Latest news with #DanishCompromise
Reuters
24-04-2025
- Business
- Reuters
BNP Paribas CFO: Two elements to AXA IM deal explain capital hit
PARIS, April 24 (Reuters) - The European Central Bank sees two elements to BNP Paribas' ( opens new tab 5.1-billion-euro ($5.8 billion) acquisition of AXA's asset management arm, BNP's finance chief said on Thursday, explaining the capital requirements made by the central bank. "The AXA deal that we have signed consists actually of two different items," Lars Machenil told analysts on a call. "On one hand, it consists of a long-term contract with AXA, and on the other hand, the acquisition of AXA IM (Investment Managers). And they require a different handling," he added. BNP last week hiked its forecast for the capital burden it expected from the acquisition of AXA IM by 10 basis points to 35 basis points on its CET1 ratio - a key measure of financial strength - following updated guidance from the ECB. BNP is acquiring AXA IM via its insurance subsidiary, Cardif. Many investors had expected BNP would be able to apply the so-called Danish Compromise to the deal, a regulatory approach that reduces the capital for banks that own insurers. "We considered the deal to be insurance," Machenil said. The bank's updated guidance on the capital impact reflects this dual view of the transaction, the CFO said. "It's two different deals and if you look at it, that's how we come to a step-up of 10 basis points." ($1 = 0.8800 euros)
Business Mayor
23-04-2025
- Business
- Business Mayor
The trouble with Danish, squared
Unlock the Editor's Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. When a piece of financial regulation has the word 'Compromise' right there in the name, you can tell that it's going to cause problems. And the EU's 'Danish Compromise' on bancassurance groups is doing so at the moment. As businesses, banking and insurance are two great flavours that go well together, like dill and herring. But as accounting systems, they are individually distasteful and even worse in combination, like liquorice and ammonia. This is the root of the problem of regulating bancassurance groups; there is no sensible way to consolidate the sets of accounts without massively distorting the regulatory ratios of one side or the other. The hardcore, no-compromises approach (and the one required by the Basel Standards) is simply to take the equity of the insurance company and deduct it from the tier one capital of the bank. This makes sure that there is absolutely zero double-counting, but it's very harsh and doesn't really reflect the underlying economic reality. The European approach is more lenient, because it allows the bank to treat its insurance subsidiary as just another risk-weighted asset and hold some capital against it. That's somewhat controversial, but it's the law in Europe and it's not wholly indefensible — the insurance capital doesn't disappear just because the owner is a bank. It makes quite a difference, in a stylised but reasonably representative pro forma calculation of the total capital ratio of a banking group with a material insurance subsidiary: But this loophole ended up being a little more generous than anyone had realised. Last year, an obscure posting on the European Banking Authority's Q&A Blog created what the team at Mediobanca called 'The Danish Compromise-Squared' and set in motion a train of events that are now causing a little bit of controversy. Basically, if you allow the Compromise, then the basis for the capital requirement is the (accounting) book value of the insurance subsidiary. But if you do this, then what happens if the insurance subsidiary itself makes an acquisition? Particularly, what if it acquires a fund manager? Fund management companies are always difficult for banks to buy, because of what's known as the 'goodwill hit'. The market capitalisation of an asset manager is usually a lot bigger than its tangible book value, because it's made up of intangibles like brands, management contracts, the services of skilled employees, relationships with advisers, and all the other things which make it possible to charge hefty fees for debatable performance. The difference between tangible asset value and the price paid is recorded as 'goodwill' on the balance sheet, and it's pretty settled regulation that goodwill has to be deducted from a bank's regulatory capital. But it isn't deducted from accounting equity, and accounting equity is the basis of the Danish Compromise. This makes it much more capital efficient to carry out any acquisitions in this sector through your insurance subsidiary rather than on the balance sheet of the parent bank, if you have previously gained the DC treatment. As the EBA makes clear, there's no real basis to 'look through' the accounts of the subsidiary and pick out things that would be subtracted if they had been acquired in a different way. And this makes a real difference — let's add an acquisition of an asset manager at 3x book value to the picture: It certainly feels like 'One Weird Trick — Bank Supervisors Hate It', and they do. The ECB never liked the original Danish Compromise, and seemingly likes the extended version even less; in a recent interview, supervisory board chair Claudia Buch said that 'Our interpretation is that it's intended to be applied to the insurance sector and not to, for example, asset management undertakings.' So far the ECB has already told Banco BPM that it is not going to be allowed to use this method for its acquisition of Anima in Italy. BNP Paribas sent out a press release last week saying that as a result of the ECB's recent expressions of opinion, they had updated their internal analysis of the effect of acquiring the AXA IM investment management business to assume that it would have a negative 35bp of capital ratio, rather than the 25bp initially estimated. But it gets more complicated, because the ECB isn't actually allowed to make policy like this — it's a supervisor, not a regulator. The same interview, Buch admitted that 'this is the role of the European legislators and the European Banking Authority as drafter of technical standards'. Banco BPM even put a question in to the EBA about whether the treatment was allowed, but they rejected it, saying that it would take 'deeper and broader consideration' than they felt able to give in a short time span. It feels like this is a bit of a regulatory hot potato that nobody wants to catch. And in many ways, the 'DC-Squared' might be quite defensible, because 'goodwill in asset management subsidiaries' is actually quite a high quality intangible, particularly when compared to things like capitalised software development costs. After all, Barclays managed to raise more than $10bn by selling Barclays Global Investors to BlackRock in the absolute teeth of the global financial crisis. Saying that the goodwill is worth literally nothing feels wrong. Read More Inside Apollo's alleged grim-reaper gamble Even the BNP press release might be a clue that the ECB isn't fully committed to full deduction. The Mediobanca team estimate that if they had to fully deduct goodwill on the AXA transaction, they would be talking about something closer to 65bp of capital impact, rather than the 35bp mentioned in their updated analysis. So perhaps they are anticipating that there is some halfway house to be achieved with the ECB. If that happens, we would be looking at a compromise with respect to the compromise on the Compromise, which surely ought to be some kind of world record.
Reuters
17-04-2025
- Business
- Reuters
Regulatory snag in BNP's AXA IM bid may cast doubt on similar deals, sources say
PARIS/LONDON, April 17 (Reuters) - BNP Paribas ( opens new tab embarked on a 5.1 billion euro ($5.8 billion) purchase of an asset management business last year expecting regulators would let it through with minimal impact on the bank's capital, people familiar with the matter said, a model some peers were keen to replicate. But the latest assessment from its chief supervisor, the European Central Bank, tempered those expectations, leading to a greater hit to its capital than the lender had initially priced in, the people said. BNP said on Monday it had lowered its expected returns on the deal following guidance from the ECB on the so-called Danish Compromise - a prudential treatment that allows lower capital requirements for banks that own insurance units. It added that the prudential treatment of the deal will be disclosed at closing, pending final talks with regulators. BNP and the ECB declined to comment. Dealmakers had anticipated a wave of tie-ups after the BNP-AXA deal as European money managers sought to fend off U.S. rivals and demand grows for cheap technology-driven investing. Some analysts had foreseen other banks would follow the French lender's footsteps as a way to boost fees. "It will maybe dampen excitement a little bit," said Johann Scholtz, an analyst at Morningstar. "What makes it a little bit surprising is, in the current environment, you'd expect the ECB to be maybe a little bit more supportive of consolidation across the board." RAISING THE BAR In an interview published on Friday on the ECB's website, Claudia Buch, the central bank's chief supervisor, said the central bank interprets the 'Danish Compromise' as applying to the insurance sector — not to asset management firms. The ECB's decision took some dealmakers by surprise and the lack of clarity around the regulatory treatment may make such transactions more difficult to execute, several said. Some said parties pursuing deals may now seek written assurances from the ECB, effectively raising the bar for such transactions. Not all experts shared that view. "I do not believe that this will materially impact similar activity in the EU," said Alvin Abraham, chief executive of prudential risk consultancy firm Katalysys. The ECB's decision on the use of the Danish Compromise, by limiting the impact on its capital reserves, signals that many of the benefits of the EU provision still apply, Abraham added. Matthew Clark, an analyst at Mediobanca, agreed that BNP's statement on Monday indicated a partial application of the favourable capital treatment. "That very strongly points to the idea that there's been some kind of splitting mechanism used whereby the ECB said: 'you're buying an asset manager where a lot of the business is insurance related, so let's split that kind of notionally in two," Clark said, meaning that the Danish Compromise was applied to the insurance part AXA IM's activities only. The Danish Compromise is a provision that makes it less costly for banks to hold stakes in insurance companies. Instead of subtracting the full value of those holdings from their capital, banks can apply a risk-based calculation. By lowering the capital impact of insurance stakes, the measure encourages banks to own insurers and can reduce the cost of certain acquisitions made through insurance arms. BNP is acquiring AXA IM through its insurance business Cardif. However, following the ECB's comments on the "prudential" treatment of the acquisition of asset management companies, the French lender cut returns guidance to 14% in the third year, from a previously projected 18%, followed by more than 20% in the fourth year, it said in its statement on Monday. BNP's market update follows a similar ECB assessment last month, when the regulator issued a negative opinion on Italian bank Banco BPM's request for favourable capital treatment for its proposed bid for fund manager Anima. BNP Paribas shares have gained about 15% since the AXA IM deal was announced in early August, trailing French rivals Crédit Agricole and Societe Generale, as well as the European banking index (.SX7E), opens new tab, which is up by close to 28% over the same period. ($1 = 0.8814 euros)
Reuters
11-04-2025
- Business
- Reuters
ECB opposes favourable capital treatment for BNP Paribas' AXA deal, source says
PARIS, April 11 (Reuters) - The European Central Bank is opposed to BNP Paribas ( opens new tab using a favourable capital treatment for its deal to buy French insurer AXA's ( opens new tab asset management business, a person with knowledge of the matter said. The ECB's view could have negative implications for consolidation across Europe's financial industry, making certain deals more expensive. The Reuters Tariff Watch newsletter is your daily guide to the latest global trade and tariff news. Sign up here. BNP shares fell on Friday and were last down 3%, underperforming the wider European banking sector, which dropped about 0.2% (.SX7P), opens new tab. BNP Paribas and AXA declined to comment. The ECB did not immediately respond to a request for comment. The French bank had asked the ECB to use what is known as the"Danish Compromise" that provides favourable capital treatment in asset management takeovers carried out through banks' insurance businesses. This makes an asset management acquisition cheaper for the buyer in terms of the hit to its regulatory capital. The compromise lets banks risk-weight their insurance investments instead of deducting them in full from their capital. BNP Paribas's AXA deal was agreed last year but is yet to be finalised. The ECB has said previously it would decide on the use of the Danish Compromise on a case-by-case basis. Last month, the ECB took a negative stance on Italian bank Banco BPM ( opens new tab benefiting from the same rule for its acquisition of a local asset manager. Banking executives are keen to see what stance the ECB takes, with industry sources saying a positive opinion on the use of the Danish Compromise would support further dealmaking.
Bloomberg
11-04-2025
- Business
- Bloomberg
BNP Paribas' Capital Treatment for Axa IM Deal Opposed by ECB
The European Central Bank has taken a negative view on applying a rule that might have reduced the impact on BNP Paribas SA 's capital from its planned acquisition of Axa SA 's asset manager, people familiar with the matter said. In opposing the use of the regulation, known as the Danish Compromise, the ECB's banking supervision arm wants to ensure equal treatment across the industry, the people said, asking not to be identified discussing internal deliberations. The watchdog recently issued a negative opinion on a similar but unrelated deal in Italy.
