RBNZ issues proposals for new bank acquisition policy

Tuesday 7th December 2010

The Reserve Bank has issued a consultation paper outlining a new policy for locally incorporated registered banks considering making significant acquisitions, investments or business mergers.

The consultation paper proposes banks be required to seek a notice of non-objection from the Reserve Bank ahead of any such transactions to "avoid significant damage to the financial system that could result from the failure of a registered bank."

The requirement to obtain the notice would be imposed by way of a condition of bank registration.

Reserve Bank deputy governor Grant Spencer said a bank's board of directors is responsible for assessing any potential acquisition.

"However, the proposed policy is intended to enable the Bank to assess any risks to the wider financial system arising from a significant acquisition before that acquisition takes place."

The consultation paper, Significant Acquisitions Policy for Banks, outlines a number of proposals which the Reserve Bank believes will promote a sound and efficient financial system.

Under the proposal a new banking supervision handbook will be issued detailing the policy and providing specific criteria on what constitutes a significant acquisition and what information banks would have to provide.

Among the proposals outlined in the report is allowing the Reserve Bank powers to "impose additional regulatory requirements" in the wake of an acquisition considered to "post significant risks to the soundness of the financial system."

The new measures are also intended to promote self-discipline among banks and end the current system where "there is no requirement on banks to engage with the Reserve Bank prior to undertaking a significant acquisition."

Three options are outlined for acquisition assessment; prior approval, prior notification or requiring that a notice of non-objection be obtained, with the Bank favouring the last option.

"We consider that this approach provides an appropriate balance to ensuring that the responsibility for assessing risks to a registered bank lies with the board of directors of the bank."

The report also outlines options for ascertaining whether an acquisition, investment or merger is to be considered "significant", including whether the transaction:

Results in a material change in the size of the bank

Results in a material change in the size of the risks the bank is exposed to

Results in the acquisition of a business that is material relative to the total activities of the bank

A single transaction for which the total consideration exceeds 25% of the actual tier 1 capital of the bank

Proposals for the information a bank applying for a non-objection notice should provide are also outlined, including:

A description of the proposed transaction

A strategic rationale for the transaction the consideration for the transaction and how it is funded

Impact of the transaction on tier 1 capital and risk weighted assets

Changes in loan concentration

Extent and nature of due diligence undertaken

Systems and policies for managing risk associated with the new business

The Reserve Bank believes the new proposals will also help make regulation more efficient by providing banks with information as to the types of acquisition that could be of concern.

The discussion document is available online at www.rbnz.govt.nz/finstab/banking/regulation/4242534.pdf.

Comments from our readers

No comments yet