By Mathieu Rosemain and Charlie Conchie

PARIS/LONDON (Reuters) - BNP Paribas embarked on a 5.1 billion euro ($5.8 billion) purchase of an asset management business last year expecting regulators would let it through with minimal impact on the bank's capital, people familiar with the matter said, a model some peers were keen to replicate.

But the latest assessment from its chief supervisor, the European Central Bank, tempered those expectations, leading to a greater hit to its capital than the lender had initially priced in, the people said.

BNP said on Monday it had lowered its expected returns on the deal following guidance from the ECB on the so-called Danish Compromise - a prudential treatment that allows lower capital requirements for banks that own insurance units.

It added that the prudential treatment of the deal will be disclosed at closing, pending final talks with regulators.

BNP and the ECB declined to comment.

Dealmakers had anticipated a wave of tie-ups after the BNP-AXA deal as European money managers sought to fend off U.S. rivals and demand grows for cheap technology-driven investing. Some analysts had foreseen other banks would follow the French lender's footsteps as a way to boost fees. 

"It will maybe dampen excitement a little bit," said Johann Scholtz, an analyst at Morningstar. "What makes it a little bit surprising is, in the current environment, you'd expect the ECB to be maybe a little bit more supportive of consolidation across the board."

RAISING THE BAR

In an interview published on Friday on the ECB's website, Claudia Buch, the central bank’s chief supervisor, said the central bank interprets the “Danish Compromise” as applying to the insurance sector — not to asset management firms.

The ECB's decision took some dealmakers by surprise and the lack of clarity around the regulatory treatment may make such transactions more difficult to execute, several said.

Some said parties pursuing deals may now seek written assurances from the ECB, effectively raising the bar for such transactions.

Not all experts shared that view. 

"I do not believe that this will materially impact similar activity in the EU," said Alvin Abraham, chief executive of prudential risk consultancy firm Katalysys.

The ECB's decision on the use of the Danish Compromise, by limiting the impact on its capital reserves, signals that many of the benefits of the EU provision still apply, Abraham added.

Matthew Clark, an analyst at Mediobanca, agreed that BNP's statement on Monday indicated a partial application of the favourable capital treatment.

"That very strongly points to the idea that there's been some kind of splitting mechanism used whereby the ECB said: 'you're buying an asset manager where a lot of the business is insurance related, so let's split that kind of notionally in two," Clark said, meaning that the Danish Compromise was applied to the insurance part AXA IM's activities only.

The Danish Compromise is a provision that makes it less costly for banks to hold stakes in insurance companies. Instead of subtracting the full value of those holdings from their capital, banks can apply a risk-based calculation.

By lowering the capital impact of insurance stakes, the measure encourages banks to own insurers and can reduce the cost of certain acquisitions made through insurance arms. 

BNP is acquiring AXA IM through its insurance business Cardif.

However, following the ECB's comments on the "prudential" treatment of the acquisition of asset management companies, the French lender cut returns guidance to 14% in the third year, from a previously projected 18%, followed by more than 20% in the fourth year, it said in its statement on Monday.

BNP's market update follows a similar ECB assessment last month, when the regulator issued a negative opinion on Italian bank Banco BPM's request for favourable capital treatment for its proposed bid for fund manager Anima.

BNP Paribas shares have gained about 15% since the AXA IM deal was announced in early August, trailing French rivals Crédit Agricole and Societe Generale, as well as the European banking index, which is up by close to 28% over the same period.

($1 = 0.8814 euros)

(Reporting by Mathieu Rosemain in Paris and Charlie Conchie in London; Additonal reporting by Balazs Koranyi; Writing by Anousha Sakoui; Editing by David Holmes)