1. To provide banking, securities and insurance supervisors with principles and measurement techniques (a) to facilitate the assessment of capital adequacy on a group-wide basis for heterogeneous financial conglomerates; and (b) to identify situations such as double or multiple gearing which can result in an overstatement of group capital and which can have a material adverse effect on the regulated financial entities. The principles and measurement techniques put forward in this paper do not replace existing sectoral rules and regulatory responsibilities.

Summary of Principles

2. Supervisors should assess the capital adequacy of financial conglomerates. In so doing, measurement techniques should be designed to:

1. detect and provide for situations of double or multiple gearing, i.e. where the same capital is used simultaneously as a buffer against risk in two or more legal entities;

2. detect and provide for situations where a parent issues debt and downstreams the proceeds in the form of equity, which can result in excessive leverage;

3. include a mechanism to detect and provide for the effects of double, multiple or excessive gearing through unregulated intermediate holding companies which have participations in dependants or affiliates engaged in financial activities;

4. include a mechanism to address the risks being accepted by unregulated entities within a financial conglomerate that are carrying out activities similar to the activities of entities regulated for solvency purposes (e.g. leasing, factoring, reinsurance).

5. address the issue of participations in regulated dependants (and in unregulated dependants covered by principle IV) and to ensure the treatment of minority and majority interests is prudentially sound.