CFPB Director Comments on Small Bank M&A
When the FDIC’s board of directors met recently to approve a joint Fed-FDIC ANPR on potential new long-term debt or other requirements for large regional banks,1 CFPB Director Rohit Chopra voted in favor and issued a statement that began as follows.
Today, the Federal Deposit Insurance Corporation is taking an important step to reduce bailout risk among a group of systemically important financial institutions and guard against increasing concentration in banking. In conjunction with the Federal Reserve Board of Governors, the FDIC Board of Directors is issuing an Advanced Notice of Proposed Rulemaking to help prepare for a potential failure of a very large bank that isn’t one of the big Wall Street banks.
Here’s the pickle that we’re in. The United States now has a substantial number of massive banks with over $100 billion in assets. These aren’t the very biggest banks that are deeply integrated into the global financial system, like JPMorgan Chase and Citigroup. These are domestic systemically important banks that are heavily focused on retail and commercial banking. They have grown much larger over time given that the Justice Department and the bank regulators have been relatively strict when reviewing small bank mergers and quite lax when evaluating big bank buyouts.
Director Chopra’s characterization of the regulatory approach to small bank mergers is a slightly different take on the issue than what has been offered by some of Director Chopra’s closest allies in Congress. It also perhaps implies a different view than the one held by Director Chopra’s former colleague at the FTC, Chair Lina Khan.
Not A Rubber Stamp?
A few years ago Senator Elizabeth Warren published correspondence with Federal Reserve Board Chair Powell relating to the Board’s approach to reviewing applications from banking organizations. According to Senator Warren’s press release, the correspondence showed that “the Fed has not declined a single merger request since before the financial crisis.”
Senator Warren stated that the data provided by Chair Powell “confirmed [her] worst suspicions” and proved that the Federal Reserve Board is a mere “rubber stamp” for bank M&A. The OCC and FDIC are also guilty of rubber stamping, per subsequent statements from Senator Warren.
Intentionally or not, Director Chopra’s statement disputes this claim, at least when it comes to smaller banks. So what does the evidence say?
Senator Warren is at least superficially correct. It has been a very long time since the Board issued a formal denial of any bank merger application, large or small.2 But the typical reply to this from those more sympathetic to the current approach is that looking only at formal denials is not the best way to analyze the question. For instance, here is Chair Powell in his letter to Senator Warren:
Prospective applicants may discuss a proposed transaction with Federal Reserve System staff prior to filing an Application, and applicants will be discouraged from filing Applications where it is apparent that the Applications would not meet all of the statutory factors required for approval. In addition, if an Application has been filed and staff does not believe the proposed Application meets all of the required factors for approval, the applicant typically is provided an opportunity to withdraw the Application before the Board acts on the Application. […]
With respect to competitive concerns, in several instances the concerns in particular local banking markets were addressed, and a denial recommendation was averted, through divestitures of specific branch offices of the target firm.
In several other instances, Applications that would have raised competition concerns were avoided after those concerns were explained to the potential acquirers. In these cases, either no Application was filed, or an Application was withdrawn.
In other words, looking only at formal approvals and disapprovals is often misleading because if a proposal is unlikely to be approved it is either withdrawn or, in many cases, never put forward in the first place.
Director Chopra did not in his remarks explicitly embrace Chair Powell’s side of the argument, but it seems to me to be a necessary implication of his comments. If, as Senator Warren contends, regulators’ attitudes toward bank mergers should be evaluated by looking only at formal approvals and disapprovals, and if there have been no formal disapprovals in more than a decade, how can Director Chopra believe that the approach to smaller bank M&A has been relatively strict?
It must be the case that Director Chopra is looking at other data, either of applications that were filed and withdrawn, or of transactions that never even progressed to that stage. And it further must be the case that Director Chopra believes that looking at such other data is necessary to reach an accurate understanding of the regulatory environment for bank M&A.
None of this is to suggest that the federal banking regulators' approach to bank mergers is beyond criticism.3 The point is simply that the rubber stamping argument is incomplete at best, and I was glad to see Director Chopra at least hint at a more nuanced view.
HHI Thresholds
Director Chopra’s comments may be interesting from another angle as well.
Although the remarks themselves did not identify any particular aspect of the regulators’ approach to small bank mergers that Director Chopra believes may be too strict, one area he could have in mind is the Herfindahl-Hirschman Index, which in this context looks at the concentration of deposit-based market shares as a tool for evaluating the competitive aspects of bank mergers. (Credit to Brendan Pedersen of Punchbowl News for mentioning this first.)
If this is indeed what Director Chopra meant, Federal Reserve Governor Michelle Bowman may have found an unexpected ally. Governor Bowman has noted in a multiple recent speeches that the banking regulators’ current approach to evaluating competition may be in need of recalibration, including because it does not take into account (or at least does not take fully into account) competitors like nonbank fintechs or credit unions. This is an issue of particular relevance to community banks.4 Of course it is important not to use one half of one sentence in an otherwise pretty fiery statement from Director Chopra to overstate the level of agreement between the CFPB Director and Governor Bowman, but still it is something to watch going forward.
Also worth watching are the important players pushing in the other direction. Writing in her personal capacity, FTC Chair Lina Khan earlier this year submitted a letter to the Department of Justice observing that “[d]eposit-based HHI screens at the current thresholds appear to have permitted consolidation that reduced competition in consumer banking” and that therefore “adjustments to those thresholds should be considered to strengthen enforcement.”
Is this a rare area of public disagreement between Director Chopra and Chair Khan? Or does Director Chopra believe that Chair Khan’s recommendation should be understood to include the implied caveat “but not for smaller banks”?
The stats for the other federal banking regulators are similar. According to the FDIC’s data for example, the agency has not formally denied any applications under the Bank Merger Act since 2013 (the starting point for the data). With respect to Change in Bank Control Act applications, the FDIC’s only on the record denial since 2013 is a May 2022 denial of an application concerning the Bank of Orrick. This is the same application that was at issue in the Hurry v. FDIC case.
Even taking into account applications that are withdrawn, it remains the case that a substantial majority of applications are approved - around 86% based on the 2006-2017 data in Chair Powell's letter to Senator Warren, and even higher than that in recent years.
Is that too high? I have no idea! I am skeptical there is some ideal percentage that the regulators should be aiming for, but I can certainly think of individual cases where the regulatory review could have been more exacting, particularly in its evaluation of the parties’ claimed public benefits of the transaction.
In addition, even if you believe the overall mix of approvals and (informal) disapprovals is about right, my own personal biases in favor of transparency lead me to believe that even if that overall mix remains the same, it would be in the public interest for many disapprovals to take the form of on-the-record denials, rather than quiet withdrawals at the suggestion (read: direction) of the agencies. This is particularly the case if, as may be the emerging trend, the agencies are going to differ in their approach to evaluating merger applications.