RPT-Fitch: French bancassurers may lose more generous capital option
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Sept 24 (Reuters) - (The following statement was released by the rating agency)
French banks may no longer be able to apply more generous regulatory capital treatment for insurance subsidiaries when the single European supervisor is in place, Fitch Ratings says. This could moderately lower Basel III capital ratios for some banking groups with insurance subsidiaries, but would be neutral for credit ratings as we already use the more conservative method in our primary measure of capital.
Under current regulation, most large French banks risk-weight part of the equity interests in insurance subsidiaries. When CRDIV (the legislation that implements Basel III rules for EU banks) comes into force in 2014, the French regulator is likely to continue to exercise its discretion and keep a more generous treatment, known as the "Danish Compromise". This would allow equity interests in insurers to be risk weighted, instead of the standard approach of all being fully deducted from capital.
The largest four French banking groups have so far reported their fully loaded Basel III common equity Tier 1 ratios based on their interpretation of final CRDIV legislation. These were between 9.4% and 10.4% at end-June 2013 and could be lowered by up to about 100bp without the "Danish compromise".
Within the eurozone, we believe only France and Finland are considering using the compromise. Most EU countries do not intend to adopt this less onerous treatment for banks' insurance arms. We think the European Central Bank may take a more conservative stance when it takes over direct supervision for the largest French banks, likely in autumn 2014, but this is not yet certain.
We expect a single supervisor to bring more standardisation of regulatory capital and risk-weighting, among other things. This harmonisation should help eliminate some of the discrepancies in reporting, making it easier to compare financial information and level the playing field for attracting investment. If the full-deduction method is used, the banks with relatively large insurance subsidiaries, including some large French banks, would report moderately lower regulatory capital ratios.
However, we already deduct the net asset value of insurance subsidiaries from our own measure of capital, so the treatment selected by the French regulator in 2014 and subsequently by the ECB would not change the banks' Fitch Core Capital. Our ratio is more akin to Basel III, without the Danish compromise for insurance deductions. All major French banks had Fitch Core Capital over 9.5% at end-June 2013 and we expect this to continue to improve through deleveraging, low demand for loans, limited dividends and increased earnings retention.
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