6. Quality of capital
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As the previous example demonstrated, the divergence of capital definitions complicates the assessment of capital adequacy at group level in the sense that it introduces a qualitative element. The following example, using the risk-based aggregation method, shows that the importance of the qualitative aspect is not limited to the case of diverging capital definitions.
Parent
Subsidiary (100% participation)
Both, the parent's and the subsidiary's regulator recognise subordinated debt as capital elements eligible for regulatory purposes.
Group
The solvency surplus at group level stems from the subsidiary's subordinated debt. Although subordinated debt is an acceptable form of capital under the parent's own regulatory rules as well, the group surplus in this example is arguably only available to the subsidiary, in which case the regulator of the parent will need to guard against the possibility that this excess is used to cover risks at group level (e.g. a notional deficit in an unregulated entity). The use of subordinated debt capital to cover losses is limited to the institution which has issued it. Its integration in a group wide assessment of capital adequacy raises the same type of issues as the inclusion of minority interests.
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Risk Library *
Documents by Author *
Committees at the Bank for International Settlement (BIS) *
Supervision of Financial Conglomerates *
Supplement to the Capital Adequacy Principles paper *
Illustrative examples
