What is the Danish Compromise that Banco BPM was counting on?

(This March 26 story has been corrected to show that the EBA in 2023 issued the regulatory clarification, requested in 2021, in paragraph 11)

By Valentina Za

MILAN (Reuters) - The European Central Bank on Wednesday gave a negative opinion on the possibility for Banco BPM to use more favourable capital rules known as the "Danish Compromise" in its proposed acquisition of fund manager Anima Holding.

WHAT IS THE DANISH COMPROMISE?

It is a regulatory provision in the European Union's Capital Requirements Regulation (CRR) that stems from a compromise reached in 2012 when Denmark held the rotating EU presidency.

WHY WAS IT INTRODUCED?

The Danish Compromise was devised as a temporary arrangement aimed at easing the introduction of international banking rules known as "Basel framework" which the EU adopted through the CRR.

WHAT DOES IT ENTAIL?

The Danish Compromise reduces the burden for banks of owning an insurer by letting them hold capital against insurance holdings on a risk-weighted basis rather than deducting them in full from their capital. The idea is that the insurance sector's tight regulation removes the need for a full capital deduction.

WHEN DID IT BECOME PERMANENT?

The Danish Compromise regime has become permanent starting January 1, 2025 when a CRR reform the EU Parliament adopted in April last year kicked in. The change is an incentive for banks to own an insurer. As an example, UniCredit decided to internalise its life insurance business in light of it.

HOW DOES IT APPLY TO BPM'S ANIMA ACQUISITION?

The European Banking Authority in 2023 issued a regulatory clarification on the capital treatment of acquisitions banks make through their insurance business, allowing the goodwill booked on the purchase to be risk-weighted rather than deducted from capital.

WHY IS THAT IMPORTANT?

In the purchase of asset management companies typically a large goodwill arises from the valuation of the client base, according to consultancy EY, which makes an expensive buy for banks.

WHAT HAPPENS NOW?

Banco BPM already enjoys the benefits of the Danish Compromise on its insurance business and will continue to do so. The Anima acquisition however will cost it more in terms of capital than anticipated, a possibility which the bank plans to counter by paying out fewer dividends and by taking other measures.

HOW DOES THE EBA COME IN?

The EBA had been consulted by the ECB following Banco BPM's application, the bank has said. Pending a response to the ECB, Banco BPM in February turned to the EBA directly seeking a ruling on the matter. The EBA is in charge of such regulatory clarifications and its stance would take precedence over the ECB's, but their views are normally aligned, people with knowledge of their functioning said.

(Reporting by Valentina Za; editing by David Evans)