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What is Double Gearing?

Highlighted from a real earnings story. Explained by Clicked.

Used in a sentence

The Daily Ledger · Markets

Regulators flagged the financial conglomerate for double gearing capital across subsidiaries.

The reader highlighted one word mid-article. Clicked broke down the finance term β€œdouble gearing” into plain English:

Explained in three depths

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Overview

Double gearing is when the same pot of capital gets counted twice, once at a parent company and again at a subsidiary it was passed down to. That makes a financial group look better protected against losses than it really is.
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Overview

Double gearing is counting the same money twice and hoping nobody checks. The parent says it has capital, the subsidiary says it has capital, and it's the same capital commuting between floors. 😎

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Detail

The mechanism is simple: a parent raises capital, injects it into a subsidiary as equity, and both entities count it, the parent as an investment it owns and the subsidiary as capital it holds. On paper the group looks doubly cushioned, but in a crisis the same dollar cannot absorb losses in two places. This is why regulators supervise banking and insurance groups on a consolidated basis, deducting intra-group holdings when measuring real strength. The problem compounds in layered structures, where parent to holding company to operating subsidiary produces triple gearing. Reading a group's accounts, the question is how much capital exists once.
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Detail

The move: parent raises cash, pushes it down into the subsidiary as equity, and now the parent's books show a valuable stake while the subsidiary's books show fresh capital. Same dollar, flexed twice. Works great until something breaks, because one dollar can't put out two fires. Regulators know the trick, which is why they measure the group consolidated and subtract the double-counted bits. Stack more layers and you get triple gearing: same dollar, three floors, three flexes. 😎

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Analogy

Parents show the bank $20,000 in savings on their loan application. Their son, applying for his own loan, lists the same $20,000 and says his parents are backing him. Both applications look safe, but one pot of money exists, and if both loans go bad in the same year that $20,000 can rescue exactly one of them.
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Analogy

Dad hands his kid $500. Now dad's net worth includes the $500 his kid owes him while the kid's wallet includes the actual $500, so the family total sounds like a grand and is really five hundred bucks. A bank checking the family as one unit figures that out fast.
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AI explanations may contain errors · Not professional advice

Formal definition β€” The same term, explained the usual way

Double gearing denotes the use of the same regulatory capital in two or more entities within a financial group, typically arising where a parent downstreams capital to a subsidiary that recognizes it within its own solvency requirements. Because such capital cannot simultaneously absorb losses in multiple entities, supervisory frameworks for financial conglomerates mandate consolidated capital adequacy assessment and the deduction of participations in group entities, with multiple gearing across tiered structures attracting equivalent treatment.

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