Regulatory Policy - Major Acquisitions or Investments by Banks (November 2008)

Summary

This is CIMA's Regulatory Policy (November 2008) explaining how the Authority applies its statutory approval power over major acquisitions or investments by banks under section 14(2) of the Banks and Trust Companies Law (2007 Revision), as amended. Under that law, a locally incorporated licensed bank may not acquire or hold a beneficial interest in another entity (directly or indirectly) exceeding 20% of the bank's net worth, unless it obtains CIMA's prior written approval, or the interest was acquired in satisfaction of a debt (in which case it must generally be disposed of within five years unless CIMA agrees to extend that period). The policy sets out the documentation a bank must submit when seeking approval, and the factors CIMA will weigh in deciding whether to approve, attach conditions to, or assess the consolidated supervision implications of, such an acquisition.

Scope of the policy

• The policy applies to the banking business of banks locally incorporated and licensed under the BTCL.
• It separately addresses branches of foreign banks seeking to acquire an equity interest through their parent bank.
• It does not apply to large exposures within a bank's trading activities, which are covered by separate large exposure/credit risk concentration rules and guidance.

Practical requirements

In practice, a bank planning an acquisition or investment that would exceed the 20% of net worth threshold must proactively approach CIMA with a detailed package of information before proceeding, and must be prepared for CIMA to impose conditions or require a memorandum of understanding with a host regulator where the acquisition occurs in another jurisdiction.

• Required information package: About the target entity, funding, financial statements, management structure, business plan, and regulatory status.

Key obligations

• A licensed bank incorporated under the Companies Law must obtain CIMA's prior written approval before acquiring or holding a beneficial interest (directly or indirectly) in an entity where the value of that interest exceeds 20% of the bank's net worth.
• Where an interest exceeding the 20% threshold is acquired in satisfaction of debts owed to the bank, the bank must dispose of that interest within five years unless CIMA grants an extension.
• When seeking approval for a major acquisition or investment, a bank must submit to CIMA a formal request accompanied by specified information and documents, including the target entity's identity and place of incorporation, the value of the acquisition and its impact on capital adequacy ratios, funding source, financial statements for the prior three years, management structure, business plan, and the entity's regulatory status.
• A branch of a foreign bank licensed under the BTCL seeking to acquire an equity interest through its parent bank must submit copies of the parent bank's approval.
• A bank must be prepared to comply with any conditions CIMA attaches to an approval, whether imposed at the time of initial consent or subsequently, to safeguard depositor interests.
• Where an acquisition occurs in another jurisdiction, the bank may need to facilitate CIMA obtaining a Memorandum of Understanding with the host regulator as a condition of final approval.

Applies to

locally incorporated banks licensed under the Banks and Trust Companies Law, branches of foreign banks licensed under the Banks and Trust Companies Law

Deadlines

• within a period not exceeding five years: An interest acquired by a bank in satisfaction of debts due to it, exceeding 20% of net worth, must be disposed of within five years unless CIMA permits an extension.