(Bloomberg) — The European Central Bank has all but shut down a regulatory loophole heralded as a potential catalyst for a deal wave in asset management.
The ECB’s supervisory arm recently opposed the application of an accounting treatment known as Danish Compromise in two takeovers pursued by euro area banks. That has put its use in doubt for similar transactions.
“The negative opinions may act as a slowing factor in M&A interest in the sector,” ING Groep NV analyst Suvi Platerink Kosonen said in a note on Monday.
The ECB’s stance puts a damper on expectations that the regulation, designed to reduce the capital burden on banks that diversify by adding insurance operations, could be used to spur purchases of investment firms or wealth managers. BNP Paribas SA’s last year tried to apply the rule in a big deal, by agreeing to buy Axa SA’s asset manager through its insurance unit.
But the French bank said on Monday that the ECB has recently expressed opposition to the plan. The announcement came shortly after Italian lender Banco BPM SpA said it had been informed of the central bank’s negative stance on applying the Danish Compromise in asset management deals.
Banco BPM and BNP Paribas both indicated that the ECB’s negative view doesn’t constitute a final decision, with Banco BPM adding in its March 26 release that it’s in “ongoing” discussions with the ECB. The Italian bank also said that the final decision lies with another regulator, the European Banking Authority.
When the capital rule was first agreed in 2012 under the Danish presidency of the EU Council, the idea was to make it less burdensome for banks to diversify into insurance, which is tightly regulated. To that end, banks only have to partially include insurance businesses when calculating their total capital requirements, making it financially more attractive to own them.
Initially a temporary fix, the Danish Compromise became permanent this year.
BNP Paribas and Banco BPM have recently sought to apply the rule in proposed takeovers of asset management firms. By conducting the deals through their insurance units, they sought to reduce the impact on their regulatory capital.
Making the Danish Compromise permanent would open “new and wider M&A frontiers for banks,” Mediobanca SpA analysts Andrea Filtri said in a note in September, shortly after BNP Paribas had unveiled its plan to buy Axa Investment Managers.
The ECB’s negative view on the transactions seems to have come as a surprise to BNP Paribas and Banco BPM, with the French lender issuing a statement on Monday that pared back its return expectations from the Axa IM deal in that scenario.
As for Banco BPM, Chief Executive Officer Giuseppe Castagna said just a few days before the ECB signaled its opposition to using the Danish Compromise that he was certain the regulator would approve the structure.
The Danish Compromise is “intended to be applied to the insurance sector and not to, for example, asset management undertakings,” ECB banking supervisory head Claudia Buch said in a Bloomberg News interview last week.
BNP Paribas and Banco BPM have each said they’ll continue to pursue the deals even if they can’t achieve the favorable capital treatment. In BNP Paribas’ case, that could increase the hit to a capital metric known as CET1 ratio by about 10 basis points to around 35 basis points, it said.
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