In Short

The Situation: On January 29, 2024, the Office of the Comptroller of the Currency ("OCC") requested comment on a proposed rule updating its bank merger rules and incorporating a policy statement (the "Proposal") on agency review of merger applications.

The Result: The Proposal largely reflects the previously unwritten, but widely understood, skepticism of the OCC under the Biden administration toward bank M&A and elaborates on its general principles for evaluating applications, including explaining how it intends to consider applicable statutory factors.

Looking Ahead: The Proposal is likely to draw criticism from banks for further narrowing and lengthening the path to approval for bank M&A transactions.

Background

Under the Bank Merger Act, the OCC reviews mergers and acquisitions of OCC-regulated institutions. Specifically, mergers in which the resulting institution will be a national bank or federal savings association must receive OCC approval. The Bank Merger Act directs the OCC to consider five factors when conducting these reviews: (i) competition; (ii) the financial and managerial resources and future prospects of the existing and proposed institutions; (iii) the convenience and needs of the community to be served; (iv) the risk to the stability of the U.S. banking or financial system; and (v) the effectiveness of any insured depository institution involved in combatting money-laundering activities, including in overseas branches. When considering the impact a merger will have on competition (the first factor above), the OCC has traditionally relied on the Department of Justice ("DOJ") and its 1995 guidelines.

On January 29, 2024, the OCC published its Proposal regarding bank merger reviews. On the same day, Acting Comptroller Michael Hsu gave a speech announcing the release of the proposed rule and policy statement. In the speech, he outlined a holistic vision for bank merger reviews that considers the macroeconomic effects mergers have on the broader economy. Left unclear is how Acting Comptroller Hsu would reconcile his desired "macro view" with existing legal requirements for a case-by-case analysis.

The Proposed Rule

The proposed rule is brief, only rescinding two regulatory provisions. First, it removes certain "expedited review procedures," including a provision that deems certain applications approved 15 days after the close of the public comment period if the OCC fails to act. As explained in his speech, Acting Comptroller Hsu objects to the automatic approval process because it relieves the OCC from affirmatively reviewing and acting on all M&A applications. Second, it eliminates the use of the streamlined business combination application, proposing instead to require use of the full Interagency Bank Merger Act Application in all situations.

Perhaps not surprisingly, the proposed rule relegates discussion of its competition review to a footnote, stating that the OCC will continue to follow the process outlined in the 1995 guidelines. It is unclear, however, how the OCC would proceed should the DOJ issue new guidelines. As discussed in our article, "Competition and Financial Stability: The Emerging Regulatory Framework for Bank Merger Reviews" (The M&A Lawyer, Vol. 27, Issue 7), the industry has been anticipating revised bank merger guidance since the DOJ sought public comment to the existing guidelines in 2021. The only insight provided by the DOJ since that time came from Jonathan Kanter, Assistant Attorney General of the Antitrust Division of the DOJ, who reaffirmed that the DOJ would take a robust approach to its competition review and emphasized that the agency will challenge bank mergers even if federal bank regulators approve the transaction. More importantly, Kanter noted that the DOJ would look at a variety of factors, including some not listed in the 1995 guidelines, when determining if a transaction would tend to substantially lessen competition. Although Acting Comptroller Hsu noted his support to "go beyond retail deposits as a proxy for market power" in his speech on bank M&A, the proposed rule suggests the OCC intends to maintain the status quo for now.

The Policy Statement

The OCC also proposed a policy statement that would be an appendix to the rule. The policy statement outlines the general principles used by the agency in its review of applications, including certain "indicators" of applications likely to be successful or not, and provides additional visibility into the OCC's consideration of certain statutory factors under the Bank Merger Act.

Indicators that Raise "Supervisory or Regulatory Concerns." The OCC describes six indicators that, as a general principle, would make an applicant unlikely to be approved "unless and until the applicant has adequately addressed or remediated the concern." The six factors are:

1. The acquirer has a Community Reinvestment Act ("CRA") rating of "Needs to Improve" or "Substantial Noncompliance."
2. The acquirer has a consumer compliance rating of 3 or worse.
3. The acquirer has Uniform Financial Institutions Rating System ("UFIRS") or Risk Management, Operational Controls, Compliance, and Asset Quality ("ROCA") composite or management ratings of 3 or worse, or the most recent report of examination otherwise indicates that the acquirer is not financially sound or well managed.
4. The acquirer is a global systemically important banking organization ("G-SIB"), or subsidiary thereof.
5. The acquirer has open or pending Bank Secrecy Act ("BSA")/Anti-Money Laundering ("AML") enforcement or fair lending actions, including referrals or notifications to other agencies.
6. Failure by the acquirer to adopt, implement, and adhere to all the corrective actions required by a formal enforcement action in a timely manner; or multiple enforcement actions against the acquirer executed or outstanding during a three-year period.

Indicators that Are "Consistent with Approval." Conversely, the OCC identifies 13 indicators that are consistent with merger approval as a general principle. In order to be approved, applications generally must feature all of these indicators. The factors are:

1. The acquirer is well capitalized and the resulting institution will be well capitalized.
2. The resulting institution will have total assets less than $50 billion.
3. The acquirer has a CRA rating of "Outstanding" or "Satisfactory."
4. The acquirer has composite and management ratings of 1 or 2 under the UFIRS or ROCA rating system.
5. The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System, if applicable.
6. The acquirer has no open formal or informal enforcement actions.
7. The acquirer has no open or pending fair lending actions, including referrals or notifications to other agencies.
8. The acquirer is effective in combatting money-laundering activities.
9. The target's combined total assets are less than or equal to 50% of acquirer's total assets.
10. The target is an eligible depository institution.
11. The proposed transaction clearly would not have a significant adverse effect on competition.
12. The OCC has not identified a significant legal or policy issue.
13. No adverse comment has raised a significant CRA or consumer compliance concern.

The foregoing general principles make explicit what many assumed: The OCC is unlikely to approve transactions involving a G-SIB, although the possibility for approval may exist in the troubled bank context. However, the statement that the OCC is unlikely to approve bank merger applications where the resulting size of the institution would exceed $50 billion is surprising; although the Dodd-Frank Act originally set a $50 billion threshold for enhanced prudential standards, which thresholds were increased by statute in 2018, the Bank Merger Act makes no mention of any asset threshold that should be considered (much less be dispositive) when evaluating bank mergers. And, taken together, these two principles suggest that approval is unlikely for any merger involving one of the 50 largest banks in the United States.

Likewise surprising is the OCC's statement that it is unlikely to approve any application where the acquirer is close to the same size or smaller than the target; there is ample precedent for OCC approvals of mergers of equals, including among smaller banks.

Finally, the likelihood that BSA/AML or fair lending issues, including a mere referral, may impede success is alarming; the standards for referral are quite low already, and the OCC's 2023 revisions to its Fair Lending booklet, which increased its reliance on statistical modeling to drive more referrals, means that more banks may find themselves with a pending referral. The possibility of adverse comments that "raise[] a significant CRA or consumer compliance concern" to derail a merger is also highly problematic since it may allow third parties to use the application process to extract further concessions from bank applicants.

Financial Stability. Moving beyond general principles and addressing its consideration of certain statutory factors, the policy statement provides additional details about how the OCC assesses the "risk to the stability of the United States banking or financial system" as required under the Bank Merger Act. The OCC considers, among other things, whether the merger would: (i) materially increase risk to financial stability; (ii) reduce the availability of substitute providers for the services offered by the combining institutions; (iii) engage in business activities that would cause significant risks to other institutions; (iv) contribute to the complexity of the financial system; and (v) increase the relative degree of difficulty of resolving or winding up the resulting institution's business in the event of failure or insolvency.

Financial and Managerial Resources. Under the financial and managerial resources factor, the OCC is less likely to approve applicants when the acquirer: (i) has a less than satisfactory supervisory record, including its financial and managerial resources; (ii) has experienced rapid growth; (iii) has engaged in multiple acquisitions with overlapping integration periods; (iv) has failed to comply with conditions imposed in OCC licensing decisions; or (v) is functionally the target in the transaction (raising the possibility that the OCC disfavors transactions structured as reverse triangular mergers without an explicit policy rationale).

The OCC seems particularly focused on integration issues, including operational issues. The OCC believes that a "critical component of [plans to identify and manage systems compatibility and integration issues] includes the identification of overreliance on manual controls, strategies for automating critical processes, and capacity and modernization of aging and legacy information technology systems." Anticipating, much less credibly addressing, integration issues before they arise and before the merger is even consummated can be a tall order for applicants.

Convenience and Needs. The OCC breaks new ground on the convenience and needs factor, by making explicit its consideration of job losses or reduced job opportunities as well as community benefit plans, which have become an increasingly common feature and cost of merger approvals.

Three Key Takeaways

1. The Proposal would increase "front-loading" with respect to resolving real or perceived issues at the resulting institution prior to application, raising the bar that target and acquirer must meet for approval.
2. Community groups will have increased leverage to influence outcomes given the Proposal's explicit consideration of community benefit plans, job losses, and adverse comments raising significant CRA or consumer compliance concerns.
3. Banks considering future acquisition plans should take steps now to ensure that their operational, compliance, and financial infrastructure can support targets for growth through M&A.