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The Danish Compromise sounds like a plan to avoid calories at coffee time. But it may be the thing that prompts consolidation among Europe’s banks and insurers.
Dating back to Denmark’s spell as EU president in 2012, the compromise was a supposedly temporary exception to Basel rules for European banks with insurance businesses. This was a political sop to countries such as France where the bancassurance model is most common. Instead, this regulatory treat is likely to become a permanent fixture.
Bancassurance was once common across Europe. After the financial crisis struggling banks sold or spun off insurance units: the UK’s RBS (now NatWest) spun off Direct Line; ING of the Netherlands listed insurer NN.
In France and Italy, the model lives on with the likes of Crédit Agricole and Intesa Sanpaolo operating large insurance businesses. Distribution within bank branches offers significant cost savings over standalone insurers.
Those advantages will be reinforced if, as expected, the EU allows a capital relief clause for bancassurance when its formal plans for Basel implementation are revealed later this year. Previously, insurance subsidiaries were typically assigned a capital risk weight of 370 per cent. Under the new Basel rules, that weighting should fall to 250 per cent. The rationale is that insurance is tightly regulated by separate regional authorities, but banks will still be allocating less capital to the same risk.
Take Intesa Sanpaolo: today it has about €24bn of risk-weighted assets for its insurance businesses. If the weighting moves as expected, it would lower its RWAs by about €8bn. That would translate into about 0.4 percentage points on its 13.7 per cent CET 1 capital ratio as of December.
Although, all in, the latest Basel rules may require more capital for most banks, this Danish Compromise should make insurance a more attractive proposition.
Indeed, UniCredit will probably buy back and consolidate its insurance businesses, at present held within joint ventures with insurance companies. Assuming the Basel process proceeds as expected, this move could mean no change to its capital needs after year one while adding 3 per cent to earnings per share, thinks Andrea Filtri of Mediobanca.
Big bancassurers such as France’s Crédit Agricole and KBC of Belgium could capitalise on rule changes. Unicredit’s deal-hungry chief executive Andrea Orcel might even be encouraged to buy another insurance business.
The notion of a pan-European financial services champion has been much discussed, with little action. The Danish Compromise, at least, gives some reason to reconsider those opportunities.
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