43. Because banks, insurance companies and securities firms are subject to different prudential requirements, supervisors face a fundamental problem in determining whether there is adequate capital coverage in a financial conglomerate. The Tripartite Group discussed this issue in some depth and concluded that the desired group­wide perspective can be achieved either by adopting a consolidated type of supervision, or by a "solo­plus" approach to supervision. For the purposes of this report, the following working definitions were agreed upon:

Consolidated Supervision ­ This supervisory approach focuses on the parent or holding company, although individual entities may (and the Tripartite Group advocates that they should) continue to be supervised on a solo basis according to the capital requirements of their respective regulators). In order to determine whether the group as a whole has adequate capital, the assets and liabilities of individual companies are consolidated; capital requirements are applied to the consolidated entity at the parent company level; and the result is compared with the parent's (or group's) capital.

Solo­Plus Supervision ­ This supervisory approach focuses on individual group entities. Individual entities are supervised on a solo basis according to the capital requirements of their respective regulators. The solo supervision of individual entities is complemented by a general qualitative assessment of the group as a whole and, usually, by a quantitative group-wide assessment of the adequacy of capital. There are several ways in which this quantitative assessment can be carried out.

44. Because of its importance with respect to the supervision of financial conglomerates, the assessment of capital adequacy was singled out for further study and the results of that study are discussed in detail in the next chapter. However, a section dealing with the supervisory issues posed by conglomerates would not be complete without a reference to the fact that it is possible for all entities in a group to fulfil their capital requirements on an individual basis, but for the own funds of the group as a whole to be less than the sum of those requirements. Such a situation occurs where the same own funds are used simultaneously as a buffer more than once - i.e. to cover the capital requirements of the parent company as well as those of a subsidiary (and possibly also those of a subsidiary of a subsidiary). This dual or multiple use of the same capital in several members of a financial conglomerate is often referred to as "double gearing" or "excessive gearing"; it can lead to the under capitalisation of the group.

45. The term "excessive gearing" can also be used to describe two other problems faced by supervisors with regard to the application of capital within a financial conglomerate. The first of these relates to the situation where a parent issues debt and downstreams the proceeds as equity; the need to remunerate the debt could be a source of financial stress to the subsidiary or to the group as a whole. "Excessive gearing" is also said to occur when a group has sufficient capital to support its regulated activities, but the size and nature of its unregulated activities is such as to make overall capital adequacy doubtful. If the parent is itself unregulated, it is particularly important that supervisors have adequate control over the release of equity capital from the authorised entity. Unregulated entities in general are a source of complication for supervisors in their endeavours to assess capital adequacy within a financial conglomerate and due consideration is given to the difficulties they raise in the ensuing chapter.

46. Another problem facing supervisors trying to ascertain the capital adequacy of a financial conglomerate is that, because of the different definitions of capital which apply across the various supervisory sectors, it is unlikely to be sufficient merely to ensure that there is adequate capital. An analysis of the distribution of that capital also seems to be necessary in order to be satisfied that risks are covered by the right sort of capital. Similarly, many supervisors believe that they need to be satisfied about the availability of that capital to the supervised entity. These aspects are also covered in detail in the next chapter.