DRAFT BS 15: Significant Acquisitions Policy

DRAFT BS 15: SIGNIFICANT ACQUISITIONS POLICY

1. Locally incorporated registered banks are generally subject to standard conditions of registration
   providing that the banking group may not enter into:

• Significant acquisitions or business combinations meeting the criteria in paragraph 6
  unless the registered bank has given the Reserve Bank at least 10 working days notice of the intended acquisition or business combination;
• Significant acquisitions or business combinations meeting the criteria in paragraph 7
  unless the registered bank has received a notice of non-objection from the Reserve Bank relating to that acquisition or business combination. This document sets out the standard requirements.

2. The Reserve Bank reserves the right to impose a non-standard condition of registration or to vary
   the standard condition of registration where special circumstances apply. Scope of requirement
3. These conditions of registration apply to any acquisition or business combination meeting the
   requirements of paragraphs 6 or 7 and not excluded under paragraph 5. For clarity, the following would be covered:

• the acquisition of loans from another financial institution;
• the acquisition of another business of a financial nature, such as a custodial or a wealth
  management business; or
• the acquisition of an offshore subsidiary.

4. An acquisition includes taking on by way of purchase, gift or exchange and includes the
   acquisition of interests in a joint venture. The meaning of business combination is as defined in the New Zealand equivalents to international financial reporting standards – Business Combinations (NZ IFRS 3).
5. The following acquisitions or business combinations are excluded from these requirements:

• Transactions that require approval under section 77A of the Reserve Bank Act;
• Transfers of assets within a banking group that do not result in a material change or
  transfer of risk outside the banking group;
• The acquisition of debt instruments issued by the central government of any country with
  a long-term credit rating of A- or A3 or above, or its equivalent;
• The acquisition of debt instruments issued by Public Sector Entities, as defined in
  paragraph 43(d) of BS2A;
• The acquisition of debt instruments issued by any bank with a long-term credit rating of
  A- or A3 or above, or its equivalent.

Requirements
6. The registered bank must notify the Reserve Bank at least 10 working days prior to the banking
group entering into any acquisition or business combination meeting the threshold below:

• a single transaction, or series of related transactions, for which the total consideration
  exceeds 15%, but is less than 25%, of the tier 1 capital of the banking group; or
• a single transaction, or series of related transactions, for which the value of the assets
  acquired exceeds 15%, but is less than 25%, of the value of the total assets of the banking group.

7. The registered bank must obtain a notice of non-objection from the Reserve Bank prior to the
   banking group entering into any acquisition or business combination meeting the threshold below:

• a single transaction, or series of related transactions, for which the consideration is or
  exceeds 25% of the tier 1 capital of the banking group; or
• a single transaction, or series of related transactions, for which the value of the assets
  acquired is or exceeds 25% of the total assets of the banking group.
  Tier one capital is to be measured, using the most recent monthly data, prior to the acquisition or business combination taking place. The value of assets is measured in accordance with New Zealand equivalents to international financial reporting standards as at the last reporting date. The value of the consideration is measured in accordance with New Zealand equivalents to international financial reporting standards and may include cash, other assets, a business or subsidiary of the acquirer, options, warrants and member interests of mutual entities.

8. A series of transactions will be considered to be related where the transactions occur within a
   year and one or more of the following applies:
   A. the transactions relate to the assets or capital of a single entity; B. the transactions relate to the assets or capital of related parties, as defined by NZ IFRS;
   C. a transaction has been completed with an entity, A, and the assets or capital of entity A
   are transferred to a third party with whom subsequent transactions are completed.
9. Notification of an acquisition or business combination under paragraph 6, does not remove the
   need to obtain a notice of non-objection where that acquisition or business combination forms
   part of a series of related transactions that meets the threshold in paragraph 7. A registered bank
   may request that a series of transactions be treated under paragraph 7 where it is expected that a series of transactions will trigger that threshold.

Nature of notice non-objection
10. A notice of non-objection is in the nature of a negative assurance. It is not a positive affirmation
as to the prudence of the acquisition. The primary responsibility for ensuring that the risks arising from significant acquisitions or business combinations are adequately identified and managed lies with the board of directors of the registered bank, not with the Reserve Bank.
11. A notice of non-objection may be issued unconditionally or subject to conditions. Conditions
will be imposed as conditions of registration under section 74 of the Reserve Bank Act. Assessment process for a notice of non-objection
12. The Reserve Bank will seek to follow the process below in assessing an application for a notice of
non-objection. The Reserve Bank will use best endeavours to meet these timeframes however actual timeframes will depend on the complexity of the transaction and the quality of the information provided to the Reserve Bank.
13. Banks are encouraged to engage with the Reserve Bank on possible significant acquisitions or
business combinations as early as is practicable. Once there is a good faith intention to proceed with an acquisition or business combination, the bank should make an initial application providing the information set out in paragraph 20. The registered bank may request a meeting with the Reserve Bank to discuss the initial application. Day 1: Initial application Day 10: Notice of non-objection Day 10: Initial summary of issues Day 25: Notice of non-objection Day 25: Letter of issues Day 40: Notice of non-objection Day 40: Notice refused

14. Following the initial application the Reserve Bank will seek, within 10 working days, to either
    issue a notice of non-objection or issue the registered bank with a written initial summary of issues. The initial summary of issues will set out any areas of concern that the Reserve Bank may have. The Reserve Bank may at this time use its power under section 93 of the Reserve Bank Act to request further information. The registered bank will have 5 working days to provide the information requested unless a longer time frame is agreed.
15. By day 25 the Reserve Bank will seek to either provide the bank with a notice of non-objection
    or provide in writing a letter of issues. The letter of issues will set out any remaining issues to be resolved and the Reserve Bank’s view on how those issues may be resolved. The Reserve Bank may request further information under section 93 of the Act at this stage. The bank will have 5 working days to provide the information requested unless a longer time frame is agreed.
16. The Reserve Bank will seek to make a final decision on all applications for a notice of non￾objection by the end of 40 working days, unless a longer time frame is agreed. Applicants may
    at any stage in the process provide the Reserve Bank with information or request a meeting.
17. Where the Reserve Bank issues a notice of non-objection subject to imposing new conditions of
    registration on the registered bank, the bank will have a further 7 days to provide a submission on the proposed conditions of registration. Assessment criteria
18. In assessing acquisitions or business combinations, the scope of the Reserve Bank’s
    consideration is restricted to matters relevant under S68 of the Reserve Bank Act, namely:

• Promoting the maintenance of a sound and efficient financial system; and
• Avoiding significant damage to the financial system that could result from the failure of a
  registered bank.

19. In considering an application for a notice of non-objection the Reserve Bank may give
    consideration to any of the matters that the Reserve Bank is empowered to consider under sections 73 or78 of the Reserve Bank Act. Without limiting those considerations the Reserve Bank is likely to take into account whether:

• Following the acquisition the banking group will continue to hold adequate capital in
  relation to the risks arising from the assets it holds;

• The banking group will maintain sufficient legal and practical ability to control and
  execute any business, and any function relating to any business, to meet the outcomes set out in Paragraph 4 of BS11: Outsourcing Policy;

• The acquisition exposes the banking group to any new material risks, such as
  concentrations of credit or liquidity risk;

• The banking group has or will have adequate risk management systems and policies for
  the type of business being acquired;

• The banking group has or will have internal controls and systems that are appropriate for
  the registered bank and for the type of business to be conducted.
  Information requirements

20. A registered bank shall supply the following information in notifying the Reserve Bank of an
    acquisition or business combination under paragraph 6 above or in making an initial application for a notice of non-objection required by paragraph 7.

• A description of the proposed transaction;
• Draft heads of agreement, tender documents or equivalent legal documentation;
• Value of the assets being purchased and, where relevant, indicators of the quality of the
  assets such as the value of past due or impaired assets;
• An explanation of the impact of the transaction on the financial position of the entity,
  including an estimate of the impact of the transaction on the tier one capital ratio and risk weighted assets;
• Whether there is likely to be any material change in the risks facing the bank, such as
  material changes in asset concentration or liquidity risk;
• Proposed commercial timeframe and timeframes for any other regulatory applications;
• Any risks to the bank not meeting its conditions of registration.

21. Where a bank is unable to supply the information above the bank shall provide the Reserve Bank
    with written reasons as to why that information cannot be supplied and indicate when that information is likely to be available.
22. For acquisitions or business combinations for which prior notification is required under
    paragraph 6, the information in 20 shall be supplied at least 10 working days prior to the acquisition or business combination taking place.
23. All information supplied will be subject to the confidentiality provisions under S105 of the
    Reserve Bank Act.