ECB’s Montagner: banks, insurers need separate capitalisation

Financial conglomerates must ensure that each of their business arms is well capitalised, a member of the European Central Bank’s supervisory board has said.

At an event in Frankfurt on June 13, Patrick Montagner explained the ECB’s supervisory expectations for companies that combine various forms of financial activities, such as banking, insurance and investment management.

Montagner said the ECB expected ‘bancassurance’ groups – which combine banking and insurance activities, and are the most common form of conglomerate in Europe – to provide both arms of their business with separate capital and liquidity backing.

He noted that the ECB recognised the “Danish compromise”, which enables a bancassurance group to treat its insurance arm as a risk-weighted asset. This is in contrast with the stricter Basel prudential treatment, which requires a conglomerate to fully deduct its insurance holdings from its core capital.

The European Union introduced the Danish compromise as a temporary measure in 2012, when Denmark held the bloc’s rotating presidency. The rule became permanent at turn of this year under the Capital Requirements Regulations III reform.

Montagner argued that the Danish compromise was intended as a “narrowly tailored relief”.

“It only applies to closely defined situations where strong insurance regulation effectively protects capital,” he said. “It is not a blank cheque.”

He noted that banks and insurers carried out different activities, with the former collecting deposits and granting loans and the latter underwriting policies and investing premiums.

“The fundamental differences between banking activities and insurance activities require depositors and policy-holders to be considered separately while preventing potential contamination between these two activities,” Montagner claimed.

In practice, he said, this meant a financial conglomerate’s insurance arm must “stand on its own two feet” and hold sufficient capital and liquidity on a “standalone basis”. He added that any transfers between the insurance subsidiary and the banking arm must only be justified by the insurer’s own business interests.

Montagner acknowledged that the ECB was not responsible for supervising insurers at the sectoral level. This, he said, fell under the remit of national insurance supervisors.

However, he said the ECB would continue to co-ordinate the supervision of financial conglomerates by collaborating with the relevant authorities. The central bank, he said, would ensure that the different arms of a conglomerate were supervised together and not in isolation.

“Above all, we will not allow the insurance arm to be a backstop for the bank in a way that undermines policy-holder protection or creates hidden leverage,” he concluded. “This means conducting our supplementary supervision thoroughly, focusing on conglomerate-level risks, in close collaboration with our fellow supervisors in the other sectors.”