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FDIC opens comment period on proposed Statement of Policy regarding bank merger transactions, highlights “added scrutiny” for $100+ billion mergers
On March 21, the FDIC issued a request for comment on its proposed Statement of Policy (SOP) on bank merger transactions, which will aim to update, strengthen, and clarify the FDIC’s approach to bank merger evaluation. The proposed SOP does note that transactions in excess of $100 billion are more likely to present financial stability concerns and will be “subject to added scrutiny.” The new SOP will replace the FDIC’s current SOP on its responsibilities under the Bank Merger Act (BMA) or Section 18(c) of the FDI Act. Both the heads of the CFPB and OCC issued statements on this review, with the Acting Comptroller of the Currency offering his explicit support.
Broadly speaking, the proposed SOP aims to make the process more principles based, communicate the FDIC’s expectations in its evaluation of merger applications, and describe which merger transactions are under the FDIC’s domain. The proposed SOP will include separate discussions for each statutory factor as set forth in the BMA, including the effects on competition, financial resources, future prospects, CRA, financial and banking stability risk, and AML considerations. Further, this will not be an exhaustive list, as the FDIC will claim jurisdiction over any other elements that could present a risk to financial stability. Of note, the proposed SOP will not include any “bright lines or specific metrics” on what transaction would be considered anti-competitive, as the FDIC wishes to maintain its flexibility to appropriately evaluate the circumstances of each merger application.
This new comment period will begin after the FDIC reviewed 33 comment letters received during the previous comment period, about three-fourths of which were in favor of at least some changes to the FDIC’s merger review process. Six commenters were against such changes and two commenters were neither in favor of nor against the changes. The comments against argued that the current framework was “sound,” and any revisions could harm the sector by making the bank merger process more difficult and disproportionally impacting community, mid-size, and regional banks. Comments must be received by 60 days from the date of the SOP’s publication in the Federal Register.
OCC issues proposed rule for bank merger approvals
On January 29, the OCC announced a proposed rule for bank merger approvals under the Bank Merger Act (BMA). The OCC proposed changes to 12 CFR 5.33 to reflect its view that a business combination is a significant corporate transaction.
The OCC suggested two key changes to its business combination regulation (12 CFR 5.33). First, it proposed removing the expedited review procedures outlined in § 5.33(i). Currently, this provision automatically approves certain filings after the 15th day following the close of the comment period, but the OCC believes that no business combinations subject to § 5.33 should be approved solely based on elapsed time. Additionally, the OCC suggests removing paragraph (d)(3), as it pertains to defining applications eligible for expedited review. Second, the OCC proposes the removal of § 5.33(j), which outlines four scenarios allowing an applicant to use the OCC's streamlined business combination application instead of the full Interagency Bank Merger Act Application. The streamlined application seeks information on similar topics, but only requires detailed information if the applicant answers affirmatively to specific yes-or-no questions. Currently, a transaction eligible for the streamlined application also qualifies for expedited review, a feature the OCC is proposing to eliminate. Additionally, a new policy statement (proposed as Appendix A to 12 CFR part 5, subpart C) is introduced to provide clarity and guidance on general principles used by the OCC in reviewing applications under the BMA. The policy statement also covers considerations for financial stability, resources, prospects, and convenience and needs factors. Criteria for deciding whether to hold a public meeting on a BMA application were also outlined.
Comments from the public are due 60 days from the date of publication in the Federal Register.
Agencies cite need to update bank merger evaluation framework
On February 10, OCC Senior Deputy Comptroller and Chief Counsel Ben W. McDonough spoke before the OCC Banker Merger Symposium about the future of bank merger policy. Acting Comptroller of the Currency Michael J. Hsu’s prepared remarks, which were delivered on his behalf by McDonough, stressed the need to update the framework used for analyzing bank mergers. Hsu commented that without necessary enhancements, “there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks,” but cautioned that imposing a moratorium on bank mergers would inhibit growth and improvements that could benefit communities and increase competition. Hsu observed that “many experts have raised questions about the ongoing suitability of the current bank merger standards at a time of intense technological and societal change.” He noted that federal bank regulators currently use the Herfindahl–Hirschman Index (HHI) to assess market concentration—which, while transparent, empirically proven, and efficient—may not be as relevant since the bank merger guidelines were last updated in 1995. Hsu reflected that HHI—which is based solely on deposits—may now be “a less effective predictor of competition across product lines” due to the offering of other banking products, including online and mobile banking. Hsu also said that “the current framework for assessing the financial stability risks of bank mergers bears examining,” as “there is a resolvability gap for large regional banks in that our resolution tools may not be up to the task.” Additionally, Hsu pointed out that it is also critical to analyze a merger’s effects on the communities a bank serves, and that assessing each bank’s Community Reinvestment Act performance and ratings are just a starting point.
Separately, Federal Reserve Governor Michelle W. Bowman touched upon the topic of bank mergers during a speech before the American Bankers Association Community Banking Conference. Bowman discussed topics related to the Fed’s independence in bank regulation, predictability in bank merger applications, and tailoring of regulations and supervision. Among other things, Bowman commented that while the bank merger review framework is the same for all applications, each case varies widely, which “necessitates an in-depth review of each transaction on its own merits.” According to Bowman, “these reviews are most effective when the expectations of the regulators are clear in advance and the parties can reasonably anticipate the application review process.” She pointed to a recent increase in average processing times in the merger review process and expressed concerns about how delays may lead to increased operation risk, as well as fears that “the increase in average processing times will become the new normal.” Bowman said she believes that transparency between regulators and applicants can help to ensure clear expectations about certain potential delays.
Fed vice chair for supervision outlines future priorities
On September 7, Federal Reserve Board Vice Chair for Supervision Michael Barr laid out his goals for making the financial system safer and fairer during a speech at the Brookings Institution, highlighting priorities related to risk-focused capital frameworks and bank resiliency, mergers and acquisitions, digital assets and stablecoins, climate-related financial risks, innovation, and Community Reinvestment Act modernization plans. Addressing issues related to resolvability, Barr signaled that the Fed would begin “looking at the resolvability of some of the other largest banks [in addition to globally systemically important banks] as they grow and as their significance in the financial system increases.” With respect to bank mergers, Barr commented that “the advantages that firms seek to gain through mergers must be weighed against the risks that mergers can pose to competition, consumers and financial stability.” He said he plans to work with Fed staff to assess how the agency performs merger analysis and whether there are areas for improvement. Barr also discussed financial stability risks posed by new forms of private money created through stablecoins and stressed that Congress should work quickly to enact legislation for bringing stablecoins (especially those intended to serve as a means of payment) within the prudential regulatory perimeter. He added that the Fed plans to make sure that the crypto activity of supervised banks “is subject to the necessary safeguards that protect the safety of the banking system as well as bank customers,” and said “[b]anks engaged in crypto-related activities need to have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering.”
DOJ weighs in on FDIC chair’s powers
Recently, the assistant attorney general for the DOJ’s Office of Legal Counsel opined that the chairperson of the FDIC cannot prevent a majority of the agency’s Board of Directors from presenting items for a vote and decision. The DOJ’s opinion follows a December 2021 conflict among members of the FDIC Board of Directors related to a joint request for information seeking public comment on revisions to the FDIC’s framework for vetting proposed bank mergers. Shortly after the announcement was issued, the FDIC released a statement disputing that any action had been approved. FDIC board member, and CFPB Director, Rohit Chopra released a follow-up statement challenging the view that only the FDIC chairperson has the right to raise matters for discussion in Board meetings, and called for “immediate[]” resolution of the conflict, stating that “[a]bsent a return to legal reality and constructive engagement, board members will need to take further steps to exercise independence from management and to ensure sound governance of the [FDIC].” (Covered by InfoBytes here.)
The DOJ wrote in the opinion that “[t]here is no general or specific source of authority in the [Federal Deposit Insurance Act (FDIA)] that can be read as permitting the Chairperson to prevent a majority of the Board from exercising its statutory responsibilities or otherwise making decisions for the FDIC.” The opinion stated that the FDIA gives the Board “broad governance and decision-making authority” and clarified that while the “power to present matters for Board vote and decision is not explicitly addressed by the Act[,] . . . the Board, not the Chairperson, has the authority to determine how the FDIC should exercise its substantive powers.” Furthermore, the opinion emphasized that the FDIA authorizes the Board to “prescribe bylaws ‘regulating the manner in which its general business may be conducted’ and to prescribe ‘such rules and regulations as it may deem necessary.’” According to the opinion, nothing in the FDIA “can be read as authorizing the Chairperson to prevent a majority of the Board from presenting items to the Board for a vote and decision, and, as far as we are aware, no one has ever taken the position that the [FDIA] authorizes the Chairperson to do so.”
While the opinion emphasized that it does not have the authority “to provide more than a general response,” it stated that the FDIC Bylaws mirror the FDIA in providing that “[t]he management of the [FDIC] shall be vested in the Board of Directors, which shall have all powers specifically granted by the provisions of the [FDIA] and other laws of the United States and such incidental powers as shall be necessary to carry out the powers so granted.” The opinion agreed with the current Board majority’s interpretation “that the delegations of authority to the Chairperson in the Bylaws are best understood as preserving the power of a Board majority to present items for Board decision and vote.” The DOJ noted, however, “that the current Board majority’s understanding of its Bylaws may not be the only possible interpretation,” and pointed out that the FDIC Bylaws can be amended “to eliminate any uncertainty about questions such as the one at issue here.”
The DOJ’s opinion prompted a critical response from House Financial Services Committee Ranking Member Patrick McHenry (R-NC), who said that the “newly released opinion from the Office of Legal Counsel does not change the fact that Democrats’ power grab at the FDIC upended an 88-year tradition of considering the Chair’s agenda on a collegial basis” and pledged that “House Republicans will not be deterred from our investigations into the lawless tactics of rogue Democrat regulators.”
Fed publishes financial sector liabilities
On June 6, the Federal Reserve Board published a notice in the Federal Register regarding Regulation XX (Concentration Limit) to announce that the Fed will publish the aggregate financial sector liabilities by July 1 of each year. Regulation XX generally “prohibits a merger or acquisition that would result in a financial company that controls more than 10 percent of the aggregate consolidated liabilities of all financial companies (‘aggregate financial sector liabilities’).” The Fed explained in the notice that aggregate financial sector liabilities are “equal to the average of the year-end financial sector liabilities figure (as of December 31) of each of the preceding two calendar years.”
Hsu: Bank merger framework needs updating
On May 9, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the Brookings Institution focusing on updating the framework used to analyze bank merger applications. In his remarks, Hsu described that bank mergers have “received significant attention this past year” and that “[c]oncerns about the negative effects of bank mergers on competition, communities and financial stability have prompted some to call for a moratorium on merger activity.” Hsu also noted that “others have defended the benefits of mergers,” noting that “the U.S. financial services market is highly competitive, and mergers allow institutions to achieve needed economies of scale and to diversify risk through geographic or product expansion.” The OCC adopted the DOJ’s bank merger review guidelines, which were last revised in 1995, but public comments as to whether it should update the guidelines to reflect trends in the banking and financial services sector and to modernize its approach to bank merger review is currently pending. Stating that the frameworks for analyzing bank mergers need updating, Hsu noted that imposing a moratorium on mergers would “lock in the status quo,” thus, “prevent[ing] mergers that could increase competition, serve communities better, and enhance industry resiliency.” Considering that it is time to “rethink the frameworks” for analyzing bank merger applications, Hsu stated that he does not believe that “the statutory prongs of competitiveness, safety and soundness, meeting community needs, and financial stability need to be revisited.” Instead, he described that, “the modes of analysis used by regulators to apply these factors need to be improved.” According to Hsu, there is a “resolvability gap” among large regional banks, which is creating a whole new set of "too-big-to-fail" entities as these banks grow in size.
FDIC issues RFI on bank mergers
On March 25, the FDIC issued a request for information (RFI) seeking public comments on bank mergers, including mergers between an insured depository institution and a noninsured institution, to aid the agency’s understanding of and any potential policymaking in this area. Specifically, the RFI seeks input related to the effectiveness of the existing framework in meeting the requirements of Section 18(c) of the Federal Deposit Insurance Act (known as the Bank Merger Act). According to the FDIC, “[s]ignificant changes over the past several decades in the banking industry and financial system warrant a review of the regulatory framework.”
Among the questions posed by the RFI are topics concerning (i) whether additional requirements or criteria (including quantitative measures) should be added to the existing regulatory framework to address financial stability risks that may arise from bank mergers (e.g. “[s]hould the FDIC presume that any merger transaction that results in a financial institution that exceeds a predetermined asset size threshold, for example $100 billion in total consolidated assets, poses a systemic risk concern?”); (ii) the extent to which prudential factors should be considered when acting on a merger application, and whether bright line minimum standards for these factors should be established; (iii) whether agencies should rethink the way they consider whether a merger might affect the convenience and needs factor of a community, and to “what extent should the CFPB be consulted by the FDIC when considering the convenience and needs factor and should that consultation be formalized”; (iv) whether the existing merger review framework creates “an implicit presumption of approval” or requires “an appropriate burden of proof” on bank applicants to prove they have met the criteria of the Bank Merger Act; (v) to what extent has the Bank Merger Act exception “proven beneficial or detrimental to the bank resolution process and to financial stability”; and (vi) to what extent would responses to the questions differ if the merger transaction involves a small insured depository institution.
Comments on the RFI are due 60 days after publication in the Federal Register.
Jelena McWilliams to resign as FDIC chairman
On December 31, Jelena McWilliams announced her resignation as FDIC Chairman effective February 4. McWilliams, who was appointed in 2018, noted in her resignation letter to President Biden that throughout her tenure at the agency the FDIC “has focused on its fundamental mission to maintain and instill confidence in our banking system while at the same time promoting innovation, strengthening financial inclusion, improving transparency, and supporting community banks and minority depository institutions, including through the creation of the Mission Driven Bank Fund.” She also credited FDIC staff for taking swift measures to maintain stability and provide flexibility for banks and consumers impacted by the Covid-19 pandemic.
McWilliams’ resignation follows a conflict among members of the FDIC Board of Directors related to a joint request for information (RFI) seeking public comment on revisions to the FDIC’s framework for vetting proposed bank mergers. Last month, FDIC Board member Martin J. Gruenberg and Rohit Chopra (who has an automatic board seat as Director of the CFPB) issued a joint statement announcing that the FDIC Board of Directors voted to launch a public comment period on updating the FDIC’s regulatory implementation of the Bank Merger Act. Gruenberg and Chopra indicated at the time that the Board members taking part in this action had approved the RFI. Shortly following the announcement, the FDIC released a statement disputing that any action had been approved. (Covered by InfoBytes here.) Chopra issued a follow-up statement challenging the view that only the FDIC Chairperson has the right to raise matters for discussion in Board meetings, and called for “immediate[]” resolution of the conflict, stating that “[a]bsent a return to legal reality and constructive engagement, board members will need to take further steps to exercise independence from management and to ensure sound governance of the [FDIC].” (Covered by InfoBytes here.)
DOJ solicits additional comments on bank mergers
On December 17, the DOJ announced that its Antitrust Division is soliciting additional public comments regarding the potential revision of the 1995 Bank Merger Competitive Review Guidelines (Banking Guidelines) as part of a continuing effort by the federal agencies responsible for banking regulation and supervision. According to the announcement, the division will utilize “additional comments to ensure that the Banking Guidelines reflect current economic realities and empirical learning, ensure Americans have choices among financial institutions, and guard against the accumulation of market power.” The division had previously announced in September 2020 that it was soliciting comments regarding the Banking Guidelines’ potential revision. The call for public comment contained specific questions, including whether: (i) any new guidance should be bank-specific; (ii) any new bank merger guidance should be jointly issued; (iii) the 1800/200 Herfindahl-Hirschman Index screen should be updated; and (iv) there should be a de minimis exception. The announcement also noted that “[b]uilding on the responses, the updated call for comment focuses on whether bank merger review is currently sufficient to prevent harmful mergers and whether it accounts for the full range of competitive factors appropriate under the laws.” The announcement further noted that the division will continue working with the Federal Reserve, OCC, and the FDIC, and will consider comments from the public.