On March 25, 2022, the Federal Deposit Insurance Corporation (“FDIC”) issued a Request for Information (“RFI”) on the regulatory framework that applies to merger transactions involving one or more insured depository institutions.1 The long-expected RFI solicits comment on the effectiveness of the existing framework under the Bank Merger Act (“BMA”)2 and is likely to result in the issuance of a proposal that would change aspects of the framework.
Comments must be received by May 31, 2022. In this Legal Update, we provide background on the framework for bank mergers and summarize the RFI.
The Bank Merger Act generally requires the responsible federal banking regulator to approve any merger involving an insured depository institution, including certain asset purchases and liability assumption transactions. The FDIC generally is the responsible agency for mergers where the resulting institution is a state nonmember bank or state savings association or any participant is a noninsured institution. Notably, the BMA does not apply to acquisitions of or by insured depository institutions (which may be subject to other federal law, such as the Bank Holding Company Act, Change in Bank Control Act or National Bank Act) or the acquisition of a nonbank subsidiary, such as a broker-dealer or fintech.
Prior to approving a merger, the responsible agency must (a) ensure that notice of a proposed transaction be published; (b) request a report on competitive factors from the Attorney General of the United States for merger transactions involving non-affiliates; (c) not approve any proposed merger that would result in a monopoly or produce substantial anticompetitive effects; and (d) consider certain additional factors, such as the financial and managerial resources and future prospects of the existing and proposed institutions, the convenience and needs of the community to be served, the risk to the stability of the United States banking or financial system, and the effectiveness of any insured depository institution involved in the merger at combatting money laundering.
The FDIC and the Office of the Comptroller of the Currency (“OCC”) have issued regulations and guidelines that address the BMA and, with the Federal Reserve Board, maintain an Interagency Bank Merger Act Application form for use by applicants. Further, the US Department of Justice reviews bank mergers under the general antitrust laws and issued Bank Merger Competitive Review Guidelines in 1995 to define and expedite the competitive review process required by the BMA. This is a more limited review after the banking agencies have conducted their analysis under the BMA.
Impetus for the RFI
The FDIC asserts in the RFI that industry changes over the past several decades may have affected the effectiveness of the agency’s merger oversight framework under the BMA, and, therefore, the agency is requesting comment on the effectiveness of the framework. The FDIC specifically notes the following changes as precipitating the RFI:
- The consolidation and growth of the banking industry, which has significantly reduced the number of smaller banking organizations and increased the number of large and systemically important banking organizations
- The federal banking agencies’ responsibility to promote public confidence in the banking system, maintain financial stability, review proposed mergers and resolve failing large insured depository institutions
- The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) amendment to BMA to include a financial stability factor for the first time
- A recent executive order instructing US agencies to consider the impact that consolidation may have on maintaining a competitive marketplace
First, the FDIC believes that the growth of the banking industry may warrant a change in the regulatory framework for reviewing merger transactions. For example, the FDIC asserts that while insured depository institutions with total assets of more than $100 billion comprise less than one percent of the total number of insured depository institutions, these hold about 70 percent of total industry assets and 66 percent of domestic deposits. Consolidation also has contributed to the economic landscape of insured depository institutions with assets less than $100 billion. Over the same 30-year period, the number of institutions with assets less than $10 billion has declined from 15,099 in 1990 to 4,851 in 2020, a reduction of approximately 68 percent.
Next, the FDIC emphasizes the need to update its monitoring obligations for the merger transaction process. The Dodd-Frank Act amended the BMA to require consideration of the risk posed to the stability of the US banking or financial system by a proposed bank merger. According to the FDIC, from a financial stability perspective, efforts to improve the resolvability of large banks have almost exclusively focused on Global Systemically Important Banks (“G-SIBs”). However, as the number, size and complexity of non-GSIB large banks has risen, the FDIC believes this warrants reconsideration of the framework for assessing the financial stability prong of the BMA. The agency highlights that there is a need to focus attention on the financial stability risks that could arise from a merger involving a large bank. The FDIC is particularly concerned that the failure of a large insured depository institution would present significant challenges to the FDIC’s resolutions and receivership functions and could present a threat to the financial stability of the United States.
Lastly, President Biden signed an Executive Order on Promoting Competition in the American Economy on July 9, 2021 (“Executive Order”). The Executive Order instructs federal agencies to consider the impact that consolidation may have on maintaining a fair, open and competitive marketplace and on the welfare of consumers. With respect to the banking sector, the Executive Order specifically directs the attorney general, in consultation with the chair of the Federal Reserve Board, the chair of the Board of Directors of the FDIC and the comptroller of the currency, to adopt a plan for the revitalization of merger oversight under the BMA, among other competition laws.
The RFI contains 10 multi-part questions on the effectiveness of the existing BMA framework, which we have reproduced at the end of this Legal Update. Some of the questions are broad, open-ended inquires on the BMA framework. However, others foreshadow a potentially radical change to the way in which the FDIC will think about merger oversight. For example:
- Question 2 asks if the FDIC should 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.
- Question 3 asks if the FDIC should consider prudential factors or set “bright line minimum standards” for prudential factors as part of the merger application review process.3
- Question 5 asks if the FDIC should adopt quantitative measures in addition to the Herfindahl-Hirschman Index.
- Question 6 asks if the FDIC should take actions to address what some at the FDIC perceive as an implicit presumption of approval for merger applications.
- Question 9 asks if there are attributes of the resolvability framework for US G-SIBs, such as a Total Loss-Absorbing Capacity (“TLAC”) requirement, that should be put into place to facilitate the resolution of a large insured depository institution without resorting to a merger with another large institution or a purchase and assumption transaction with another large institution.
- Question 10 asks if the FDIC should differentiate its merger policy for transactions involving large vs. small depository institutions.
These questions imply that the FDIC is considering wide-ranging changes that would fundamentally alter the BMA framework and could prevent mergers that otherwise would have been approved.
Any proposal from the FDIC is likely to face substantial opposition from industry participants and other stakeholders. This is particularly likely because the FDIC’s actions would raise the bar only for mergers involving banks, meaning that mergers between two nonbanks would remain subject only to the already less restrictive general antitrust laws while banks would be subject to much more restrictive requirements.
Additionally, it is notable that the Federal Reserve Board and OCC did not join the FDIC’s RFI, even though the comptroller of the currency serves as a member of the FDIC’s board of directors and voted in favor of issuing the RFI. If the FDIC were to materially alter the BMA framework without the involvement of the other banking regulators, then there would be different merger standards based on the somewhat arbitrary distinctions among charter types. Further, the comptroller of the currency recently indicated that he is considering conditioning mergers involving larger regional banks on compliance with specific prudential standards, such as the external long-term debt requirement in the TLAC rules.4 This action would not require the involvement of the FDIC and could further complicate merger policy for US banks.
Finally, the lead-up to the issuance of the RFI involved certain members of the FDIC’s board of directors attempting to issue the request without the consent of the chair.5 This resulted in the resignation of the FDIC chair and illustrates the diverging views with respect to merger policy in Washington. Any action (or perceived inaction) by the FDIC is likely to draw congressional scrutiny and could face judicial challenge, depending on the process.
The 10 RFI Questions
Question 1. Does the existing regulatory framework properly consider all aspects of the Bank Merger Act as currently codified in Section 18(c) of the Federal Deposit Insurance Act?
Question 2. What, if any, additional requirements or criteria should be included in the existing regulatory framework to address the financial stability risk factor included by the Dodd-Frank Act? Are there specific quantitative or qualitative measures that should be used to address financial stability risk that may arise from bank mergers? If so, are there specific quantitative measures that would also ensure greater clarity and administrability? Should 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?
Question 3. To what extent should prudential factors (for example, capital levels, management quality, earnings, etc.) be considered in acting on a merger application? Should bright line minimum standards for prudential factors be established? If so, what minimum standard(s) should be established and for which prudential factor(s)?
Question 4. To what extent should the convenience and needs factor be considered in acting on a merger application? Is the convenience and needs factor appropriately defined in the existing framework? Is the reliance on an insured depository institution’s successful Community Reinvestment Act performance evaluation record sufficient? Are the convenience and needs of all stakeholders appropriately addressed in the existing regulatory framework? To what extent and how should the convenience and needs factor take into consideration the impact that branch closings and consolidations may have on affected communities? To what extent should the FDIC differentiate its consideration of the convenience and needs factor when considering merger transactions involving a large insured depository institution and merger transactions involving a small insured depository institution? To what extent should the CFPB be consulted by the FDIC when considering the convenience and needs factor and should that consultation be formalized?
Question 5. In addition to the HHI, are there other quantitative measures that the federal banking agencies should consider when reviewing a merger application? If so, please describe the measures and how such measures should be considered in conjunction with the HHI. To what extent should such quantitative measures be differentiated when considering mergers involving a large insured depository institution and mergers involving only small insured depository institutions?
Question 6. How and to what extent should the following factors be considered in determining whether a particular merger transaction creates a monopoly or is otherwise anticompetitive?
Please address the following factors:
(a) The merging parties do not significantly compete with one another;
(b) Rapid economic change has resulted in an outdated geographic market definition and an alternate market is more appropriate;
(c) Market shares are not an adequate indicator of the extent of competition in the market;
(d) A thrift institution is actively engaged in providing services to commercial customers, particularly loans for business startup or working capital purposes and cash management services;
(e) A credit union has such membership restrictions, or lack of restrictions, and offers such services to commercial customers that it should be considered to be in the market;
(f) There is actual competition by out-of-market institutions for commercial customers, particularly competition for loans for business startup or working capital purposes; and
(g) There is actual competition by non-bank institutions for commercial customers, particularly competition for loans for business startup or working capital purposes.
With respect to the preceding factors, how and to what extent should the activity of current branches or pending branch applications be considered?
Question 7. Does the existing regulatory framework create an implicit presumption of approval? If so, what actions should the FDIC take to address this implicit presumption?
Question 8. Does the existing regulatory framework require an appropriate burden of proof from the merger applicant that the criteria of the Bank Merger Act have been met? If not, what modifications to the framework would be appropriate with respect to the burden of proof?
Question 9. The Bank Merger Act provides an exception to its requirements if the responsible agency finds that it must act immediately in order to prevent the probable failure of one of the insured depository institutions involved in the merger transaction. To what extent has this exception proven beneficial or detrimental to the bank resolution process and to financial stability? Should any requirements or controls be put into place regarding the use of this exemption, for example when considering purchase and assumption transactions in a large bank resolution? Are there attributes of GSIB resolvability, such as a Total Loss-Absorbing Capacity (TLAC) requirement, that could be put into place that would facilitate the resolution of a large insured depository institution without resorting to a merger with another large institution or a purchase and assumption transaction with another large institutions?
Question 10. To what extent would responses to Questions 1-9 differ for the consideration of merger transactions involving a small insured depository institution? Should the regulations and policies of the FDIC be updated to differentiate between merger transactions involving a large insured depository institution and those involving a small insured depository institution? If yes, please explain. How should the FDIC define large insured depository institutions for these purposes?
1 87 Fed. Reg. 18,740 (Mar. 31, 2022), https://www.federalregister.gov/documents/2022/03/31/2022-06720/request-for-information-and-comment-on-rules-regulations-guidance-and-statements-of-policy-regarding.
3 This question is notable because courts have held that banking regulators may not add requirements for acquisitions in the absence of congressional authorization. See, e.g., Security Bancorp v. Federal Reserve, 655 F.2d 164, 168 (9th Cir. 1980) (“Since Congress has chosen not to make such a requirement, we hold that the Board cannot create one under the guise of managerial resources.”).
4 Please see our Legal Update on the Acting Comptroller’s statement: https://www.mayerbrown.com/en/perspectives-events/publications/2022/04/shifting-sands-new-prudential-standards-for-larger-regional-banks-under-consideration-by-us-occ.