3. This paper recognises the existence of capital adequacy rules in each sector and does not seek to impose specific techniques for giving effect to the principles. Rather, the paper sets out techniques that usefully complement existing approaches to the assessment of capital adequacy. The Joint Forum has identified three measurement techniques outlined in Annex 1.

Background

4. The emergence of corporate groups which provide a wide range of financial services, known as financial conglomerates and typically incorporating at least two of banking, securities and insurance, has created an additional dimension for the solo supervisors of entities within those groups. Supervisory concerns have been explored from the perspective of each of the three supervisory disciplines and also from a broader perspective by the three groups of supervisors working together.

5. A central issue has been to ensure that the objectives of individual supervisors as they relate to the entities for which they have regulatory responsibility are not impaired as a result of the existence of financial conglomerates. Supervisors collectively recognise the need for individual supervisors of businesses within a conglomerate to satisfy themselves that there is sufficient capital available to the individual regulated entities to ensure their viability. Different supervisors attach different weights to the relative importance of the two objectives identified in the opening paragraph of this paper while recognising that neither is exclusive of the other.

6. The solo capital adequacy requirements of each of the banking, securities and insurance sectors are different with varying definitions of the elements of capital, and varying approaches to asset and liability valuations. Each sector's capital adequacy requirements reflect the nature of the different businesses undertaken by each sector, the differing risks to which they are exposed, and the different ways in which risk is managed by the firms and assessed (and/or constrained) by supervisors.

7. The elaboration and application of capital adequacy measurement techniques on a group-wide basis, and the possibility of the exercise of supervisory powers including those providing for remedial action which may prove necessary, is not intended to create an expectation that the full extent of regulation extends to unregulated entities within a financial conglomerate. The supervisory measures adopted should be construed so as to take this into account.