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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.”
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.”
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.”
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.
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.
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.)
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.
On December 14, after his first public meeting as a Member of the Board of Directors of the FDIC, CFPB Director Rohit Chopra issued a statement detailing the circumstances leading up to the request for information (RFI) that seeks public comment on revising the FDIC’s framework for vetting proposed bank mergers. Chopra’s statement follows an FDIC statement (covered by InfoBytes here) refuting a request for review of bank merger policies announced in a CFPB blog post. In his December 14 statement, Chopra challenged the view that only the FDIC Chairperson has the right to raise matters for discussion in board meetings and explained how the Directors had “circulated a draft Request for Information on the Bank Merger Act with the intention of releasing it jointly with the Office of the Comptroller of the Currency.” Chopra noted the draft RFI “was not a draft rule or guidance document – it was largely a series of questions to solicit input, given the President’s reasonable request, the need to incorporate the Dodd-Frank Act’s amendments, and the long-term trend in consolidation.” Chopra further stated that it “should have been a no-brainer where consensus could easily be achieved,” but due to “the General Counsel’s improper assertion that the Chairperson had implicit veto power, the draft was not given appropriate attention.”
Chopra called for “immediate” resolution of the conflict, adding 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].”
The same day, acting Comptroller of the Currency Michael J. Hsu released a statement supporting “the view of the majority of the FDIC Board members that the Bank Merger Act (BMA) guidelines are ripe for review,” noting that his particular focus is on “the financial stability prong, given large bank merger trends and my experience in the 2008 financial crisis with too-big-to-fail firms.” Hsu also stated that he “voted for the Request for Information (RFI) on the BMA due to the inability to reach compromise and urgency on the financial stability issue,” and he expressed concerns that “legal or procedural quicksand may ultimately limit our ability to act on this issue in a timely manner.”
On December 9, the FDIC issued a statement refuting a request for review of bank merger policies announced in a CFPB blog post. According to a joint statement issued by FDIC Board member Martin J. Gruenberg and Rohit Chopra (who has an automatic board seat as Director of the CFPB), 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 that the Board members taking part in this action have approved a Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions, which would seek public input on the FDIC’s approach to considering prudential factors in acting on a bank merger application, specifically related to “whether bright line minimum standards for prudential factors should be established, and if so, what minimum standards for which prudential factors.” In his blog post, Chopra noted that the Bureau is particularly interested in how the assessment of a bank merger’s impact on families and businesses in local communities would work in practice, and how should regulators ensure a merger does not increase the risk of bank failure or otherwise disrupt the economy should the bank face financial distress. According to the Gruenberg and Chopra joint statement, the Board’s action authorizes the FDIC’s executive secretary to publish the RFI in the Federal Register, upon which a 60-day window for comments will commence.
Shortly following the release of the joint statement, the FDIC released a statement disputing that any action had been approved, stressing that it “has longstanding internal policies and procedures for circulating and conducting votes of its Board of Directors, and for issuing documents for publication in the Federal Register.” Adding that “[i]n this case, there was no valid vote by the Board, and no such request for information and comment has been approved by the agency for publication in the Federal Register,” the FDIC commented that “[n]otwithstanding the actions taken today, the FDIC expects this time-honored tradition of collegiality and comity to continue.”
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