Significant Acquisitions Regulatory Impact Analysis

Regulatory Impact Analysis
From 31 December 2011 locally incorporated banks are subject to a condition of registration relating to significant acquisitions. This regulatory impact analysis sets out the Reserve Bank’s reasons for the imposition of this condition of registration, as required by section 162AB of the Reserve Bank Act. Status quo and problem definition Prior to the imposition of the condition of registration for significant acquisitions, there were no formal requirements for banks to consult with the Reserve Bank on significant acquisitions. However, significant acquisitions can significantly alter the risk profile of a bank and hence pose risks to financial stability. Due to this, during the International Monetary Fund’s Financial System Assessment Programme (FSAP) undertaken in 2004, New Zealand was rated as materially non-compliant with Basel Core Principle 5, which recommends that: “The supervisor has the power to review major acquisitions or investments by a bank”. Despite the lack of formal requirements, banks have tended to informally consult with the Reserve Bank before undertaking significant acquisitions. However, there are a number of problems with this approach, in particular:

• it is not clear on which acquisitions banks should consult;
• the Reserve Bank does not always have access to timely and full information; and
• should a bank undertake an acquisition which posed a significant risk to the financial
  system, the Reserve Bank’s formal powers are limited to recommending deregistration or the issuance of directions to a bank. As the use of these powers would impose high costs, they would only be used in extreme circumstances and hence do not provide an effective mechanism to address the risks arising from significant acquisitions. Objectives The objective of the significant acquisitions policy is to strengthen the Reserve Bank’s supervisory oversight of significant acquisitions. Option analysis The options considered by the Reserve Bank were:
• a requirement that banks notify the Reserve Bank prior to undertaking defined
  acquisitions;
• a requirement that banks obtain a notice of non-objection from the Reserve Bank prior
  to undertaking defined acquisitions;
• a requirement that the Reserve Bank give prior approval to defined acquisitions.
  The Reserve Bank considers that a requirement for banks to obtain approval from the Reserve Bank is undesirable as it could give the impression that responsibility for assessment of the prudence of the acquisition has moved from the acquiring bank to the Reserve Bank. Either a requirement to notify the Reserve Bank or obtain a notice of non-objection from the Reserve Bank for significant acquisitions would be consistent with meeting the objective of

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2 | Regulatory Impact Statement strengthening the Reserve Bank’s supervisory oversight of significant acquisitions. Whilst a requirement to obtain a notice of non-objection would provide the Reserve Bank with a greater level of supervisory power, this approach is also potentially more costly than a notification approach. The main costs of the policy will arise from requirements to provide information to the Reserve Bank, requirements for legal advice or delays to a transaction being undertaken. Given these potential costs, the Reserve Bank considered an approach under which banks are required to:

• notify the Reserve Bank of transactions which meet a lower threshold, with a short
  consultation timeframe and standard information requirements;
• obtain a notice of non-objection for transactions meeting a higher threshold, with a
  longer timeframe for Reserve Bank consideration and potentially more detailed information requirements. This approach is expected to result in the greatest net benefit, as only very large transactions which can be expected to pose the biggest risk to financial stability, will bear material costs. Consultation In December 2010 the Reserve Bank issued a public consultation document on significant acquisitions. A further round of consultation was undertaken with affected banks in 2011. Affected banks were given a further opportunity to comment on the condition of registration on significant acquisitions prior to the imposition of the condition of registration. Conclusions The requirements are that:
• a registered bank must give the Reserve Bank at least 10 working days notice of an
  acquisition for which the value of the consideration exceeds 15 percent of the tier 1 capital of the banking group, or for which the value of the assets purchased exceeds 15 percent of the value of the banking group’s assets; and
• a registered bank must obtain a notice of non-objection from the Reserve Bank for an
  acquisition for which the value of the consideration exceeds 25 percent of the tier 1 capital of the banking group, or for which the value of the assets purchased exceeds 25 percent of the value of the banking group’s assets. The banking supervision handbook document on significant acquisitions sets out guidelines on the process and assessment criteria for a notice of non-objection, including the timeframe. Implementation The policy is implemented by condition of registration. It applies to locally incorporated banks only. The condition of registration is effective as of 31 December 2011, but applies to acquisitions to which a bank intends to give effect on 1 April 2012, or after.