The Proposal clarifies the FDIC’s bank merger approval process but may prove challenging for new large bank consolidations with the FDIC as the primary regulator.

On March 21, 2024, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved Proposed Revisions to its Statement of Policy on Bank Merger Transactions (the Proposal). The Proposal adopts a principles-based approach and aims to update, strengthen, and clarify the FDIC’s policies and expectations on the evaluation of bank merger transactions[1] subject to FDIC approval under the Bank Merger Act (BMA), that is, transactions in which the FDIC is the primary federal regulator for the surviving or assuming bank. The Proposal also addresses evaluative considerations for each statutory factor applicable to a merger transaction, including assessing for monopolistic or anti-competitive effects and potential risk to the stability of the US banking or financial system.

The Proposal reflects legislative developments since the Statement of Policy was last updated in February 2008, including the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank) 2010 amendment to the BMA and a 2022 Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions.

Guiding Principles for the Statutory Factors

For any given bank merger application, the FDIC will generally grant approval if all statutory factors are favorably resolved, and all other applicable regulatory requirements are satisfied. On the other hand, if the merger review uncovers deficiencies in one or more statutory factors, FDIC staff will generally recommend denial of the application.

The Proposal sets forth the following principles, analytical considerations, and expectations for each of the applicable statutory factors under the BMA:

Monopolistic or Anti-Competitive Effects

• For all merger transactions, the BMA prohibits the FDIC from approving a merger transaction that would result in a banking monopoly (or would be in furtherance of an attempt to monopolize the business of banking), or that may substantially lessen competition, in any part of the US. 
• The FDIC will tailor its evaluation to consider the size and competitive effects of the resulting insured depository institution (IDI).
• The FDIC will consider concentrations with respect to both geographic (local, regional, and national) and product markets.
• The FDIC will use deposits as an initial proxy for commercial banking products and services.
• The FDIC, however, will consider concentrations beyond those based on deposits, in any specific products or customer segments, such as the volume of small business or residential loan originations, or the pricing of products and services.
• The FDIC may require divestitures of business lines, branches, or portions thereof as a condition of merger approval. The FDIC would also prohibit the divesting institution from entering into or enforcing non-compete agreements with any employee of the divested entity.
• The FDIC may make an exception and approve a merger transaction that substantially lessens competition if the convenience and needs of the community (such as preventing the probable failure of an IDI) outweigh the proposed merger’s anti-competitive effects.
• The FDIC expects to continue coordinating merger reviews with the Department of Justice (DOJ) when the competitive effects of the transaction raise questions or concerns.

Financial Resources

• For all merger transactions, the BMA prohibits the FDIC from approving a merger transaction if the merger would result in a weaker institution from an overall financial perspective. The Proposal therefore expects that the resulting IDI will reflect sound financial performance and condition, and the FDIC will not approve a merger if the resulting institution is weaker.
• The FDIC will consider the resulting IDI’s ability to meet applicable capital standards (including maintenance of appropriate allowances for loan or credit losses), and may even impose higher capital requirements on the resulting IDI.
• The FDIC expects the resulting IDI to maintain sufficient liquidity and appropriate funding strategies given its size, complexity, and risk profile.
• The FDIC will consider the financial effect that related entities, such as a parent organization and any key affiliates, will have on the IDI. For each entity under consideration, the FDIC will evaluate the size and scope of operations, capital position, quality of assets, overall financial performance and condition, compliance and regulatory history, primary revenue and expense sources, and funding strategies.

Managerial Resources

• For all merger transactions, the BMA requires the FDIC to consider the managerial resources of the existing and proposed entities.
• The FDIC expects that management possesses the managerial and operational capacity (and the ability to devote adequate resources), to effectively implement post-merger integration plans and strategies; identify, measure, monitor, and control risks; ensure a safe and sound operation in compliance with applicable laws and regulations; and ensure full and timely compliance with any outstanding corrective programs or supervisory recommendations.
• Managerial resource considerations may include supervisory capacity and history; operating history; risk management; compliance management system; control environment of the parent organization; adequacy of succession planning; responsiveness to supervisory recommendations from regulators or auditors; existing or pending enforcement actions; any issues or concerns with regard to specialty areas; reasonableness of fees, expenses, and other payments made to insiders; and recent rapid growth and management’s record in controlling risks associated with such growth.
• Effective merger integration includes human capital; products and services; operating systems, policies, and procedures; internal controls and audit coverage; physical locations; information technology; and risk management programs.

Future Prospects

• For all merger transactions, the BMA requires the FDIC to consider the future prospects of the existing and proposed entities involved in the transaction.
• Future prospect considerations may include the economic environment; the competitive landscape; the acquiring IDI’s history in integrating merger targets and managing growth; the anticipated scope of the resulting IDI’s operations; the quality of its supporting infrastructure; any significant planned changes to the resulting IDI’s strategies, operations, products or services, activities, income or expense levels, or other key elements of its business; and maintenance of an acceptable risk profile.

Convenience and Needs of the Community to Be Served

• For all merger transactions, the BMA requires the FDIC to consider the convenience and needs of the community to be served.
• A merger must result in an IDI positioned to better meet the convenience and needs of the community it serves than would be the case absent the merger.
• A better outcome may be demonstrated through higher lending limits, greater access to products and services, introduction of new or expanded products or services, increased convenience in utilizing the credit and banking services and facilities of the resulting IDI, or other means.
• The FDIC will evaluate the community to be served broadly, including the proposed assessment area(s), retail delivery systems, populations in affected communities, and identified needs for banking services.
• The FDIC will also review the Community Reinvestment Act (CRA) record of the merging entities, taking into account each IDI’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution. The FDIC’s review, however, will not be limited to the CRA records and will encompass a broad review of the IDIs’ existing products and services.
• The FDIC will consider the record of each IDI in complying with consumer protection requirements and maintaining a sound and effective compliance management system.

Risk to the Stability of the US Banking or Financial System

• For all merger transactions, the BMA requires the FDIC to consider the risk that a merger transaction poses to the stability of the US banking or financial system.
• A merger must therefore result in an IDI that will not materially increase the risk to the stability of the US banking or financial system. The FDIC will consider the following factors:
  • The size of the entities involved in the transaction
  • The availability of substitute providers for any critical products or services to be offered by the resulting IDI
  • The resulting IDI’s degree of interconnectedness with the US banking or financial system, including exposures with creditors, counterparties, investors, or other market participants
  • The extent to which the resulting IDI contributes to the US banking or financial system’s complexity, considering the full scope of the IDI’s operations, such as business lines, products and services, on- and off-balance sheet activities, branch network and delivery channels, number of account holders (including the volume of uninsured deposits), extent of information technology systems, and any material affiliate or other third-party relationships)
  • The extent of the resulting IDI’s cross-border activities, and whether such activities present a significant degree of cross-jurisdictional claims or liabilities
• Although the size of the entities in the merger may not necessarily be the sole consideration for this factor, the Proposal indicates that “transactions that result in a large IDI (e.g., in excess of $100 billion) are more likely to present potential financial stability concerns with respect to substitute providers, interconnectedness, complexity, and cross border activities, and will be subject to added scrutiny.”

Effectiveness in Combatting Money Laundering Activities

• For all merger transactions, the BMA requires the FDIC to consider the effectiveness of any IDI involved in combatting money-laundering activities, including in overseas branches.
• The FDIC expects that merger transactions result in IDIs with effective, comprehensive, and integrated anti-money laundering (AML) and countering the financing of terrorism (CFT) programs.
• The FDIC will review each entity’s AML/CFT program (including overseas branches); policies, procedures, and processes; risk management programs; the supervisory record of each participating entity; the entity’s current and prospective compliance with the Bank Secrecy Act (BSA); and remediation efforts pursuant to any corrective programs.
• An acquirer’s strong AML/CFT program may be a mitigating factor when a target entity’s program is unsatisfactory, if the acquirer presents an appropriate plan to address the target entity’s deficiencies.

Statements for and Against the Proposal

The FDIC Board of Directors reviewed the Proposal and approved it with a 3–2 vote.

• FDIC Chairman Martin Gruenberg supported the Proposal, stating that in light of “the rapid pace of change and consolidation in the banking industry,” revisions to the FDIC’s Statement of Policy for evaluating mergers are warranted to “reflect regulatory, legislative, and industry changes that have occurred over the past 27 years.”
• Director Michael Hsu (Acting Comptroller of the Currency) supported the Proposal, stating that “[b]y faithfully applying on a case-by-case basis the Bank Merger Act statutory factors, the diversity and dynamism of the U.S. banking system can be maintained and strengthened.”
• Director Rohit Chopra (Director of the Consumer Financial Protection Bureau) supported the Proposal, stating that the “creep of concentration” in the banking industry warrants attention, citing the statistic that “in 1990, the top 10 banks controlled 15 percent of banking sector assets. Today, they control 53 percent.” The Proposal, he asserts, “would bring analytical rigor to merger review and better align the agency’s framework with the statute.”
• FDIC Vice Chairman Travis Hill voted against the Proposal, stating that although the FDIC’s merger approval process “needs to be reevaluated and refreshed,” the Proposal would “add considerable unpredictability to the analysis.” He cited examples under each factor that demonstrate his position. For example, regarding financial resources, he noted that bank merger proposals could be unduly stymied because “[a]s a general matter, any time an acquiring institution is on stronger financial footing than a target institution, the resulting [institution] will initially look worse from a balance sheet perspective.”
• Director Jonathan McKernan voted against the Proposal, stating that although the FDIC “owe[s] it to the public to articulate a revised policy framework and timely consider applications under that policy,” the Proposal as written “reflects and would implement a bias against bank mergers that is bad policy and contrary to law.” He pointed out that although the Proposal highlights how mergers could increase the risk of financial stability, it ignores any mention of how they could have the opposite effect, such as “fostering competition with the largest banks or improving the financial condition of a weaker bank.” While he cited numerous areas in which he believes the Proposal is deficient or flawed, he said he hopes to support a final policy statement that “takes a more balanced approach.”

Conclusion

The FDIC’s Proposal is related to the Biden Administration’s broader initiative to strengthen antitrust regulation, starting with the issuance of the Executive Order on Promoting Competition in the American Economy. Then, in June 2023, the DOJ’s Antitrust Division announced a review of its bank merger policy, aiming to strengthen the DOJ’s authority to challenge a bank merger under the antitrust laws. And in January 2024, the Office of the Comptroller of the Currency (OCC) requested comment on a proposal to update its rules for business combinations involving national banks and federal savings associations, with a policy statement clarifying the OCC’s review of applications under the BMA.

While the Proposal does not take an all-or-nothing approach to any one statutory factor or consideration under those factors, mergers that result in an IDI larger than $100 billion will be subject to heightened regulatory scrutiny due to financial stability concerns. However, a proposed merger with potential anti-competitive concerns may be permitted if intended to prevent the failure of an IDI. It appears then, under the Proposal, that organic or strategic industry consolidation at the higher tiers of the banking industry may face headwinds, whereas regulators will continue to shuttle through emergency takeovers.

For merger applications at the $50 billion resulting IDI level, or for any proposed merger with a significant number of CRA protests, the FDIC has indicated that it may hold hearings if warranted by public interest. And contrary to current practice, if a merger applicant voluntarily withdraws a filing, the FDIC may still choose to release a statement addressing concerns with the transaction if in the public interest.

Therefore, the Proposal, if finalized, may prove to be a deterrent for some strategic banking M&A transactions. And if the approving board members are taken at their words, this prevention of further industry concentration is not a flaw of the Proposal, but its very objective.

The Proposal is open to public comment for 60 days after publication in the Federal Register.

Endnotes

[1] According to the FDIC, a transaction is a merger when a target would no longer compete in the market, regardless of whether the target plans to liquidate immediately after consummating the transaction. In addition, an FDIC-supervised IDI’s assumption of deposits from another IDI, or any IDI’s assumption of deposits from a non-insured entity (or a transfer of deposits from any IDI to a non-insured entity) is subject to FDIC approval.

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