The US Bank-MUFG Approval and Related Developments
This post offers a few quick thoughts on yesterday’s approvals from the Federal Reserve Board and the Office of Comptroller of the Currency in connection with U.S. Bancorp’s acquisition of MUFG Union Bank.1 It also briefly discusses the related advance notice of proposed rulemaking from the Board and Federal Deposit Insurance Corporation seeking comment on potential new resolution-related requirements for large firms that are not U.S. G-SIBs.
As always with these posts, this does not claim to be a comprehensive discussion of the issues. Instead, these are just things that looked interesting on a first read.
The Board and OCC Orders
Financial Stability Risks and Potential Mitigants
Each of the Board and OCC orders includes an analysis of the financial stability risks of the transaction and any potential mitigants to those risks.
The approach to the financial stability analysis in the Board’s order is consistent with its approach in prior orders, as is the Board’s conclusion that “in light of all the facts and circumstances, this transaction would not appear to result in meaningfully greater or more concentrated risks to the stability of the U.S. banking or financial system.”
Notable in light of other developments yesterday, though, was the discussion in the financial stability analysis concerning resolvability:
[T]he organizational structure and operations of the combined organization would be centered on a commercial banking business, and in the event of distress, the resolution process would be handled in a predictable manner by relevant authorities. The Board also has considered other measures that are suggestive of the degree of difficulty with which the combined organization could be resolved in the event of a failure, such as the organizational and legal complexity and cross-border activities of the combined organization. These measures suggest that the combined organization would be significantly less complicated to resolve than the largest U.S. financial institutions.
This language is identical to the language used in the Board’s 2021 order approving PNC’s acquisition of BBVA USA.
None of what the Board said in either order seems wrong exactly, but it is sort of funny to read in the context of yesterday’s ANPR, which took a much dimmer view of the prospects of straightforwardly resolving a large non-GSIB. The two sets of statements are not completely impossible to square - “predictable” is not a synonym for painless, and “significantly less complicated to resolve” than a G-SIB could still be quite complicated indeed - but nonetheless there is some tension here.
The OCC’s order also included a few noteworthy statements of its own. On the one hand, the OCC’s order was a bit starker about the potential financial stability risk than the Board, saying that the bank merger “presents increased potential for risk” to financial stability, and citing to previous comments from Acting Comptroller Hsu on this topic.
On the other hand, the OCC’s order as compared to the Board’s order was also more willing to identify potential benefits of transactions like this one, noting that the merger will result in the application to the target bank of a “stronger enterprise governance framework” and “stronger technology systems,” while also better positioning U.S. Bank to compete in markets that are “largely dominated by the GSIBs,” thus “enhancing certain aspects of financial stability.” These potential benefits, combined with the mitigants to financial stability risk the OCC imposed as conditions to the approval as discussed in the next section, led the OCC to conclude that the financial stability standard was consistent with approval.
The Commitments
The Board and OCC each secured various commitments.
Resolution Planning. The Board’s order requires U.S. Bancorp to submit an “interim update” to its 165(d) resolution plan to the Board and FDIC no later than six months after the closing of the acquisition.2 From the public order it is not clear what this interim update will be required to cover,3 or how closely this interim update will resemble a full resolution plan, which remains due by July 2024.
The OCC also imposed a resolution-related requirement, conditioning its approval of the bank merger on U.S. Bank developing a list of business lines or portfolios that could be sold quickly in the event of stress, along with a planned timeline to effectuate such separations, including through the establishment of data rooms for each business line or portfolio that it would intend to sell.
This is a limitation in my understanding and not a criticism of the OCC, but it is not clear to me how much different this commitment is from what an insured depository institution is already required to do under the FDIC’s IDI plan resolution rule, the relevant portion of which the FDIC described in 2021 as follows:
The Rule requires a resolution plan to provide a strategy for the sale or disposition of the deposit franchise, including branches, core business lines and major assets of the CIDI in the manner specified in the Rule. An appropriate strategy includes meaningful optionality to provide the FDIC with flexibility to address the potential range of facts and circumstances that may exist at the time of a CIDI’s resolution. … The FDIC also expects a resolution plan to present … a sequence and process to sell or dispose of one or more combinations of franchise components that maximizes return through their sale or disposition.
So maybe the best way to view the commitment the OCC secured is as something building on what U.S. Bank had already done (albeit not since 2018, and not with respect to any additional objects of sale resulting from the Union Bank acquisition), rather than something entirely new.
Enhanced Prudential Standards. U.S. Bancorp is currently subject to Category III enhanced prudential standards which, although meaningful, are comparatively less stringent than those that apply to the U.S. G-SIBS (Category I) or to firms with $700 billion or more in total assets (Category II).4 Among other things, unlike firms in Category II, firms in Category III are permitted to choose to exclude AOCI from regulatory capital, and generally are subject to less demanding Liquidity Coverage Ratio and Net Stable Funding Ratio requirements.
Upon consummation of the transaction, the Board's order estimates using June 30, 2022 data that U.S. Bancorp would have approximately $698.7 billion in total assets - close to being, but not quite yet, a Category II firm.
The Board’s order states that the firm has committed to submit quarterly implementation plans for coming into compliance with Category II standards, and has agreed it will meet such standards by the earlier of (i) the date it is required to do so by regulation or (ii) December 31, 2024, if the Board tells it by January 1, 2024 that it must do so.5
Governor Bowman’s statement on the Board’s order took issue with this condition, arguing that the Board should have stuck with the transition provisions set out in its regulations. It is not clear to me that the difference in this specific case will be all that meaningful,6 but perhaps Governor Bowman was concerned about the precedent this might set.
Consent Order. Shortly before the transaction was announced in 2021, MUFG Union Bank entered into a significant consent order with the OCC regarding Union Bank’s “unsafe or unsound practices regarding technology and operational risk management.”
As a condition to the OCC’s approval of the bank merger, U.S. Bank is required to “immediately succeed to the terms and obligations of” Union Bank’s 2021 consent order, and must “fully and timely perform all of the obligations and responsibilities” originally imposed on Union Bank under that order. So, for instance, under the consent order Union Bank was required to develop and submit for the OCC’s approval various plans to enhance its controls, and to the extent the OCC has approved those plans U.S. Bank will be required to continue to implement them, if still applicable.
That all makes sense so far as it goes, but the more intriguing thing is whether by agreeing to become subject to this consent order, U.S. Bank has also agreed to subject itself to some of the non-public supervisory consequences - for example, restrictions on activities or on new acquisitions - that often (but not always) accompany consent orders like the one imposed on Union Bank. My gut reaction to this is that it is unlikely, but there is no way to say for sure, and for a counterargument see Patrick Rucker’s reporting from earlier this year, which suggested this was at least under consideration.
Something else? The OCC’s merger approval order includes as a separate condition that U.S. Bank comply with the commitments U.S Bank’s CEO made in an October 10 letter to a senior OCC bank supervisor. The public order provides no further details on what these commitments were, and it is not clear whether the commitments in the letter merely memorialize certain aspects of the public commitments described in the Board and OCC order, or whether they relate to something else entirely.
An Evolving Approach to Climate Related Issues?
As is typical for Board merger approval orders, the Board gives a brief overview of various substantive comments made in opposition to the merger. For example, in two consecutive footnotes the Board notes the following:
[…] Some commenters expressed concerns that the combined bank would increase fossil fuel funding and asserted that certain emissions information is not sufficiently disclosed. Another commenter contended that the merger should not be approved due to the impediments it would pose to transitioning to a low carbon economy. In response to these comments, USB represents that it has taken steps to enhance its assessment of climate-related risks posed to the firm, and the Board has consulted with the OCC regarding the risk management policies and procedures of U.S. Bank.
Commenters expressed concerns regarding the level of diversity among U.S. Bank’s employees and officers and about U.S. Bank preserving Union Bank’s current business relationships with minority-owned suppliers. These comments concern matters that are outside the scope of the limited statutory factors that the Board is authorized to consider when reviewing an application under the BHC Act. See CIT Group, Inc., FRB Board Order No. 2015-20 at 11 n.24 (July 19, 2015); Bank of America Corporation, 90 Federal Reserve Bulletin 217, 223 n.31 (2004); see also Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973).
This may be veering into the territory of reading too much into things, but it caught my eye that diversity-related concerns are regarded as outside of the scope of what the Board can consider (which, to be clear, is consistent with statements made in past orders), while concerns about fossil fuel financing and the low carbon transition are not described as such.
This is consistent with the Board’s recently articulated approach to climate-related financial risk, but it arguably marks a break from past orders, which said explicitly that things like a bank's "financing of various activities and projects worldwide that might damage the environment or cause other social harm" were outside the scope of what the Board is allowed to consider.7
The Board/FDIC ANPR
Finally, a few quick points on the Board/FDIC ANPR, acknowledging that these bullets will not come close to doing justice to all the interesting questions raised therein.
How Would Bank-Level LTD Issuance Work? The headline of the ANPR is the agencies asking commenters to explore the pluses and minuses of a new long-term debt requirement for large but not systemically important banks. The ANPR contemplates that this could be imposed at either or both of the holding company and bank levels and - if issued at the bank level - could be required to be issued either (or both) externally or internally. Setting aside arguments on the merits of this, I am curious about the Board and FDIC’s authority to require bank-level LTD issuance - would the OCC need to be involved in the rulemaking for those large regionals that maintain national bank subsidiaries?
Tailoring the Tailoring. The focus of the ANPR is Category II and Category III firms, and the ANPR appears to raise the possibility of new sub-categories within these categories, asking whether it should apply the new requirements on a blanket basis to all such firms, or whether it should differentiate between individual firms on the basis of factors such as non-bank operations, critical operations, critical services outside the bank chain, cross-border operations or reliance on uninsured deposits.
I wonder if this will eventually make it tougher for the industry to take a unified position here, as some banks gear up to fight these requirements entirely, while others focus on formulating arguments why, even if these requirements apply to some banks, they should not apply to our bank.
Savings and Loan Holding Companies. The ANPR notes in passing that large savings and loan holding companies are not subject to resolution planning requirements, and asks whether, even so, such firms should nonetheless be subject to long-term debt requirements. The subtext here is that there is only one SLHC to which this requirement would apply, and it is not clear that there is any policy reason why this SLHC should be treated differently for these purposes than similarly sized bank holding companies. (It is also not clear that there is any policy reason why large SLHCs should not be subject to resolution planning requirements in the first place, but the statute says what the statute says.)
Separability. The final few paragraphs of the ANPR are devoted to asking whether the agencies should require Category II and Category III firms to identify “separability options” — i.e., assets, portfolios, legal entities or business lines that could be sold off in a stress or resolution scenario, thus avoiding the need to sell the entire bank to a larger institution. This is already a feature of the resolution planning guidance for U.S. G-SIBs, and it is not clear if the ANPR here contemplates including similar separability requirements in forthcoming resolution plan guidance for Category II and Category III firms, or whether the agencies envision doing this through a rulemaking.
It is also maybe notable that certain foreign banks with significant U.S. operations used to be subject to separability expectations included in resolution planning guidance, but the agencies scrapped those requirements in late 2020 as they had failed to produce much that was worthwhile.8
Availability of Credit. The ANPR throws in a single sentence saying that a long-term debt requirement “could impact the cost and availability of credit.” Commenters on the ANPR may have comparatively more to say about that.
An FDIC approval under the Bank Merger Act was also required because, as described in a footnote in the Board’s order, prior to consummation of the acquisition an affiliate of MUFG will acquire certain assets and liabilities of Union Bank. According to a press release issued by U.S. Bancorp, the FDIC has now approved this portion of the transaction as well. Approval from Japanese regulators remains outstanding.
The Board and FDIC have the authority to require such interim updates under Section _.4(d)(3) of the resolution plan rule.
The resolution plan rule requires that if the agencies require an interim update, they “specify the portions or aspects of the resolution plan the covered company shall update.”
Firms with $75 billion or more in cross-jurisdictional activity are also subject to Category II standards.
The Board stated explicitly in its order that it “would likely” require compliance by this December 31, 2024 date unless U.S. Bancorp “can demonstrate through its quarterly implementation plan a credible path to reducing its projected risk profile such that the requirements should not apply (including, for example, a path toward a material reduction in assets).”
The tailoring rules work by measuring total assets on a four-quarter rolling average basis, so even if the combined company is at or above $700 billion in total assets at 12/31/22, it could be at least three additional quarters before it is regarded as having reached the threshold for purposes of Category II requirements. And even after crossing the threshold the new requirements do not necessarily apply immediately — each of the individual enhanced prudential standards generally include their own transition provisions as to how much time a firm has to come into compliance with more stringent requirements after bumping up a category. The Board’s LCR and NSFR rules, for example, give firms until the first day of the third calendar quarter after crossing a threshold to come into compliance with the heightened requirements.
So assuming U.S. Bancorp was not planning to manage its total assets to narrowly avoid becoming subject to Category II standards, a strategy the Board’s order seems to foreclose, I am not sure the Board’s condition will make more than a few quarters of difference, at most, in terms of the compliance date.
See, e.g., this Bank of America order: “Commenters also expressed concern about … Bank of America’s financing of various activities and projects worldwide that might damage the environment or cause other social harm … These contentions and concerns are outside the limited statutory factors that the Board is authorized to consider when reviewing an application under the BHC Act.” For other examples, see orders involving TD, Credit Agricole, and Barclays.
The context was much different than it is for regional U.S. banks, though: “Given that the U.S. operations of the Specified FBOs are a subcomponent of a larger FBO, for which the preferred resolution approach is a home-country SPOE resolution, the agencies have found that the separability options within the United States are few and that their inclusion in resolution plans has yielded limited new insights. Moreover, the agencies expect that such information is obtainable through international collaboration with home country regulators. As such, the agencies have eliminated these expectations from the final guidance.”