• A parent life insurance company has own funds of 500, of which 200 is paid-up share capital (also recognised by banking regulators);
• The remaining 300 stems from profit reserves appearing in the balance sheet and future profits, capital components which are only recognised by insurance regulators;
• The insurance company has a 100% participation in a bank subsidiary with a book value of 250. It therefore complies with its capital requirement of 250.
• In addition to the 250 paid-up share capital furnished by the insurance parent, the banking subsidiary has hidden reserves and reserves for general banking risk of 50 which - by definition - are not elements recognised as liable funds by insurance regulators. Its capital requirement is 300.

An undifferentiated, purely quantitative, calculation, based on the risk-based aggregation method, identifies a balanced capital position at group level with the sum of the capital elements equalling the capital requirements:

Capital of Insurance Parent		Capital of Banking Subsidiary
Profit Reserves, Future Profits	300	Paid-Up Share Capital	250
Paid-Up Share Capital	200	Hidden Reserves and Reserves for General Banking Use	50
Less Book Value of Participation	250
Net Capital	250	Net Capital	300
Capital Req't	250	Capital Req't	300

Analysis reveals a deficit in group-wide capital for banking risk; leaving the question of overall capital adequacy to each individual supervisor:-

	Capital Requirements
	Banking Risk	Insurance Risk	Excess/Deficit
	300	250
Insurance Capital 300		250	50
Banking Capital 50	50		0
"All-round" Capital 200	200
Excess/Deficit	- 50	0

The capital charge for insurance risk of 250 is more than covered by the 300 units of capital recognised only by insurance regulators; there is an excess of 50 units. The capital charge for banking risk of 300 is covered by 50 units of capital recognised only by banking regulators and by 200 units of capital recognised under both supervisory regimes; but the remaining charge of 50 is effectively covered by insurance capital - i.e. by capital components which banking regulators have deemed unsuitable for covering banking risks.