Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 5 Figure 3: Assessment of Economic Capital Adequacy Economic capital is determined at a desired confidence level in the probability distribution of value of the business. In this paper, we assume that economic capital can be approximated by the unexpected loss at the given confidence level. Economic capital may be estimated using a range of methodologies with varying levels of robustness. The greater the methodology’s robustness, the greater will be the transparency, relevance, and applicability of the economic capital measure. A more detailed discussion of economic capital appears in Sections II through VII. 1.3 The Components of Capital Adequacy for Liquidity Liquidity adequacy comprises the right-hand side of the balance beam for capital adequacy as shown in Figure 1. Liquidity adequacy is the assessment of the sufficiency of all expected internal and external financial resources that are readily available to meet scheduled cash flow obligations, net of a measurement of the uncertainties resulting from cash flow risk factors. Liquidity adequacy must exist without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.