This paper has stressed that the distinction between the warehousing and non-warehousing activities of a financial firm is important for understand economic and regulatory capital. Much of the concern with capital adequacy today focuses on the computation of risk and the amount of capital that such risk requires. There is a great deal of attention lavished on computational and measurement issues surrounding price and credit risk, and, increasingly, liquidity risk. These risks – all of which accrue from financial firms’ warehousing functions – are certainly important, and sensible measurement of them is a necessary component of any economic or regulatory capital system.

However, given the progress being made on this front, it is important to remember that these warehousing functions are by no means all of the risks that financial firm takes on. They increasingly participate in numerous agency businesses, such as various forms of asset management, account services, and advisory services. These businesses add to the risk of the firm. But importantly they may also contribute to the profitability of the firm, and thereby reduce some of the burdens that would otherwise be born by pre-existing capital as a buffer against risk. This paper has tried to show how these non-warehousing activities impact both our assessment of risk and the capital buffer that a prudent financial firm needs.