With the recent one-year anniversary of three of the largest bank failures in U.S. history—shortly preceded by the largest bank merger announcement in recent years—bank merger policy has firmly attracted the attention of the public and policymakers. Last Thursday, the Federal Deposit Insurance Corporation (“FDIC”) joined the Office of the Comptroller of the Currency (“OCC”) in announcing a revised merger policy that, if adopted as proposed, would likely toughen its processes for reviewing bank mergers even as merger parties continue to announce new high-profile transactions.
These announcements build on long-running efforts by the Biden administration to tighten merger policy, both generally and specifically for bank mergers. At the same time, they signal that the federal banking agencies are firmly focused on larger transactions, potentially reducing regulatory uncertainty for smaller banks. Below, we summarize key aspects of the FDIC’s proposed bank merger policy and highlight key takeaways and open questions for stakeholders as they consider merger transactions and comment on the proposal.
Background
Mergers of insured depository institutions (“IDIs” or “banks”) in the United States are reviewed by the FDIC, OCC, or Federal Reserve Board (together, the “federal banking agencies”), in each case if the agency is responsible for supervising the resulting organization, and by the Department of Justice (“DOJ” and, together with the federal banking agencies, the “Agencies”). The Agencies’ bank merger-specific processes are spelled out in a range of administrative guidance and decisions on prior applications, many of which have not been updated for some time. The Agencies’ analysis of bank mergers’ competitive effects, for example, is conducted under guidelines last formally updated in 1995, and the FDIC’s standards for reviewing bank mergers are described in a statement of policy last updated in 2008. Updates to the Agencies’ review framework have been under discussion for the better part of the last four years, including in requests for information (“RFIs”) by the DOJ in 2020 and 2021, the President’s Executive Order on Promoting Competition in the American Economy in 2021, and an FDIC RFI in 2022, but the Agencies largely had refrained from adopting significant changes until recently.
The shape of potential changes to the bank merger-specific guidance began to emerge in 2023, when the DOJ’s Assistant Attorney General for Antitrust Jonathan Kanter called for updating the Agencies’ competitive analysis to account for “today’s market realities and the many dimensions of competition in the modern banking sector.” See our analysis here. In recent months, the DOJ and Federal Trade Commission (“FTC”) announcement of updates to their generally applicable merger guidelines in December was followed relatively shortly by an OCC proposal to update its rules and policies for evaluating merger transactions (the “OCC Proposal”). See our analysis of the new merger guidelines and OCC Proposal here and here, respectively. Both releases signaled significant scrutiny would be likely for larger bank mergers.[1] In particular, the DOJ and FTC revised merger guidelines would mark a significant change to the Agencies’ current analytical approach if applied to banking transactions, and the OCC Proposal, while generally closer to current practices, signaled significant scrutiny for larger transactions.
The FDIC’s Proposed Policy Statement
Last Thursday, the FDIC’s Board of Directors joined in on this trend, voting 3-2 in favor of issuing a Proposed Statement of Policy on Bank Merger Transactions (the “FDIC Proposal”) that would update the agency’s existing statement. While Acting Comptroller Michael Hsu, a member of the FDIC Board, described the FDIC Proposal as “broadly consistent” with the OCC Proposal, the FDIC Proposal would go significantly further in several areas, highlighted below.
- Convenience and Needs.
The FDIC Proposal would make significant changes to the FDIC’s analysis of a merged bank’s ability to meet the convenience and needs of the communities it serves, stating that “[t]he FDIC expects that a merger between IDIs will enable the resulting IDI to better meet the convenience and the needs of the community to be served than would occur absent the merger” (emphasis in original). Historically, the FDIC and other federal banking agencies have focused primarily on the records of the merging parties under the Community Reinvestment Act. If adopted, this would represent a substantial departure from longstanding federal banking agency practice and could introduce significant uncertainty around what is necessary to show positive effects on an organization’s ability to meet the convenience and needs of its communities.
The FDIC Proposal, like the OCC Proposal, also would include a framework for determining when to hold a public meeting on a transaction under agency consideration. Both proposals would base the decision to hold a public meeting on a range of factors relating to public interest in a proposed merger and suggest that public meetings are likely for transactions resulting in depository institutions with more than $50 billion in assets. However, the FDIC Proposal goes farther, suggesting that the FDIC “generally expects” to hold a hearing for any application resulting in an institution over $50 billion in assets. The FDIC Proposal and OCC Proposal both also state that the agencies will consider job losses at a merged institution in evaluating the convenience and needs factor, which is at odds with prior OCC and Federal Reserve statements that such effects fall outside the scope of the Bank Merger Act.
- Competition.
The FDIC Proposal would require merging parties to complete divestitures before consummating a transaction and waive or decline to enter non-compete agreements for employees of divested entities. FDIC staff indicated that these changes will be accompanied by proposed revisions to the FDIC’s supplement to the Interagency Bank Merger Act application that would require submission of materials considered by the merging parties’ boards that is required under the Hart-Scott-Rodino Act. Together, these changes could extend processing timelines and increase the risk of competitive challenges to bank mergers if adopted, although their impact may be managed through careful planning.
The FDIC Proposal also would formally codify the FDIC’s consideration of competitive effects beyond deposit markets. While several FDIC board members emphasized the importance of this revision, it is consistent with existing Federal Reserve Board-DOJ FAQs on the topic, and the federal banking agencies have publicly discussed their analysis of additional markets in several recent merger approvals.
- Financial Stability.
The FDIC Proposal largely adopts the existing financial stability framework employed in public orders of the Federal Reserve and OCC but is stricter in several key areas. First, it would formally apply added scrutiny to mergers resulting in an institution over $100 billion in assets, whereas the Federal Reserve and OCC presume that transactions resulting in an institution under $100 billion in assets would not adversely affect financial stability. Second, the FDIC Proposal would clarify that the FDIC does not believe that financial stability benefits from the application of stricter enhanced prudential standards to the merged entity could, on their own, offset increased financial stability risks resulting from a larger, more interconnected, and more complex institution. Comments by CFPB Director Rohit Chopra, who serves on the FDIC Board of Directors and voted in favor of the proposal, went even further—suggesting that the FDIC would not consider financial stability benefits of applying stricter prudential standards to the merged entity in order to avoid reading the financial stability factor out of the Bank Merger Act. It remains to be seen whether this is intended to be a clarification of how the FDIC weighs mitigating evidence in evaluating the financial stability factor or a broader rejection of federal banking agencies’ previous analyses of transactions’ positive effects on financial stability.
The FDIC Proposal also notably provides that the FDIC will consider the resolvability of the resulting institution in a potential failure situation after noting in the preamble that, based on recent experience with Silicon Valley Bank and Signature Bank, “failure of a larger IDI can have a contagion effect.” The agency indicates that staff from the FDIC’s Division of Resolutions and Receiverships and potentially from the Division of Complex Institution Supervision and Resolution may review transactions involving larger IDIs, including by “identify[ing] potential purchasers for the resulting IDI or its component parts, and identify[ing] resolution impediments that could impact the stability of the U.S. banking or financial system.” We think it is likely that an updated resolution strategy may be required in connection with larger bank applications.
- Financial and Managerial Considerations.
The FDIC Proposal generally would codify the FDIC’s existing analytical framework for evaluating whether the financial and managerial resources and future prospects of the existing and combined organization are consistent with approval. However, FDIC Vice Chairman Travis Hill noted in dissenting remarks that the FDIC Proposal’s language stating that “[g]enerally, the FDIC will not find favorably on the financial resources factor if the merger would result in a weaker IDI from an overall financial perspective” may—intentionally or inadvertently—modify the existing framework by suggesting that the FDIC would find negatively on the financial stability factor because an acquirer is on a stronger financial footing than a target or is required to recognize the target’s assets and liabilities at fair value. Consistent with the OCC Proposal, the FDIC Proposal also emphasizes the FDIC’s consideration of risks presented by integration and fast-growing firms.
- Bank Merger Act Jurisdiction.
The FDIC Proposal would codify the agency’s broad view of when an application may be required under the Bank Merger Act. The “Jurisdiction and Scope” section of the proposal clarifies that in addition to requiring approval for traditional merger transactions, a bank must seek the FDIC’s approval before acquiring all or substantially all of the assets of a non-insured entity—even if the entity is the bank’s subsidiary or affiliate—and before assuming any deposit liability (including trust or custody deposits) from a non-insured entity. A non-insured entity likewise must seek prior approval before any deposit may be transferred to it from a bank. The FDIC Proposal takes the position that an application would be required so long as a transaction would result in a transfer of deposit liabilities even if no deposits would transfer directly as a result of the transaction, repeatedly emphasizing the breadth of the Bank Merger Act’s coverage. For example, the FDIC takes the position that if customers are solicited to transfer deposits to an IDI in relation to any arrangement or agreement to which an IDI is a party, the IDI is expected to seek prior approval of the agreement under the Bank Merger Act.
- Withdrawn Applications.
The FDIC Proposal would provide for the FDIC’s Board of Directors to release statements on withdrawn transactions when it deems that doing so would be in the public interest for purposes of creating transparency to the public and future applicants. The proposal could have benefits in this regard, but FDIC Vice Chairman Travis Hill noted in his dissenting statement that such statements risk “imposing reputational damage on applicants.”
Key Takeaways and Issues to Watch
Parties considering a merger transaction should carefully monitor the progress of the FDIC Proposal and the OCC Proposal, as they are likely to significantly affect the bank merger landscape over the medium- and long-term. We believe the key issues to watch will include:
- Will the OCC and FDIC harmonize their proposals?
Acting Comptroller Mike Hsu supported the FDIC Proposal despite some notable differences from the OCC Proposal, and the differences in the proposal could reflect differences in the agencies’ dynamics or further development and iteration since the OCC Proposal was released in January. Any changes to the OCC Proposal will carry particular significance if they pertain to the financial stability analysis—the FDIC Proposal is somewhat stricter than the OCC Proposal in this area, but the FDIC supervises relatively few banks likely to be considering transactions that would result in an institution with over $100 billion in assets compared to the OCC.
- Does the Fed get involved?
The Federal Reserve Board is the only federal banking agency yet to release proposed changes to its merger policy framework in 2024. Pressure to act may build now that both the FDIC and OCC have released proposals, but it is unclear what the Fed’s appetite will be to take on another controversial issue as it manages backlash to the Basel III Endgame proposal. Any action by the Federal Reserve Board would be likely to have outsized importance in shaping the final contours of bank merger policy, as it is the only federal banking agency with jurisdiction over holding company mergers under the Bank Holding Company Act and Home Owners’ Loan Act.
- Will the Agencies update the Bank Merger Guidelines?
Both the FDIC Proposal and OCC Proposal acknowledge ongoing work among the Agencies to review the 1995 Bank Merger Guidelines, but a joint panel with Assistant Attorney General for Antitrust Jonathan Kanter and CFPB Director Rohit Chopra several hours after the FDIC released the FDIC Proposal did not seem to suggest action on the Bank Merger Guidelines would be forthcoming. In the absence of any developments, how the DOJ chooses to apply the new generally applicable merger guidelines to bank mergers will take on increased importance.
The FDIC Proposal will be subject to comments for 60 days from the date of its publication in the Federal Register. Interested parties should carefully consider the implications of FDIC Proposal to determine whether using the notice-and-comment process to share their perspectives may be warranted. We will continue to monitor developments and provide updates as appropriate.
[1] Merger enforcement by the DOJ and FTC in all areas has become significantly more expansive and stringent under the Biden administration. For example, the agencies have increased scrutiny of private equity transactions and mergers in the pharmaceutical space.
