154. There are important differences in the definition of capital across the various regulatory frameworks, reflecting the different types of risk involved in the wide range of activities undertaken by the different institutions. Some types of capital are an appropriate buffer for certain types of risk, but not for others, and in the case of financial conglomerates it is therefore unlikely to be sufficient to ensure that capital at group level is at least equal to the sum of the capital requirements of the individual entities. An examination of both the type and structure of group capital appears to be necessary if supervisors are to satisfy themselves that risks are indeed covered by capital, which is not only available to the supervised entity but is also of a type they recognise ­ i.e. that banking risks are covered by capital recognised by bank regulators, insurance risks are covered by capital acceptable to insurance regulators and so on. If excess capital recognised by one regulator is to be taken into account by a regulator in another sector, it would appear necessary for the capital components to be eligible as capital under both supervisory regimes, and for their transferability (from one entity to the other) to be beyond question.

155. It is not the parent's ability to downstream funds to a subsidiary which is under scrutiny here, but the suitability of surpluses for transfer from subsidiary to parent or from one subsidiary to a sister company. The Tripartite Group endeavoured to identify what treatments are practicable and prudent to meet the requirements set out in the paragraph above. It concluded that there are two possible approaches:

(a) the identification of elements of capital recognised by bank / securities / insurance regulators as acceptable as "all­round" capital and thus available to cover risks incurred by any entity within a financial conglomerate;

(b) a system whereby the excess capital in a dependant would be taken into account for the purposes of the parent / group only to the extent that the capital elements were suitable according to the rules of the parent.

Example G in Appendix III demonstrates the nature of the suitability problem. It shows a case where an insurance parent and a bank subsidiary each fulfil their solo capital requirements, but an analysis of the capital structure at group level reveals that banking risks are actually being covered by a type of capital recognised only by insurance regulators.

156. There was general agreement among members of the Tripartite Group that the diverging definitions of capital from sector to sector made it difficult to envisage harmonised capital rules in the foreseeable future. Development of the notion of "all­round" capital was considered attractive by some members because it would result in application of the most severe requirements in calculating own funds and the scope for supervisory arbitrage would therefore be considerably reduced. However, a methodology which ignored the existence of excess capital available for covering certain types (perhaps most types) of risk (but not all types) was considered by most members to be unduly restrictive and the second of the two approaches outlined above (option 'b') was generally favoured.

157. Under the building block prudential approach, capital items would be taken into account by the parent company and qualified at that level according to conditions ensuring the suitability of excess capital items for each other's block. In other words, the quantitative assessment of capital adequacy at group level would be supplemented by a further disaggregated assessment in order to ensure that each block of risks is covered by capital of an appropriate type. In the aggregation and risk-based deduction methods, the own funds and capital requirement would be assessed for each company in the group according to the rules applicable in the sector to which that company belongs. As an integral part of these two methods, the parent regulator would almost certainly be in liaison with regulators responsible for other entities within the group with a view to establishing whether amounts of any surplus capital which have been identified are indeed suitable to be taken into account for the parent's own purposes (i.e. that they are recognisable as capital under his own regulatory regime).

158. Again, some members of the Tripartite Group maintain that special attention needs to be paid to capital surpluses generated by the issue of subordinated debt by subsidiaries. Subordinated debt may well qualify as capital under the regulatory regimes of both the parent and its subsidiary, but, where it is issued by the subsidiary (see Example H in Appendix III), not only does it raise questions about the availability of any capital surpluses in that subsidiary (see paragraph 143), but its suitability to be regarded as capital for the group as a whole is also questionable (unless the debt is subordinated to the liabilities of the parent). It is even conceivable that an issue of subordinated debt by a subsidiary could be taken up by its parent. To help to alleviate this problem, some members would advocate that the qualitative assessment of capital needs to distinguish between subordinated debt issued by the parent and that issued by subsidiary companies in the group. However, other members of the group take the view that subordinated debt issued by a majority-owned (or wholly­owned) subsidiary should be regarded as available to the group as a whole.

Conclusions

159. The diverging definitions of capital from sector to sector make it difficult to envisage harmonised capital rules in the foreseeable future. With this in mind, the Tripartite Group agreed that the simplest way of ensuring that excess capital in a dependant is suitable to cover risks at parent / group level was a system whereby the extent and nature of any excess capital in a dependant would first be assessed by reference to the capital requirements of that dependant. The excess capital elements identified in this way would only be admitted for the purposes of the parent / group to the extent that they are suitable according to the rules of the parent (or, where the parent itself is unregulated, the dominant regulated entity). The regulators of the parent and the dependant would need to liaise closely over the acceptability and admission of different elements of capital.