Economic capital is what for example a bank has and uses in order to stay solvent. Isn't this in a way a liquidity buffer? or what would be the difference between them?
Different sides of the balance sheet.
- Capital represents long-dated instruments (infinite lifetime in the case of common equity) issued by a bank that are subordinated in a way to make them comparable to equity. (Can include instruments that are technically liabilities.) The existence of capital means that assets are greater than non-capital liabilities, i.e., the bank remains solvent.
- A liquidity buffer are assets that are deemed liquid, which means that they can be readily sold at prices near carrying value to meet payment requirements. Note that a solvent entity that only holds hard-to-liquidate assets may be unable to meet a sudden payment obligation. That is, it is solvent, but illiquid.