• EU rules block banks from applying insurance capital relief to asset managers
• The EBA says the Danish Compromise cannot extend beyond insurance units
• Regulators warned the practice could enable capital arbitrage
• The clarification affects asset managers acquired through insurers
• Banco BPM deal highlighted the regulatory uncertainty
• Subsidiaries of subsidiaries must be consolidated at group level
• Banks may face higher capital costs for future acquisitions
• The move reinforces consistency in EU capital regulation

The European Banking Authority has confirmed that European Union banking rules prevent lenders from applying favorable insurance capital treatment to asset management firms owned through insurance subsidiaries, closing a loophole regulators say could enable capital arbitrage.

In guidance published on Friday, the EBA clarified that banks cannot extend capital benefits reserved for insurance businesses to asset managers acquired via insurance units.

The move follows growing concern that some banking groups could structure deals to reduce capital requirements without reducing underlying risk.

At the center of the issue is a provision in the EU Capital Requirements Regulation known as the Danish Compromise.

The rule allows banks that own insurance companies to hold capital against those insurance subsidiaries on a risk weighted basis rather than deducting the full value from regulatory capital.

This approach reduces the capital burden associated with owning an insurer.

Originally introduced as a temporary measure, the Danish Compromise was designed to ease the transition to international banking standards under the Basel framework following the global financial crisis.

The provision has since become a permanent feature of EU banking regulation.

Regulatory uncertainty over whether the Danish Compromise could apply to asset managers acquired through insurance arms has already had real world consequences.

Last year, Italy’s Banco BPM acquired asset manager Anima Holding with the expectation that the transaction could benefit from the favorable capital treatment. That assumption has now been shown to be incorrect.

The EBA said it reviewed transactions in which asset managers were acquired through insurance subsidiaries of banking groups and found that such structures raised important supervisory questions.

Specifically, regulators examined whether asset managers should be consolidated at the group level for capital purposes or treated in the same way as the insurance entities that owned them.

“These cases have raised questions about whether the asset manager should be consolidated at group level or benefit from the Danish Compromise,” the EBA said.

The authority concluded that allowing such treatment would undermine the integrity of capital rules.

According to the EBA, extending insurance capital relief to asset managers could create incentives for banks to design group structures that reduce capital requirements without addressing actual risk exposure.

“Such treatment could lead to regulatory arbitrage, where group structures are designed to place financial institutions under insurance subsidiaries to benefit from more favourable capital treatment or avoid deductions,” the EBA said.

The regulator pointed to the wording of the Capital Requirements Regulation, which explicitly includes subsidiaries of subsidiaries when defining group consolidation.

Under the rules, a financial institution held through an insurance undertaking still qualifies as a subsidiary of the parent banking group and must therefore be treated as such for capital purposes.

By reinforcing this interpretation, the EBA aims to ensure consistent application of capital rules across the EU and prevent banks from exploiting differences between banking and insurance regulation.

The clarification also signals a tougher stance on complex group structures that blur the boundaries between regulated financial activities.

The decision is likely to influence how banks assess future acquisitions of asset managers and may increase the capital cost of such deals.

Analysts say it could also prompt some institutions to revisit existing structures to ensure compliance with supervisory expectations.

The guidance comes amid broader efforts by European regulators to tighten oversight of bank capital adequacy and limit opportunities for regulatory arbitrage, particularly as financial groups expand across multiple business lines.