By Francesco Canepa and Valentina Za
FRANKFURT (Reuters) – The European Central Bank will decide at the latest by next week whether favourable capital rules on banks’ insurance holdings, known as the ‘Danish Compromise’, also apply when the insurance units buy an asset manager, a person close to the matter said.
The decision, which follows requests from France’s BNP Paribas and Italy’s Banco BPM to use the Danish Compromise in purchases of asset managers carried out through their insurance businesses, potentially has far-reaching implications for consolidation across Europe’s financial sector.
The Danish Compromise reduces the burden for banks of owning an insurer by letting them hold capital against insurance holdings on a risk-weighted basis rather than deducting them in full from their capital.
The idea is that, given the insurance sector’s tight regulation, a full capital deduction is not necessary.
Under a broad interpretation of the rules, the Danish Compromise could also sharply reduce the capital impact for a bank of buying an asset manager through its insurance arm.
BNP Paribas’ acquisition of AXA Investment Managers and Banco BPM’s bid for Italian asset manager Anima Holding are both relying on the ECB continuing to grant Danish Compromise status to the expanded insurance businesses.
The ECB’s decision is communicated to the banks in question, which can then inform markets.
The ECB is also planning to publish guidelines after the individual decisions.
The European Parliament a year ago approved regulation that made permanent the Danish Compromise, which was a temporary arrangement agreed in 2012 when Denmark held the European Union’s rotating presidency.
A regulatory clarification has indicated that the favourable treatment could apply not only to insurance businesses held by banks, but also to assets those banks buy through their insurance units.
A broad interpretation of the rule could stoke further deals in Europe’s financial sector, bankers have said.
However, the ECB’s chief supervisor, Claudia Buch, has said each application is assessed individually.
This week, Frank Elderson, vice chair of the ECB’s supervisory board, reiterated requests by banks to apply the Danish Compromise were processed “strictly on a case-by-case basis” and that there was no set timeline for a decision.
However, he said supervisors were aware of the need for clarity.
“The ECB, and I myself am acutely that questions about the Danish Compromise are very much top of the minds of many people in this room and probably many people outside of this room,” he told Morgan Stanley’s European Financials Conference.
“I cannot speak to any specific transactions or banks,” he said, adding “we are very much aware that the market and many of you would like to see clarity sooner rather than later.”
(Reporting by Francesco Canepa in Frankfurt and Valentina Za in Milan. Editing by Mark Potter)
