There are typically two kinds of capital - Regulatory and Economic capital. The former is the regulator's estimate of the amount of capital required to protect against unexpected loss, while the latter is the bank's own estimate of the same loss. In the past, these estimates have been wildly different due to the relative lack of risk sensitivity on the part of the BIS-88 rules for calculating capital. While the newest Basel accord goes a long way to addressing these deficiencies, it is expected that significant differences between these calculations will still remain.

This white paper discusses an architecture with significant benefits - it not only ensures Basel compliance from the perspective of all three pillars, but also ensures that the investment in Basel can be leveraged to improve business profitability.