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The Danish compromise sounds like a plan to avoid calories at coffee time. But this may be the thing that drives the merger of banks and insurance companies in Europe.
This settlement dates back to the period when Denmark was EU president in 2012, and was a supposed temporary exception to Basel rules for European banks with insurers. This was a political lure for countries such as France, where the bancassurance model is more common. Instead, this regulatory treatment is likely to become a permanent fixture.
Bancassurance was popular throughout Europe. After the financial crisis, distressed banks sold off or spun off their insurance units: such as the Royal Bank of Scotland (now known as NatWest) in the UK which spun off Direct Line; ING from the Netherlands listed insurance company NN.
In France and Italy, this model continues with companies such as Credit Agricole and Intesa Sanpaolo operating large insurance companies. Distribution within bank branches provides significant cost savings compared to independent insurance companies.
These advantages will be enhanced if, as expected, the EU allows a capital exemption for bancassurance when its formal plans to implement the Basel Accord are unveiled later this year. Previously, insurance subsidiaries were typically assigned a capital risk weight of 370 percent. Under the new Basel rules, this weighting should fall to 250 percent. The rationale behind this is that insurance is strictly regulated by separate regional authorities, but banks will still allocate less capital to the same risks.
Take Intesa Sanpaolo for example: today it has around €24 billion of risk-weighted assets for its insurance subsidiaries. If the weighting moves as expected, it will reduce its weighted assets by approximately €8 billion. This would translate to about 0.4 percentage points of the CET 1 capital ratio of 13.7 percent as of December.
Although the latest Basel rules may require more capital for most banks, this Danish settlement should make insurance a more attractive proposition.
In fact, UniCredit Bank will likely buy back and merge its insurance business, which is currently held in joint ventures with insurance companies. Assuming the Basel process goes as expected, the move could mean no change in capital needs after the first year while adding 3 percent to earnings per share, believes Mediobanca's Andrea Veltri.
Major bancassurance companies, such as France's Credit Agricole and Belgium's KBC Bank, could benefit from the rule changes. Andrea Ursel, the deal-hungry chief executive of UniCredit Bank, may be encouraged to buy another insurer.
The idea of a pan-European financial services champion has been much discussed, but little action has been taken. The Danish settlement, at least, gives some reason to reconsider those opportunities.
andrew.whiffin@ft.com
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