(Bloomberg) – The European Central Bank has almost closed a regulatory loophole that heralds a catalyst for the wave of asset management trading.
The ECB’s oversight has recently opposed the use of an accounting treatment called the Denmark compromise in two takeovers by banks in euro zones. This makes it used for similar transactions.
“Negative opinions may be a slowing factor in M&A interest in this area,” Ing Groep NV analyst Suvi Platerink Kosonen said in a note on Monday.
The ECB’s position would raise expectations that the regulation is designed to relieve the capital burden of banks that diversify their insurance business and could be used to stimulate purchases from investment firms or wealth managers. BNP Paribas SA’s asset manager last year agreed to purchase Axa SA through its insurance units, trying to apply the rule to a large scale.
But the French bank said on Monday that the ECB recently expressed opposition to the plan. The news came out after Italian lender BANCO BPM SPA said it had been informed of the central bank’s negative stance on applying Denmark’s compromise to the asset management agreement.
Both Banco BPM and BNP Paribas show that the negative view of the ECB does not constitute the final decision, and BANCO BPM added in a March 26 release that it is in a “ongoing” discussion with the ECB. The Italian bank also said the final decision was another regulator, the European Banking Authority.
When the European Commission’s Danish president first agreed to the capital rules in 2012, the idea was to reduce the burden on banks to diversify insurance, which was strictly regulated. To this end, banks only need to include insurance business in part when calculating their total capital needs, making them more financially attractive.
Originally a temporary solution, this year Denmark compromise became permanent.
French Kuomintang Paribas and Banco BPM have recently tried to apply the rule to the proposed acquisition of asset management companies. By trading through their insurance units, they try to reduce the impact on regulatory capital.
Mediobanca Spa analyst Andrea Filtri said in a note in September that shortly after BNP Paribas announced its plans to buy an AXA investment manager, Mediobanca Spa analyst Andrea Filtri said in a September note that the permanent nature of compromise on Denmark would open up “new and broader M&A areas” for banks.”
The ECB’s negative views on the deal seemed to surprise French KMT Paribas and Banco BPM, with French lenders on Monday saying in this case that expectations for return for AXA IM were paid off.
As for Banco BPM, CEO Giuseppe Castagna said the ECB expressed opposition to Denmark’s compromise, and he determined that regulators would approve the structure.
Claudia Buch, head of the European Central Bank’s banking supervision department, said in a Bloomberg News interview last week that the Denmark compromise was “purpose to the insurance sector, not the asset management business.”
Both the French Kuomintang Paribas and Banco BPM said they would continue to trade even if they could not achieve favorable capital treatment. It said that in the case of BNP Paribas, this could raise the hit to the capital measure known as the CET1 ratio by about 10 basis points to around 35 basis points.
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