Introduction

On 29 January 2024, the Office of the Comptroller of the Currency (OCC) issued a notice of proposed rulemaking (NPR) regarding its review of Bank Merger Act (BMA) applications. The NPR was released immediately following a speech by Acting Comptroller of the Currency Michael Hsu in which he commented on the US banking system, including actions the OCC is taking to improve transparency in the OCC’s review and approval process for proposed bank mergers. The NPR consists of two proposals:

• regulatory changes to the OCC’s bank merger review procedures; and
• a new policy statement (Proposed Policy Statement) that summarizes the principal factors that the OCC would consider in reviewing proposed mergers under the BMA.

The OCC is accepting comments on these proposals until 15 April 2024.

Recent Actions Regarding Bank Merger Review Process

The NPR is the latest in a series of government and agency actions over the last few years that signal changes to the regulatory review and approval process for bank mergers. In 2021, President Biden issued an executive order that encouraged the U.S. Attorney General, in consultation with the heads of the respective federal bank regulatory agencies (collectively, the Agencies), to review their practices and adopt a plan “for the revitalization of merger oversight”. Notwithstanding the call for unified action on the part of the Federal bank regulators, the NPR is limited to proposed mergers for which the OCC is the reviewing Agency.

In December 2023, the US Department of Justice Antitrust Division (the DOJ) and the Federal Trade Commission jointly issued new guidelines covering antitrust review of proposed mergers, which apply across industries. They contain lower (i.e., less permissive) quantitative thresholds than had previously been applied to determine whether a proposed bank merger may run afoul of federal antitrust laws. In his 29 January speech, Acting Comptroller Hsu reported that the Agencies are collaborating with the DOJ on an updated framework for reviewing proposed bank mergers under the competition prong of the BMA.¹ The Agencies have indicated that they are reconsidering deposit market share as the sole measure for banking market concentration and assessing whether other measures may better capture competition from thrifts, credit unions, and non-bank financial service providers.

Proposed Regulatory Changes

The NPR proposed removal of the 15-day expedited review and streamlined application processes from Part 5 of the OCC’s regulations.

Currently, expedited review is available for internal business reorganizations or transactions involving qualifying well-capitalized and highly-rated “eligible institutions,” and these qualifying transactions are deemed approved as of the 15th day after the close of the public comment period unless the OCC intervenes. In the NPR, the OCC expressed an apparently new view that any business combination requiring a filing with the OCC is a significant corporate transaction requiring an OCC decision, which should not be deemed approved based solely on passage of time.

The OCC also proposes to eliminate “streamlined applications” which generally require less information compared to the standard BMA application. While the NPR suggests that the OCC may require less information for a purchase and assumption transaction from an institution in Federal Deposit Insurance Corporation (FDIC) receivership or for a transaction involving a failed bank, there is no indication that the OCC would otherwise accept abbreviated application information for bank merger transactions, including internal business reorganizations.

The result of these proposed changes would be to subject transactions that may not present much regulatory risk to more regulatory scrutiny and at a minimum increase the length of time needed to move forward with a proposed merger transaction.

Proposed Policy Statement

The Proposed Policy Statement sets forth principles the OCC would use in evaluating BMA applications and expands on how the OCC would consider three of the five statutory factors that the BMA requires the OCC to consider in reviewing a bank merger application: (1) financial stability, (2) financial and managerial resources and future prospects, and (3) convenience and needs of the community.

General Principles of OCC Bank Merger Review

The Proposed Policy Statement includes general principles that would guide the OCC’s review of a bank merger application. It sets forth 13 indicators of applications that would likely be approved, and six indicators of applications that would likely be denied or requested to withdraw:

Assessing Financial Stability

The Proposed Policy Statement provides more context surrounding the balancing test used for assessing the effects of a proposed merger on financial stability. Under the Proposed Policy Statement, the OCC would evaluate a number of factors which are viewed both individually and in combination, and in some circumstances, a single factor could be sufficient to deem a transaction too risky for approval. The OCC may also approve certain applications where risk factors are present, “subject to conditions that are enforceable under its cease-and-desist authority (12 U.S.C. 1818),” which permits the OCC to mandate the divestiture of certain assets or increased capital requirements.

Financial and Managerial Resources and Future Prospects

The Proposed Policy Statement indicates that the OCC would review financial and managerial resources and future prospects independently for each of the institutions involved in a proposed merger, as well as for the resulting institution. It sets forth the following characteristics of an acquirer for which the OCC is less likely to approve a proposed merger:

• Has an unsatisfactory supervisory record;
• Has experienced rapid growth;
• Has engaged in multiple acquisitions with overlapping integration periods;
• Has failed to comply with past OCC licensing decisions; or
• Is functionally the target of the acquisition.

In addition, the OCC generally denies any transaction that would result in an institution with “less than adequate capital, less than satisfactory management, or poor earnings prospects.” The proposal also specifies that, in its review, the OCC will consider whether the transaction would impact credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation risks. The OCC expects acquirers to conduct all relevant due diligence, and will take into consideration whether any planned implementation of controls are adequately designed based on the target institution’s business model and risk profile. The Proposed Policy Statement especially emphasizes the inclusion of a detailed integration plan for business continuity.

Convenience and Needs of the Community

The Proposed Policy Statement also discusses the OCC’s evaluation of the effect a proposed transaction would have on the needs of the communities involved, including whether the proposed merger would result in the closure or opening of any branches, and its impact on access to credit and particular financial products and services, jobs, and any community investments involved. The OCC’s review would take special notice of how proposed mergers would affect low and moderate-income communities, which will be done separate and apart from the consideration of the institutions’ CRA record of performance.

Observations

Acting Comptroller Hsu stated that the Proposed Policy Statement is intended to remove uncertainty, but not to create a legal presumption for or against the approval of any specific merger transaction. However, the Proposed Policy Statement, if adopted as proposed, would require careful considerations of each of the specific factors listed and could have a chilling effect on an already constrained bank merger market. The average approval times for bank merger applications have been steadily increasing over the past few years, and the NPR excludes any consideration of increased resources for the application reviewing teams. Removing expedited treatment for applications that meet high prudential standards would only exacerbate this trend.

Size Matters.

The Proposed Policy Statement sets forth two notable factors relating to the size of the combining institutions. First, it indicates that the OCC would generally not approve a transaction in which the resulting institution would have total assets of US$50 billion or greater. This appears to be a potential bar on acquisitions by regional institutions. However, the factors that the OCC stated would raise supervisory or regulatory concerns that include that the acquirer is a G-SIB, which raises the question of how the OCC would approach merger transactions of institutions that have more than US$50 billion in assets but are not G-SIBs. Second, the Proposed Policy Statement indicates that the target institution should have total assets that are less than or equal to 50% of the acquirer’s total assets. This consideration of relative size is currently a requirement for certain transactions to qualify for expedited review and streamlined applications. Restating such requirement as a factor that generally would be consistent with approval implies that the OCC would not look favorably on “mergers of equals” or transactions amongst similarly sized institutions regardless of the overall size or complexity of the institution, which could be very impactful to community bank mergers.

Uneven Playing Field.

There has been no indication of whether the Board of Governors of the Federal Reserve System (FRB) or the FDIC will issue similar policy statements regarding their respective reviews of BMA applications submitted by state-chartered banks. If the FRB and FDIC do not adopt similar guidelines or approaches to reviewing merger applications, this could provide a strategic benefit to state-chartered institutions. For example, a state-chartered institution that was equally sized to a target would potentially face less regulatory risk to closing the transaction than a similarly sized competing bidder that is a national bank. Such a disparity in regulatory approaches to BMA applications may also influence that choice of which bank charter survives a transaction if there is a proposed combination between a federally-chartered institution and a state-chartered institution, given that the primary federal regulator of the resulting institution will review and approve the transaction.

What About Bank Failures.

It is also unclear how these factors would be applied in the resolution context. As exhibited last spring in the resolution of First Republic Bank, sometimes it is necessary for an institution with more than US$50 billion in assets, or even a G-SIB, to acquire a failed institution under the least cost resolution doctrine. Acting Comptroller Hsu indicated that the least cost test could be formed in different ways, suggesting that the highest bid is not the only determining factor. Failed bank transactions are by design conducted on an expedited basis. By eliminating expedited processing of applications and adding potential new regulatory hurdles regarding the relative and absolute size of the acquiring institution, the Proposed Policy Statement may result in it being more efficient for an institution to wait for a target bank to fail rather than acquiring it in a troubled condition. It also appears that a transaction involving a troubled institution with one or more problematic traits listed in the Proposed Policy Statement would likely face hurdles to approval outside a transaction arranged by the Agencies.

¹ The current framework, “Bank Merger Competitive Review – Introduction and Overview” was last updated in 1995.