FDIC’s Proposal for Strict Bank Merger Policy in Spotlight

Signs explaining Federal Deposit Insurance Corporation (FDIC) policy and other banking policies are shown on the counter of a bank in Westminster, Colo., on Nov. 3, 2009. (Rick Wilking/Reuters)

U.S. banks face the prospect of steeper regulatory hurdles when looking to merge with other lenders, according to a proposal from the Federal Deposit Insurance Corp. (FDIC). The public comment period for the proposal concluded on June 18, and the agency is now weighing contrasting views before deciding on its policy revamp.

In late March, the FDIC proposed revisions to its statement of policy (SOP) on bank merger transactions. These revisions would apply to all U.S. banks and give regulators more reasons to reject merger plans under a more rigorous “principles-based” approach, taking more direct account of the potential effects that a bank merger could have on financial stability, local communities, and competition.

If the revised SOP proposal is adopted as published, it would subject bank mergers to added scrutiny. The conditions for approving tie-ups between financial institutions would be more difficult to satisfy than under the current framework, which dates back to 2008.

The rulemaking proposal comes as the Biden administration has expressed concern that, under current rules, bank mergers too often hurt consumers by reducing competition. The Office of the Comptroller of the Currency has introduced its own proposal for tightening rules, which it uses when reviewing potential tie-ups under the Bank Merger Act.

A broad range of public comments was submitted by the June 18 deadline from academics, banking associations, consumer advocates, lawmakers, and think tanks.

Proposal Details

The FDIC’s proposed revised SOP introduces a “principles-based” approach to the agency’s expectations for evaluating bank mergers, with the agency indicating it will “likely” decline approval if even a single statutory factor is found lacking.

The statutory factors listed in the SOP are competitive effects, financial and managerial resources, future prospects, community needs, financial stability, and combating money laundering.

Specifically, the FDIC will block mergers that create monopolies or lessen competition unless public interest benefits outweigh the anticompetitive effects.

The resulting institution must also demonstrate sound financial performance, compliance with capital standards, and effective management capabilities, with the FDIC taking the economic environment and competitive landscape into account.

Mergers should “better” meet community needs, including improved access to services and products, the policy draft says.

The proposal also subjects mergers resulting in a combined bank with more than $100 billion in assets to greater scrutiny to guard against the risk of financial instability.

For such tie-ups, the FDIC will consider the nature and scope of operations of the resulting bank and any elements that may influence the risk to the stability of the U.S. banking or financial system, such as the degree of interconnectedness with other financial system participants and its cross-border activities.

‘Regulatory Onslaught’ Versus ‘Good Start’

Some critics of the proposal, including the conservative think tank The Heritage Foundation, said regulators were introducing unhelpfully stringent new restrictions on bank mergers that would add uncertainty and delay, exacerbating financial stability risks.

“Federal banking regulators are rolling out onerous new restrictions on bank mergers that will impede free-market activity and harm the financial system,” Joel Griffith, a research fellow at The Heritage Foundation, wrote.

He said the rules are burdensome because they put an end to expedited reviews and give regulators too much power.

“The new proposals scuttle certain expedited review procedures, eliminate the streamlined business combination application, and threaten to subject vital business decisions to expansive and vague bureaucratic discretion,” he wrote.

Proponents of the proposal, such as Acting Comptroller of the Currency Michael J. Hsu and the left-leaning public policy organization The Greenlining Institute, said a stronger policy is welcome as the current framework creates an implicit presumption of approval, with the ensuing banking sector concentration being an unwelcome development.

“Communities of color, who are disproportionately impacted, are concerned that bank mergers will lead to more branch closures and job losses, particularly in areas where the merging banks have overlapping operations,” the institute wrote in its comment. “This could have a negative impact on local economies, reducing access to financial services and potentially leading to a decline in property values, repeating the cycle of disinvestment.”

Sen. Sherrod Brown (D-Ohio) urged the FDIC to subject bank mergers to closer scrutiny, especially in terms of their effect on consumers and communities.

“For too long, the impact of proposed mergers on people’s livelihoods has been an afterthought in the merger review process,” Mr. Brown wrote in a letter to FDIC Chair Martin Gruenberg. “The Policy Statement would reverse that trend by establishing an expectation that proposed mergers ‘will enable the resulting [institution] to better meet the convenience and the needs of the community to be served than would occur absent the merger.’”

The senator noted that the U.S. banking sector has become significantly more concentrated in the past few decades, urging the FDIC’s revised statement of policy to address this trend to avoid consumer harm.

“If the merger review process fails to take stock of the sector’s persistent trend towards concentration, this pattern will only continue, largely to the detriment of the people and places who will see reduced choice for banking products and services or lose access altogether,” he wrote.

Others, such as the Conference of State Bank Supervisors (CSBS), said the proposed merger policy would create more challenges than benefits for the banking industry, especially for community banks, for whom a merger could be the key to survival.

“The FDIC should get back to basics—the specific requirements of the Bank Merger Act—and establish an unbiased and objective policy that promotes healthy mergers,” Brandon Milhorn, CEO and president of CSBS, said in a statement. “Sound merger policy, and additional support for de novo charter activity, are essential for consumers and a vibrant financial system.”

Sheila Bair, former chair of the FDIC, and Thomas Hoenig, former vice chair, wrote in a joint comment that they are concerned the proposed rules would impede positive merger activity and increase financial stability risks.

“Such an approach would become arbitrary and inconsistent, dependent on those in power, not on established specific criteria determined through research and the rule of law,” they wrote, criticizing the proposal for giving bureaucrats too much influence over mergers.

Jeremy Kress, a professor of business law at the University of Michigan and a former attorney with the Federal Reserve Board, called the proposal a “good start” but noted that there is room for improvement.