions and
accounting data.
•Define risk specific data requirements.
•Develop impairment, capital, profitability and liquidity models for stress tests.
•Define model selection criteria and calculation methods.
•Define reporting requirements for management, business operations, regulatory
and rating agencies.
•Realised Benefits
•Satisfy regulatory requirements.
•Enable management to plan for contingency scenarios.
•Make appropriate credit and capital allocation decisions.
•Manage enterprise risk better.