The Economic Capital Management

Beyond these differences on the nature of the risk taken into account, the two types of methods are opposed to their method of calculation. Indeed, the peculiarity of the economic capital is that it incorporates the correlations between micro-economic risk of the counterparty in question and the macroeconomic risks that could affect it. The economic sector of the counterparty or its geographic location and are included in the measure of risk, so you can enjoy the most exhaustive possible potential failures.

More broadly, the sensitivity of the consideration to changing the general economic situation is also a factor in determining the economic capital, through the calculation of the coefficient R2. Thus, while regulatory capital stops at the theoretical definition of the risk of the counterparty, the internal model for determining the economic capital takes into account economic conditions and interdependencies of various factors, allowing a more detailed assessment of risk and therefore economic capital to put in front of the activity.

Specific objectives in the economic capital are an essential instrument of strategic management

Economic capital should actually meet three objectives nested, with the backdrop of the profit motive of financial institution:

* Assessment of risk-adjusted returns: in particular through the calculation of RAROC (Risk Adjusted Return on Capital). The RAROC measures the rate of return of an activity by adjusting the level of capital employed by the risk. Economic capital thus defined to measure the financial performance of the activity in the expected benefits related to capital needed to cover it.
* Portfolio Management: Once the risk-adjusted returns calculated, it becomes possible to compare the actual performance of various businesses of the bank.
* Strategic management activities: economic capital thus enables the bank to arbitrate between the different professions in order to optimize the use of capital.

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Financial Management

The recent decentralization movement thus results in the management by local authorities of new economic functions in a new accounting and budgetary framework. The resources that these functions will induce change in level as the budgets that structure.
Local authorities must seek new funding to implement investments related to the exercise of their economic function, despite a high savings capacity.


With a self-borrowing, local governments must make a tradeoff between own resources and resources of loans to finance their investments. The bond acts as an adjustment variable whose magnitude depends on both the level of savings and the relative level of debt earlier.

After several years of moderate changes, it appears that the dynamism of local public investment began in 2003 continues at an annual growth of 8% for 4 years. Local communities continue to invest heavily:

* The election cycle is conducive to investment communal;
* While nearly 70% of public investment is devoted to building and public works, costs in construction and public works experience sustained growth;
* The transfer of responsibilities will encourage communities to support heavy investments (railway equipment, road investment ...).

This increase in investment volume is characterized by a need for increased funding. This results in increases in taxation and an increased reliance on borrowing, facilitated by a context of interest rates still low. In late 2006, the amount of the debt of local authorities is around 111 billion Euros, equivalent to 6% of GDP. This proportion is low in light of European commitments on debt: according to the Maastricht Treaty, the debt cannot exceed 60% of global GDP. In addition, the "financial valve" that is the fiscal autonomy increases the flexibility of local authorities in terms of borrowing.


The principles governing the development of local budgets (principle of annual, principle of unity, and rule of balancing the budget ...) require local management framed.
Therefore, despite important differences, the level of risk and solvency of all local authorities is excellent.