For a loan portfolio, unexpected losses are charged against:

For a loan portfolio, unexpected losses are charged against:
A . Credit reserves
B . Economic credit capital
C . Economic capital
D . Regulatory capital

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Answer: B

Explanation:

Credit reserves are created in respect of expected losses, which are considered the cost of doing business. Unexpected losses are borne by economic credit capital, which is a part of economic capital. This question is a bit nuanced – and ‘economic capital’ would generally be a good answer as well. However, taking a rather beady eyed view of the terminology and distinguishing between ‘economic credit capital’ which is a subset of ‘economic capital’, we can say that ‘economic credit capital’ is a more appropriate Choice ‘a’s the question relates to credit losses.