Halfway through a year that has already seen some of the biggest bank failures in US history,[1] and with economic and competitive pressures continuing to strain mid-sized and regional banks, a complicated picture is emerging for the bank merger landscape. Speculation about further consolidation in the banking sector is widespread, including from senior policymakers in Washington. Just last week, Treasury Secretary Janet Yellen told reporters she expects that, in the near term, “there will probably be banks that end up wanting to merge,” echoing similar recent statements by Acting Comptroller of the Currency Michael Hsu and Federal Reserve Governor Philip Jefferson, President Biden’s nominee to be Vice Chair of the central bank.
At the same time, officials in Washington are signaling that banks seeking to merge may face even tougher standards and greater scrutiny. Remarks by Jonathan Kanter, Assistant Attorney General for the Department of Justice (“DOJ”) Antitrust Division, at a June 20, 2023 Brookings Institution symposium illustrate the point.
Noting that the guidelines DOJ and the federal banking agencies currently use to evaluate bank mergers were published in 1995, Kanter explained that the time has come to adopt a new approach that reflects “today’s market realities and the many dimensions of competition in the modern banking sector.”[2] Below, after briefly summarizing the current framework governing the federal agencies’ review of bank mergers, we discuss AAG Kanter’s speech against the backdrop of a government-wide initiative that purports to promote competition in the US economy more broadly. We then highlight open questions and the near-term landscape for deals involving or affecting banks.
The Current Framework for Bank Merger Review: Overview and Recent Developments
When faced with an application for various types of bank mergers, acquisitions, or dispositions, the Bank Holding Company Act and Bank Merger Act require federal banking agencies to consider the potential competitive effects of the merger.[3] Any transaction that would substantially reduce competition in the relevant market is presumptively prohibited, unless the agencies find that such an effect is outweighed by the “convenience and needs of the community to be served.”[4]
In making these determinations, the banking agencies are required to request and review a “competitive factors” report by the DOJ and satisfy a 30-day waiting period before approving the application – so that DOJ may consider whether to challenge the transaction in court using its statutory antitrust authorities. Historically, and as reflected in the 1995 Guidelines, DOJ’s analysis has focused principally on bank deposit concentration and branch overlaps in a relevant market. Where a proposed transaction exceeds certain concentration limits—calculated using the Herfindahl-Hirschman Index or “HHI”—it will not be approved unless the parties agree to take remedial steps (e.g., through branch sales or other divestitures).
There has long been consensus that innovation in the financial services industry has made the 1995 Guidelines obsolete, as consumers increasingly rely on electronic delivery channels rather than local branches to meet their banking needs and nonbank fintech providers continue to innovate and grow in popularity. In response, President Biden issued an Executive Order in July 2021 that, among other things, encouraged DOJ and the federal banking agencies to review their existing practices and “revitalize[e] merger oversight” under the federal banking laws.[5]
In discussing the Executive Order with respect to banking , AAG Kanter expressed optimism “that we will develop new guidelines.” And at least two of the banking agencies have indicated they are rethinking their policies for bank merger review:
- The FDIC issued a request for information (RFI) in May 2022 seeking comments on the existing framework. Almost a year before the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, the RFI emphasized that excessive concentration in the banking industry raises financial stability concerns and complicates the “FDIC’s resolutions and receivership functions.”
- Similarly, in testimony before Congress in May 2023, Acting Comptroller Michael Hsu reported that his agency is also working on an update to the 1995 Guidelines, stressing that the recent bank failures have made the process more urgent. Further, discussing the issue at an OCC forum on bank mergers several months before, Hsu highlighted a “resolvability gap for large regional banks” for which “our resolution tools may not be up to the task.”
Where is the DOJ Heading?
In his Brookings Institution speech, AAG Kanter suggested a novel approach that, if adopted, would depart in meaningful ways from the 1995 Guidelines.
First, rather than focusing primarily on deposit concentration and branch overlap, DOJ would assess the competitive effects of a proposed merger by looking at additional factors, such as multi-market contacts and coordinated effects (i.e., actions by firms that limit competition even absent explicit collusion). It also would “examine the extent to which a transaction threatens to entrench power of the most dominant banks by excluding existing or potential disruptive threats or rivals” and account for the availability of financial products offered by nonbank providers. According to Kanter, this change in focus reflects the evolution of banking in the 21st century, in which anticompetitive behavior or effects may not be observable solely through older bank deposit- and branch-based concentration metrics.
Second, DOJ will consider the effects of a proposed merger on “competition for different customer segments,” acknowledging that enforcement authorities “must ensure that customers retain a meaningful choice as to the type of bank with which they do business by recognizing that different segments of customers have different needs and that substitution across different types of banks may be limited.”
Third, and finally, Kanter explained that DOJ needs to rethink the tools it uses to promote competition in banking in a world where, for example, requiring branch divestitures as a condition of approval would have little effect on the actual competitive impact of a merger. To that end, he expressed a desire that DOJ limit its role in negotiating divestitures going forward and “focus on providing our advisory opinion as required by the statute and . . . [p]reserve[] our authority to challenge a bank merger under the antitrust laws.”
The Near-Term Outlook: Some Reasons for Optimism, but Uncertainty Remains
Debates over bank merger reviews and activity have, of course, taken on new urgency in light of recent events. Distress in the regional banking sector that led to the failure of Silicon Valley Bank, Signature, and First Republic continues to some degree and, as Secretary Yellen noted just days ago, it may not be long before the agencies are again asked to review merger applications. And even without a formal revision to the 1995 Guidelines, there is no question the regulatory posture toward deals involving banks could benefit from greater clarity and consistency – as witnessed by the May 4th announcement that TD Bank and First Horizon called off their long-planned merger because of “uncertainty as to when and if . . . regulatory approvals can be obtained.”
AAG Kanter’s speech and the recent statements from Treasury and banking agency policymakers highlighted above suggest that progress is being made and the regulatory landscape for bank mergers may soon be updated. But significant questions remain about the direction of change and what the market can expect, including:
- Would emphasizing the more subjective factors outlined in AAG Kanter’s speech increase uncertainty relative to the HHI factors? How can the industry prepare for reviews based on non-quantitative metrics?
- How, if at all, would the availability of financial products from nonbank providers (e.g., fintech companies, direct lenders, and private capital sources) factor into a competitive analysis that focuses on customer segments rather than local markets?
- When considering a merger, should the agencies address differing capital, liquidity, and recovery and resolution regimes applicable to respectively, domestic G-SIBs and regional banks (the so-called “resolvability gap”) and, if so, how? Should the level of scrutiny given to a specific merger proposal vary based on these differences?
- Would the US financial system be more resilient with a smaller number of larger banks or should the merger review process presumptively discourage consolidation?
- How will the agencies address criticism from members of Congress that, in effect, their recent actions changed “too big to fail” from a stigma to a seal of approval?[6]
It may not be long before revised guidelines appear, hopefully providing additional clarity on these and other questions. We will continue to monitor developments and provide updates as appropriate.
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[1] Outside the United States, 2023 has also witnessed the merger of Credit Suisse into UBS.
[2] U.S. Department of Justice, Bank Merger Competitive Review -- Introduction and Overview (1995) (the “1995 Guidelines”) available at: https://www.justice.gov/sites/default/files/atr/legacy/2007/08/14/6472.pdf
[3] See 12 U.S.C. § 1842(c)(1); 12 U.S.C. § 1828(c)(5).
[4] Id. The competitive effects are only one relevant consideration. The banking agencies must also consider, among other things, potential effects on financial stability and whether the applicant(s) satisfy certain requirements of the Community Reinvestment Act.
[5] This followed a similar DOJ initiative that began during the Trump administration. See Office of Public Affairs | Antitrust Division Seeks Public Comments On Updating Bank Merger Review Analysis | United States Department of Justice
[6] See, e.g., JPMorgan just got a lot bigger — and Elizabeth Warren is alarmed | CNN Business.