2020 M&A Forecast - Financial Services: Regulatory change set to drive activity
We expect the Financial Services sector to be a key driver of M&A activity in 2020, fuelled by changes to the regulatory capital rules issued by the Reserve Bank of New Zealand (RBNZ) and a continued focus on conduct from both the RBNZ and the Financial Markets Authority (FMA).
Regulatory capital changes
- increasing the required level of CET1 capital to 17% (up from 10.5%);
- introducing an additional 1% capital requirement for domestically significant banks (D-SIBs);
- removing the ability of eligible banks to use internal models for risk weighting of certain assets; and
- eliminating AT1 instruments as qualifying capital for most CET1 purposes.
Through 2019, the RBNZ has sought and received feedback from the public and external experts on the proposed changes. The final decision, published on 5 December 2019, required the ‘Big Four' banks to increase Tier 1 equity capital to 16% of risk weighted assets, but softened changes in other areas. For example, banks:
- can now offer redeemable perpetual preference shares of up to 2.5 percentage points of the Tier 1 requirement (previously 1.5%, with no stock to be redeemable);
- must now have a further 2 percentage points of Tier 2 capital, such as subordinated debt. This will bring the total capital requirement up to 18% for the ‘Big Four' (16% for others). If capital falls below these levels, banks will be subject to ‘more intense supervision' rather than breaching their conditions of registration. However, if capital falls below 9% of risk weighted assets it will be considered a breach of conditions of registration; and
- will be given seven years from 1 July 2020 to transition to the new regime, in order to reduce any impacts on lending rates and credit availability – up from five years.
Triggered by the Australian Financial Services Commission, the RBNZ and FMA have carried out sector-wide reviews into the conduct and culture of the banking and life insurance sectors respectively. These reviews, the responses of the financial institutions, and consequent changes in behaviour and structure will continue to work their way through the industry in 2020.