regulator’s decision to approve for the first time
a Chinese bank’s takeover of a US bank marks a
vote of confidence in China Inc and a turning point in the
Lawyers on the
deal expect similar acquisitions to follow, but note the limits
of what the approval signals.
Federal Reserve approval was granted last
week to The Industrial and Commercial Bank of China (ICBC) in
its acquisition of an 80% stake in the US subsidiary of Bank of
East Asia (BEA).
deal opens the door for Chinese banks to enter the US market
through acquisitions or establishing branches. But while the
implications of the deal should be recognised, they should not
be exaggerated according to H Rodgin Cohen, the Sullivan &
Cromwell partner that led advice to the seller.
Cohen said this
was the ideal, or most likely, first Chinese deal to receive
Federal Reserve approval because of the target’s
client-base with the indigenous Chinese population and it
specialising in Sino-US trade. The target being a small bank
engaged in a relatively traditional set of commercial banking
activities also helped.
"I think the
Federal Reserve would probably have serious issues if a Chinese
bank tried to acquire a large US bank," said Cohen. "In the
ICBC/BEA order they note the financial stability factor and
suggest that they would look with much more skepticism at large
The key to the
deal’s approval was the Federal
Reserve’s first-time decision that the foreign
bank is subject to comprehensive and consolidated supervision
(CCS) by its home country regulator – in this
instance, the China Banking Regulatory Commission
CCS approval is
on an institution-by-institution basis, but unless future
Chinese acquirers are subject to special supervisory
circumstances, it is logical that the regulatory system will be
the same and CCS approval will follow.
& Case partner Ernie Patrikis who acted for ICBS said a
signal had been sent that the US banking market was continuing
to open up for branching and acquisitions and other equity
investments by mainland Chinese banks in particular and
international banks in general.
majority of developed financial jurisdictions have received CCS
approval, China’s approval is the first to gain
the attention of the worldwide banking community.
Cohen said that
India is probably the only other country of significance yet to
receive CCS approval, and that this should come
Lessons for the
ICBC/Federal Reserve discussions leading up to the filing in
April 2011, three factors received special attention by the
regulator: CCS in China, the acquirer’s risk
management process, and the bank’s implementation
of government policies on anti-money laundering and
application the bank shared with the Fed the business plan for
its 2010 acquisition of the Bank of East Asia’s
Canadian unit. According to Patrikis, this demonstrated
ICBC’s step-by-step approach to penetrating new
markets and integrating operations.
This was cited
in the Fed’s order and appeared to provide some
US-China vote of
Fed’s consent to the ICBC/BEA deal came 13 months
after it was filed and 10 months after CBRC approved the
a long time," said Patrikis. "In my view it could have been
approved somewhat more promptly."
approval coincided with Fed approval for Bank of China and
Agricultural Bank of China to open US branches. And
the meeting this month of the fourth US China
Strategic and Economic Dialogue, in which the
US and China parties met in Beijing to discuss measures to open
trade between the two countries.
White & Case
partner Francis Zou, who represented ICBC and Bank of China
said the move reflected US confidence in CBRC’s
ability to oversee China’s banking
"After a lengthy
- but expected - wait in which the Federal Reserve consulted
with the CBRC, and analysed additional sources including
information supplied by the deal-makers as well as the
International Monetary Fund’s (IMF) study on
China’s financial sector, the regulator determined
that the CBRC had made significant progress in its ability to
regulate Chinese banks," said Zou.
should foster greater integration between the US and China and
deepen exchanges between the two countries’
financial sectors, in particular," he said.
Zou said there
were currently far more US bank subsidiaries in China than
there are China counterparts in the US. "This deal enables ICBC
to address some of the imbalances in this area," he
banks already in the US have been well received, thanks in part
to their ability to provide credit to Chinaco’s US
subsidiaries, medium sized US borrowers and multinational
corporations during the global financial crisis.
perceived in a very different light to those relatively
small-scale China Listcos that have the subject of recent
accounting irregularity scandals," said Zou.
natural that there will be other similar acquisitions or more
US branches of China banks established in the future," he
Young’s Shanghai-based partner Hubert Tse agreed.
"China’s largest banks already have a US presence
so I expect we will begin to see the next tier of smaller banks
following their lead by opening offices there or by instigating
similar deals as this," he said.
something Chinese authorities requested domestic banks be
allowed to do at the recent Strategic and Economic Dialogue in
Beijing," he added.
believed it would be some time before any Chinese takeovers of
US banks without a China nexus. "At the end of the day, this is
a change in ownership of a US subsidiary of a foreign bank," he
said. "It will be a while before we see similar deals involving
a US entity."
Zou warned that
it was important for any banks considering the move to have a
clearly thought out growth plan for the US market. "There are a
lot of well-established international banks doing very well in
the US," he said.
environment, foreign banks must grow prudently," Zou added. "If
their growth plan involves an acquisition, it helps to meet
with the US regulator in the early stage of the transaction to
get their feedback and to ascertain whether or not that kind of
transaction is likely to win regulatory approval."
internal controls and risk management process was also
critical, he said. "Maintaining a good track record in the
market is of utmost importance," he said.