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Everyone likes to get more for less. For Europe’s bankers, the so-called Danish Compromise is the gift that keeps on giving. The once-transitory regulation, which dates back to Denmark’s 2012 EU presidency and grants capital benefits to banks that own insurance businesses, was made permanent in EU law earlier this year.
With the bancassurance model blessed by regulatory overlords, the industry is reacting: take BNP Paribas’ €5.1bn acquisition of Axa Investment Managers in August. As the deal’s dust settles it is becoming clearer how powerful this regulatory fudge will be.
Eagled-eye readers will note that Axa IM is, in fact, an asset manager, not an insurance company. The regulatory magic comes because BNP is doing the deal via its insurer, BNP Paribas Cardif, where the business will then remain. The result is the deal will consume about €2bn worth of BNP’s core equity tier one capital — 60 per cent less than it would have done if BNP had bought Axa IM directly.
That happy outcome is the result of an overlooked detail in the Danish Compromise, which allows banks to ignore goodwill in acquisitions via insurance units.
This one detail amounts to a “plutonium enrichment” for the Danish Compromise, says Andrea Filtri of Mediobanca, who argues that it could unleash a series of new deals by European banks.
In effect, the goodwill BNP Cardif takes on from Axa IM’s balance sheet sits outside the regulatory boundary for consolidation. Bank regulation then counts the deal as a non-bank equity investment. Axa’s existing goodwill is added to risk-weighted assets rather than being deducted from CET1 capital.
This looks a win-win for banks able to take advantage, which should include many of the biggest banks in France, Italy, Spain and the Nordics. For these bancassurers, acquisitions of fee-generating asset management businesses have potentially become ultra capital-light deals. That opens the door for a wave of M&A given Europe’s fragmented asset management and insurance sectors.
This is not a regulatory oversight either. In its implementation of the new Basel rules, which are supposedly stricter, the EU has embedded this loophole in place. Banks are left exposed to a greater risk that valuations will fail to live up to the prices paid and that writedowns come through core banking capital.
One conclusion is that EU policymakers deemed this a risk worth taking if the new rules help promote what regulators really desire: a long-awaited cross-border consolidation in financial services.
