FDIC Proposes Revised Approach to Review of Bank Mergers

Also, a speech by Director Chopra

The FDIC on Thursday morning proposed updates to its statement of policy on bank merger transactions. Later in the day CFPB Director Chopra, who also sits on the FDIC’s board of directors, delivered a speech on bank mergers at a Peterson Institute event.

This post offers nine thoughts or questions about these developments. The typical disclaimers apply: this post does not aim to be comprehensive and definitely does not claim to always be focused on the most important issues.¹

1. As a practical matter, the FDIC doesn’t get a vote on many traditional large bank mergers

Some of the early press reactions to the proposed policy statement focused on the effects on larger banks, and in particular the FDIC’s setting expectations for increased scrutiny and higher barriers to approval for large bank mergers resulting in a bank with $100 billion or more in total assets. The FDIC says in the context of financial stability, for example, that “transactions that result in a large IDI (e.g., in excess of $100 billion) are more likely to present potential financial stability concerns” in relation to various factors.

The focus on the effect of the statement on big banks is understandable, and I think the conclusion is right that such a merger would have a very tough time with the current FDIC. But one thing that has maybe been a little underplayed in some of the coverage is that there just are not very many banks of this size supervised by the FDIC. Of the 33 insured depository institutions with $100 billion or more in total assets at the end of 2023,² only four are nonmember banks: Truist, First-Citizens, Discover and UBS.

As a general rule the agency that is responsible for deciding a Bank Merger Act application involving an ordinary course merger between two insured banks is the agency that would regulate the resulting bank. So, for example, even though Discover is a state nonmember bank supervised by the FDIC, the Bank Merger Act application Capital One intends to file in relation to its proposed acquisition of Discover will require approval from not the FDIC but the OCC, because Capital One is a national bank. (The transaction will also, like most bank merger transactions, involve a transaction at the holding company level as well, which requires approval of the Federal Reserve Board.) The FDIC will not have a vote on approving or disapproving the transaction.

If you expand the definition of big bank a bit and look at FDIC-supervised banks with $40 billion or more in total assets you get five more, so it is theoretically possible that merger activity by these slightly smaller banks could eventually bring them past the $100 billion threshold. But what is to say that the resulting bank will still be or want to be a state nonmember bank when it gets to that point?³

2. The proposed policy statement affirms the FDIC’s expansive view of the FDIC’s jurisdiction over certain transactions

As mentioned above, the general rule under the Bank Merger Act is that when two insured banks plan to merge, the statutory role in reviewing and then approving or disapproving the merger lies with the agency responsible for supervising the resulting bank.

The Bank Merger Act also, however, includes a separate provision requiring FDIC approval (regardless of who would supervise the resulting bank) for transactions where, among other things, the bank is merging or consolidating with any noninsured bank or institution. The FDIC has historically interpreted this provision very broadly to reach transactions that an ordinary person might not regard as a merger.⁴

The preamble to the proposed policy statement continues to hold very firm to this view, saying that the FDIC emphasizes “a transaction’s substance over its form and assert[s] jurisdiction over transactions that substantively result in a merger.” The FDIC continues:

Although acquisitions of assets are not specifically enumerated as a category of transactions subject to FDIC approval under the BMA, an IDI’s acquisition of assets from a non-insured entity could be the substantive equivalent of a transaction legally structured as a merger. For example, this occurs when the acquired assets constitute all, or substantially all, of the non-insured entity’s assets or business enterprise and if the non-insured entity dissolves, is rendered a shell, or otherwise substantially ceases its main business operations or enterprise. This applies when there is a transfer of all, or substantially all, of a non-insured entity’s assets to an IDI, regardless of whether: (i) such transactions consist of an assumption of identified liabilities, (ii) the assets acquired are tangible or intangible (without regard to whether the assets would be considered assets under generally accepted accounting principles), or (iii) such acquisitions occur as a single transaction or over the course of a series of transactions.

The FDIC also includes a question about whether it would be helpful for the agency to provide “additional clarity” on whether and how the Bank Merger Act applies to transactions between an insured bank and, for example, “a fintech firm, whose assets may be primarily intangible in nature.”

Along similar lines, the FDIC also in the preamble to the policy statement stakes out a broad understanding of a separate provision of the Bank Merger Act which gives the FDIC authority to approve or disapprove a transaction in which an insured bank assumes liability to pay any deposits made in, or similar liabilities of, any non-insured bank or entity.

The FDIC explains that for purposes of this section of the law it “takes the view that any expansion of an IDI’s deposit base via acquisition would be subject to approval under the BMA.” The FDIC continues:

The FDIC clarifies that the BMA would not necessarily be implicated by an organic expansion of an IDI’s deposit base, such as when a depositor or a nonaffiliated third party that acts as agent, custodian, or trustee for a depositor, elects—at their initiative—to establish a deposit relationship with the IDI or to place deposits with the IDI. However, in cases where the agent, custodian, or trustee itself serves as a depository, a transfer of deposits for which it has liability to pay to an IDI would be subject to FDIC approval under the BMA. Furthermore, if customers are solicited to transfer their deposits to an IDI in connection with, or in relation to, an arrangement or agreement to which that IDI is party, the IDI is expected to seek approval under the BMA in connection with the ultimate transfer of such deposits.

As mentioned above, the FDIC’s generally expansive view on the transactions that are within the scope of the Bank Merger Act is not new, and has been described in prior FDIC policy statements. What I am less sure about, though, are whether statements exactly like these about expansion of a bank’s deposit base have been made publicly before. I cannot personally recall a public statement exactly like this, but my memory may just be faulty.

Either way, the point is that even if for the reasons discussed in point 1 above the FDIC is unlikely to be reviewing many headline-grabbing traditional mergers between large banks, the FDIC is more likely to have a role in reviewing other transactions that it regards as covered by the Bank Merger Act. As a result, aspects of the policy statement signaling a more skeptical approach to bank mergers (as expansively defined under the Bank Merger Act) may be relevant to all banks, regardless of their size or their primary federal regulator.

3. What is the status of interagency discussions regarding bank merger policy?

The FDIC in Thursday’s release says that though it is acting on its own with the proposed statement of policy, the agency “is working collaboratively with the relevant federal agencies to review and evaluate existing merger-related regulations, guidance, and instruction.” That is maybe not the full story. Capitol Account reported this week that an interagency “effort to draft joint guidelines stalled” before the FDIC (and the OCC earlier this year) decided to issue their own standalone proposals.⁵

Another interesting point previewed in that Capitol Account piece is that the FDIC and OCC issuing their own individual, different proposals means that Acting Comptroller of the Currency Hsu voted for each.

In a statement, Acting Comptroller Hsu said he believes the FDIC’s effort is “broadly consistent with the proposed policy statement issued by the OCC in January.” There are definitely at least a few differences, but from a purely substantive perspective I can see the argument that this is true.

From a more vibes-based perspective, though, the proposals seem less similar. Acting Comptroller Hsu seemed to regard the OCC’s proposed policy statement as mostly just formalizing and writing down what was already the OCC’s practice. One gets the sense that is not necessarily what some of Acting Comptroller Hsu’s fellow FDIC board members see themselves as doing.⁶

4. To what extent does the FDIC intend to deviate from past policy?

There are a few parts of the proposed policy statement where it is not clear if the policy statement intends to describe something close to the FDIC’s existing approach, or if the agency is instead signaling a more significant policy shift.

Significant CRA Performance Deterioration

One example of this comes up in the FDIC’s discussion of how it will think about CRA ratings in the course of its broader convenience and needs analysis.

First, the FDIC indicates that CRA ratings of less than Satisfactory will mean that a buyer will have a very tough time getting its merger through. Nothing surprising relative to the agencies’ historical approach. The FDIC then says in this same paragraph, however, that a “significant deterioration in CRA performance” would also “generally result in unfavorable findings” on this factor.

Viewed in one way, this could just be the FDIC saying that, even if a bank’s CRA performance has historically achieved Satisfactory ratings, when the bank’s recent performance has been below expectations then that is going to weigh negatively in the FDIC’s analysis, even if a new CRA rating has not yet been formally issued.

I wonder, though, about a situation where a bank has historically attained Outstanding ratings, and then, whether because of the new CRA rule or otherwise, the bank in a subsequent ratings cycle achieves only a Satisfactory rating. Is that a “significant deterioration” in performance, such than even a bank with a Satisfactory CRA rating might not be able to merge? I don’t think this is what the FDIC means, but I don’t know for sure.

Supervisory Ratings

Another example. The preamble to the policy statement says that less than satisfactory examination ratings generally “present significant concerns and will result in unfavorable findings.” The proposed policy statement later more fully explains that this includes ratings for “specialty areas including information technology, trust, consumer compliance, CRA, or Anti-Money Laundering (AML)/countering the financing of terrorist activities (CFT).”

Again not all of this is new — for instance, AML issues are not an unusual stumbling block for bank merger transactions — but I wonder about some of the other “specialty” areas mentioned here. Is the FDIC saying that poor ratings in any these areas would lead the FDIC to reject a merger, even if the area in question is not of much importance to the bank’s overall operations? As with the above, I don’t think this is necessarily what the FDIC means to say, but it’s tough to know for sure.

5. Banks may need to share more internal documents with the FDIC

In addition to the proposed statement of policy, the FDIC is also planning to request comments on updates to its bank merger application form.⁷ The exact nature of the proposed updates to the application form is not yet clear,⁸ but CFPB Director Chopra’s speech yesterday seemed to signal that as updates to government forms go this one could be pretty interesting, and maybe controversial.

In his speech, Director Chopra compared and contrasted the banking agencies’ current merger evaluation practices unfavorably to those of other federal agencies. One example he gave focused on information that many merging parties are required to provide to the U.S. antitrust regulators:

[W]e identified a number of places where items requested in the Hart-Scott-Rodino filing were not requested in a Bank Merger Act application. For example, the Hart-Scott-Rodino notification requires production of documents related to the deliberations by officers and directors. In my experience, these documents are critical to understand deal rationale and may reveal anticompetitive intent. Indeed, we have seen in consumer finance how financial firms can pursue “catch-and-kill" mergers to eliminate competitive threats. However, banking agencies do not specifically or comprehensively require this information.

The prepared version of Director Chopra’s remarks includes a footnote citing to a DOJ press release announcing its suit to block Visa’s of acquisition of Plaid, which brought to light some unfortunate artwork by a Visa executive.

Later in the speech, when describing changes that would be effected by the FDIC’s proposed policy statement, Director Chopra returned to this point, saying:

The competitive analysis will be bolstered by the revisions to the FDIC’s Supplement to the Interagency Bank Merger Act Application Form. Notably, the agency will require production of the analyses of the deal conducted for the banks’ directors and officers, either internally or by third-party investment bankers or consultants.

From what I can tell the actual proposed updates are not out yet,⁹ so this is going only on Director Chopra’s remarks. But if what he describes is what the updated application form requires, that could create another pitfall for potential acquirers. Particularly given that, for the reasons discussed above, most of the merger applications the FDIC will receive are likely to come from smaller banks, and smaller banks sometimes have … varying internal communication styles.

6. Competitor sabotage?

In his dissent, FDIC Vice Chair Hill questioned why the proposed policy statement suggests that the agency will require divestitures in advance of consummating the merger, rather allowing divestitures to occur post-merger.

The policy statement itself does not explain the reasoning behind this potential change in approach, but in his Peterson Institute speech CFPB Director Chopra hinted at why he thinks this is good idea:

Finally, the banking agencies rely on remedial provisions and conditions that fail to remedy harm. For example, when ordering divestitures, agencies have frequently permitted merging parties to divest assets many months after the transaction’s closing. This gives plenty of time for the merging parties to sabotage their future competitor.

I do not know enough to say whether or how often this actually happens; I highlight it here only because it is a pretty wild thing to say in a speech and then move on without elaboration. I would be curious to hear Director Chopra say more about where he believes such sabotage occurred in the past.

7. The FDIC may publicly explain its concerns with certain transactions, after those transactions are withdrawn

Another thing Director Chopra dislikes about the current approach to bank merger review is the agencies’ approach to transactions that are not consistent with approval.

Rather than deny mergers and publish orders describing the rationale for denial, there has been an informal understanding between the regulators and the industry that applicants will be allowed to withdraw their application instead of receiving a denial. Under many, if not most, circumstances, this has struck me as quite inappropriate. But even in cases of withdrawal, the banking agencies do not provide any public communication about the rationale for non-approvals depriving the public and market participants of transparency.

The proposed policy statement suggests the FDIC may take a different approach, at least in certain (undefined) circumstances:

If FDIC staff finds unfavorably on one or more statutory factors based on the application review, staff generally will recommend denial of the application. At the FDIC’s discretion, applicants may be offered the opportunity to withdraw the filing. If an applicant withdraws their filing, the Board of Directors may release a statement regarding the concerns with the transaction if such a statement is considered to be in the public interest for purposes of creating transparency for the public and future applicants.

This blog has very apparent biases in favor of more public information, given that the vast majority of its content is driven by things regulators do or say publicly. So discount this opinion appropriately, but I think this is a pretty good idea.¹⁰

I do recognize Vice Chair Hill’s point made in dissent, though, that if the FDIC does adopt this approach, what is the practical difference between a withdrawal and a denial?

The SOP also notes that, consistent with longstanding practice, applicants may be offered the opportunity to withdraw an application rather than face a public denial. However, the SOP states that the FDIC may still publish a statement describing its concerns with the transaction, which would seem to defeat the purpose of allowing an institution to withdraw.

8. How much (if at all) do enhanced prudential standards help to mitigate financial stability concerns?

In prior posts on bank merger decisions by the U.S. federal banking regulators, this blog has discussed the argument that a merger creating a larger organization may sometimes have features that are enhancing to financial stability, because under the U.S. regulatory framework the combined company may be subject to heightened regulatory requirements compared to those that applied to one or both of the individual companies standing alone.

This argument has on occasion been adopted by U.S. banking regulators. The most notable example is probably the Federal Reserve Board’s order approving Morgan Stanley’s acquisition of E*TRADE, which said:

[W]hile the acquisition would marginally increase Morgan Stanley’s systemic footprint, certain financial-stability-enhancing features of the acquisition would operate as mitigating factors. The Board’s regulatory and supervisory frameworks are tailored to apply the strictest standards to U.S. GSIBs and to increase in stringency with an individual GSIB’s systemic footprint. For example, among other requirements, Morgan Stanley is subject to the GSIB risk-based capital surcharge, annual supervisory stress testing and the stress capital buffer requirement, the liquidity coverage ratio, and total loss-absorbing capacity and resolution planning requirements. E*TRADE, as a savings and loan holding company with less than $100 billion in assets, is currently not subject to the Board’s enhanced prudential standards. Following the acquisition, all of E*TRADE’s activities would be subject to the strictest standards. . .

More recent orders from the Board and OCC have also adopted similar arguments. For example, see the Board’s order on BMO’s acquisition of Bank of the West:

BFC is projected to become subject to additional enhanced prudential standards as a Category III U.S. intermediate holding company after consummation of the proposed transaction. These enhanced prudential standards are expected to offset the modestly increased systemic risks from the transaction.

Similarly, the OCC’s order said:

As a result of the Proposed Transaction, BHBNA will become subject to more stringent requirements, including for capital, liquidity, and recovery and resolution planning.7 For example, BHBNA, after the Proposed Transaction, will become subject to Dodd-Frank Act stress testing (“DFAST”) company-run stress testing requirements. BHBNA, after the Proposed Transaction, will also become subject to recovery planning guidelines in Appendix E to 12 CFR 30. . . . These requirements and guidelines establish a framework to effectively and efficiently address the financial effects of severe stress events and avoid failure or resolution.

As discussed above, given the relatively small size of most banks the FDIC supervises, the circumstances in which this would come up in traditional bank merger transactions subject to the FDIC’s review are likely to be few. Even so, this issue is interesting enough that I think it’s worth mentioning here what the FDIC’s proposed policy statement has to say about it:

In addition to the items previously noted, the FDIC will evaluate any additional elements that may affect the risk to the U.S. banking or financial system stability. This may include the resulting IDI’s regulatory framework; however, the framework alone would not result in a favorable finding on this factor when other financial stability concerns exist.

I am not sure how much of a break this is intended to signal from the Board and OCC approach. To be honest, I did not initially read it as signaling any break at all — I do not think the Board or OCC orders ought to be read as saying that becoming subject to a higher category of enhanced prudential standards, on its own, is decisive for the financial stability analysis. The point is that, like the FDIC says, it is a factor that may be relevant.

But maybe I am underplaying the differences. In his speech, Director Chopra signaled that he thought this was in fact an important aspect of the policy statement:¹¹

I also want to note the policy statement’s discussion that the combined bank’s current regulatory framework, or the fact that it will grow into a more stringent framework, does not automatically mean that financial stability concerns are ameliorated.

Again, I guess I am not sure I read the Board or OCC orders as saying otherwise, but like a few aspects of the proposed policy statement this seems ambiguous enough to enable multiple interpretations.

9. Would SunTrust-BB&T be decided the same way under this policy statement?

A relative dearth of large banks subject to FDIC supervision is not a new phenomenon. The FDIC historically has tended to be the supervisor of smaller banks, and thus historically has not had occasion to opine directly on many large bank M&A transactions.¹²

The FDIC was, however, a few years ago called upon to decide on a very large transaction. In November 2019 the agency approved a merger of equals between the bank subsidiaries of SunTrust and BB&T.

Martin Gruenberg, now the FDIC Chairman and at the time a member of the agency’s board of directors, issued a detailed statement on the FDIC’s order. The statement described various concerns Director Gruenberg had with the transaction, including in relation to financial stability. Director Gruenberg concluded by saying, however, that “[b]ased on the statutory factors, I will not vote against this application.”

Given that there have been no changes to the Bank Merger Act statute, and thus no changes to the statutory factors, since 2019, would Chair Gruenberg reach the same conclusion about a similar transaction if the transaction were analyzed under the proposed policy statement? If not, what does that imply about the proposed policy statement?

Thanks for reading! Thoughts on this post are welcome at bankregblog@gmail.com

1. For instance, this post punts on addressing the changes in the FDIC’s policy statement relating to the use (or not) of HHI in competitive analysis and the convenience and needs factor.

2. Data here comes from the FDIC’s BankFind suite.

3. This example involves a bank that was a little smaller in terms of asset size than those being discussed here, but last year when PacWest merged with Banc of California with PacWest surviving, the parties had PacWest become a member bank, rather than remaining a nonmember bank supervised by the FDIC.

4. See for example footnote 2 in the current application procedures manual for merger transactions.

5. This sentence in the text above was updated after original publication because the original version misstated when the OCC’s proposal was published. It was published in late January, not last month as the post originally said.

6. For instance, CFPB Director Chopra’s remarks at the PIIE event highlighted various “deficiencies” he found when he “personally conducted an analysis of existing processes and a range of past approval orders to compare them with those used and issued in merger review in other sectors.”

For a similar take from outside the agency, Professor Jeremy Kress, who earlier in President Biden’s administration was detailed to the DOJ to advise on bank merger policy, called the FDIC’s proposal “substantially better” than the OCC’s.

7. Technically, the FDIC-specific supplement to the interagency bank merger act application form.

8. Footnote 3 in the preamble to the policy statement released yesterday includes a placeholder footnote not yet filled in.

9. The FDIC published in the Federal Register last week a request for comment on updates to the application form, but if the proposed updates themselves have been posted online, I have not found them.

10. Also on the transparency point, both the preamble to the proposed statement of policy and the proposed statement of policy itself say that FDIC orders on merger applications will be posted publicly to the FDIC’s webpage. That has not been the agency’s current practice, except in the case of a handful of higher profile transactions. Footnote 19 in the policy statement includes a link to where the FDIC says these orders are posted . . . but that link just redirects to a different page that does not post the orders.

11. Professor Jeremy Kress on X also picked up on this part of the proposal, reading this as saying that “enhanced prudential standards do not offset stability risks.”

12. Statistics cited in the preamble to proposed statement of policy say that only 0.3% of the transactions the FDIC has reviewed since 2004 have involved a resulting bank that would have assets in excess of $100 billion.