"Financial conglomerates: It really depends"
In recent weeks, the role of the financial conglomerate has drawn renewed attention. Some observers argue that several European banks are seeking to expand into insurance, hoping to qualify as conglomerates and benefit from more favorable capital requirements under the so-called Danish compromise. But does this classification always serve a bank’s interests? The answer hinges on the bank’s business model. For some, the fit is natural; for others, it’s like slipping into shoes that are simply too big: awkward and ill-suited to their needs.
The long-established financial conglomerate model embodies the “bancassurance” approach: a banking group holding a substantial stake in the insurance sector. In theory, all groups receive equal capital treatment for their insurance activities. Yet once insurance assets surpass a certain threshold on the balance sheet, the rules grow punitive. The Danish compromise emerged in response, allowing groups with sizable insurance businesses to apply a 370 percent risk weighting to these assets, a formula that offers more favorable capital treatment. The latest European capital regulation, CRR3, lowers this risk weighting to 250 percent, the same applied to holdings in non-financial sectors. To qualify, a bank must first meet quantitative thresholds for insurance on its balance sheet, establishing its status as a financial conglomerate. In addition, it must submit to heightened, coordinated oversight by both banking and insurance regulators. Nonetheless, local supervisors may grant waivers, exempting certain banks from enhanced oversight and the accompanying capital treatment even when they meet the criteria for conglomerate status.
The latest European capital regulation, CRR3, lowers this risk weighting to 250 percent, the same applied to holdings in non-financial sectors like construction or energy
Before seeking this classification, a bank must weigh whether its insurance holdings are substantial enough to justify an alternative capital regime. It must then consider whether the local supervisor will require enhanced supervision. Finally, the bank needs to calculate whether the benefits of preferential capital treatment outweigh the potential costs of stricter oversight. Most European conglomerates are based in France, though Belgium, Germany, Italy, and Spain also count a few.
In the end, not everyone can, or should, fit into the same pair of shoes. Banks, like individuals, must know their own dimensions and choose accordingly. Big shoes do little good for small feet.
Most European conglomerates are based in France, though Belgium, Germany, Italy, and Spain also count a few