Economic Capital refers to the amount of capital that a company needs to cover its risks and ensure its long-term stability. It acts as a buffer against potential losses, allowing businesses to operate safely and meet their obligations. This concept is crucial for financial institutions, as it helps them assess their risk exposure and maintain solvency. In practice, Economic Capital is calculated by evaluating various risks, including credit, market, and operational risks. By quantifying these risks, organizations can determine the necessary capital reserves to protect against unexpected financial downturns, ensuring they remain resilient in changing economic conditions.