European Central Bank's Case-by-Case Approach on Banks' Insurance Holdings

FRANKFURT (Reuters) – The European Central Bank (ECB) will apply a favorable regulatory treatment of banks' insurance holdings on a "case by case" basis, according to the ECB's top supervisor Claudia Buch on Tuesday.

The Danish Compromise

The so-called Danish compromise, which reduces the capital costs for banks that own an insurer, is pivotal for several proposed deals, including BNP Paribas's bid for AXA Investment Managers and Banco BPM's offer for Anima Holding.

The use of the Danish compromise allows for a cheaper acquisition of fund managers like AXA IM or Anima, mitigating the regulatory capital hit for buyers. This compromise enables banks to risk-weigh their insurance investments instead of fully deducting them from their capital.

Regulatory Consultation

Both deals heavily rely on an expansive interpretation of the Danish compromise, which analysts and bankers argue has sparked a series of potential mergers and acquisitions in Europe’s financial sector.

Buch stated, "We currently have under consultation a new guide that clarifies our approach there but at the end it's also an issue that we would assess on a case by case basis for individual institutions." The ECB has initiated a consultation on how to apply options and discretions available in EU law.

Background of the Danish Compromise

The Danish compromise was introduced over a decade ago during the Danish EU presidency, initially aimed at tempering strict 'Basel' rules for European banks with insurance ventures. In April, the EU Parliament made this compromise permanent, later clarifying that the favorable treatment could extend beyond just insurance businesses held by banks but also to assets acquired through their insurance units. Nevertheless, the ECB retains the final authority on these matters.

BNP is executing the AXA IM acquisition via its insurance business, BNP Paribas Cardif, while Banco BPM targets Anima through its unit, Banco BPM Vita.

Mediobanca Securities analyst Andrea Filtri estimated that the €5 billion ($5.25 billion) AXA IM deal would cost BNP Paribas 65 basis points of capital without the Danish compromise, instead of only 25 basis points. "The once-a-forbidden-dream is now reality, opening a new horizon for M&A," Filtri remarked.

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