Under all methods described in Annexes 1 and 2 of the Capital Adequacy Principles paper a decision has to be made, explicitly or implicitly, as to how to deal with minority interests in the various entities of the group. Essentially, the question is whether to include them by using full integration or to exclude them by using a pro-rata approach.

The example, using the risk-based aggregation method, demonstrates that full consolidation may yield a less conservative result than the pro-rata approach in cases where there are important surpluses and no deficits at solo level elsewhere in the group and thus, may mislead supervisors about the situation of the group.

Consider first a regulated parent and its 100% participation in a regulated subsidiary.

Parent

Capital	100
Capital requirements	- 90
Participation 1 (historic cost)	40
SOLO SURPLUS	10

Subsidiary 1 (100%)

Capital	40
Capital requirement	- 25
SOLO SURPLUS	15

Group (Parent + Subsidiary 1)

Both institutions (parent and subsidiary 1) comply with their respective capital requirements at solo level. The assessment of capital adequacy at group level however reveals that there is an element of double gearing which would call for regulatory action from the parent's regulator. As a result the parent would have to increase its capital or to reduce its risk or the subsidiary's risk. (Since the parent has a 100% stake in the first subsidiary there is no difference between full and pro-rata integration).

Consider a situation where the parent also has a 60% participation in a second subsidiary with a considerable surplus at solo level.

Subsidiary 2 (60 %)

Capital	100
- parent	60
- minority interest	40
Capital requirements	- 25
SOLO SURPLUS	75

The group position would be as follows:
Group (Parent + Subsidiary 1 + Subsidiary 2)

	full integration	pro rata integration
Capital	240	200
- parent	100	100
- subsidiary 1	40	40
- subsidiary 2	100 (60 parent's share; 40 minority interests	60
Capital requirement	- 140	- 130
- parent	- 90	- 90
- subsidiary 1	- 25	- 25
- subsidiary 2	- 25	- 15
Participation 1 (book value)	- 40	- 40
Participation 2 (book value)	- 60	- 60
GROUP DEFICIT	0	- 30

While pro-rata integration reveals a deficit at group level, full integration of the second subsidiary in the group calculation reveals no deficit because the second subsidiary's surplus compensates for the previous deficit at group level. This is because full integration regards capital elements attributable to minority shareholders as available to the group as a whole unless supervisors decide to limit the inclusion of the excess capital of this subsidiary. Of course, if the second subsidiary had a capital deficit at solo level then full integration would reveal a larger deficit at group level than pro-rata integration because full integration has the effect of placing full responsibility for making good the deficit on the controlling shareholder (the parent).