The European Central Bank will determine by next week whether the favorable capital rules regarding banks' insurance holdings, known as the 'Danish Compromise', apply when insurance units acquire an asset manager, according to a source familiar with the matter.
This decision follows requests from BNP Paribas and Banco BPM to utilize the Danish Compromise in their acquisitions of asset managers through their insurance divisions. The implications are significant for consolidation across Europe's financial sector.
The Danish Compromise alleviates the capital burden on banks owning insurers by allowing them to hold capital against insurance holdings on a risk-weighted basis instead of fully deducting them from their capital. This adjustment reflects the stringent regulation of the insurance sector, which makes a full capital deduction unnecessary.
If interpreted broadly, the Danish Compromise could also substantially lessen the capital impact on a bank that purchases an asset manager via its insurance arm. BNP Paribas' acquisition of AXA Investment Managers and Banco BPM's bid for Anima Holding both depend on the ECB's continued recognition of the Danish Compromise status for these expanded insurance operations.
The ECB will communicate its decision to the affected banks, which will then relay the information to the markets. The ECB also plans to release guidelines following these individual decisions.
A year ago, the European Parliament approved regulations to make the Danish Compromise a permanent measure, which had initially been a temporary arrangement established in 2012 during Denmark's presidency of the European Union.
Recent regulatory clarifications have suggested that this favorable treatment could extend beyond insurance businesses owned by banks to include assets acquired through their insurance units. Bankers believe that a broad interpretation of the rule could stimulate further deals within Europe's financial sector.
However, Claudia Buch, the ECB's chief supervisor, emphasized that each application is evaluated individually. This week, Frank Elderson, vice chair of the ECB's supervisory board, reiterated that requests for the Danish Compromise are processed on a strictly case-by-case basis, with no established timeline for decisions. Nonetheless, he acknowledged the importance of providing clarity to the market.
"The ECB, and I myself, are acutely aware that questions about the Danish Compromise are top of mind for many in this room and likely for others outside as well," he noted at Morgan Stanley's European Financials Conference. He added that while specific transactions or banks cannot be discussed, the ECB recognizes the market's desire for prompt clarity.