Federal Bank Merger Guidelines Under Review: Banks With $100 Billion or More in Assets Are in the Cross-Fire, and the FDIC Board Is Divided

Introduction

Last week’s widely publicized inter-agency squabble between members of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) has thrown a spotlight on efforts to revise the regulatory framework governing bank mergers in the United States.

In response to pressure from the progressive wing of the Democratic Party,¹ on July 9, 2021, President Biden issued an Executive Order calling on the US Attorney General and the federal banking agencies to revitalize the existing regulatory framework for bank mergers and acquisitions under the Bank Merger Act of 1960, as amended (BMA),² the Bank Holding Company Act of 1956, as amended (BHC Act),³ and the regulations and agency guidance promulgated thereunder—with the goal of “ensur[ing] Americans have choices among financial institutions and to guard against excessive market power” by the largest financial institutions.⁴

The federal banking agencies’ response to the Executive Order has been slow, in part because of vacancies and unconfirmed nominees for key leadership roles at several of the agencies, but partisan differences may also be playing a role. After the Executive Order was issued, there was a delay in processing of bank merger applications by the Federal Reserve Board, with a seven month stretch of action on bank merger applications involving banks with $100 billion in total assets. However, neither the influx in leadership of the federal banking agencies, nor the delay in regulatory approvals of bank mergers that raise no competitive issues, has quieted the calls of progressive members of the Democrat Party for progress on the review of bank merger guidelines. Congresswoman Maxine Waters, chairwoman of the House Financial Services Committee, sent a letter to the federal banking agencies requesting a moratorium on all bank merger applications involving banks with $100 billion or more in total assets until completion of the review of the bank merger guidelines. In addition, on December 9, 2021, the three Democratic-leaning members of the five-member FDIC Board released a Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions (RFI), purported to be “approved” by the FDIC, but that lacks the support of the Republican FDIC Chair, Jelena McWilliams, and was not considered at the last FDIC’s Board meeting on December 14, 2021. The actions of the Democrat members of the FDIC Board has resulted in legal questions surrounding the validity of the RFI as well as the authority of the FDIC Chair to overrule approved actions by a majority of the FDIC Board members and will likely compound existing delays in approval of bank merger applications.

Although the RFI currently stands as an informal document until it receives the support of FDIC Chair Jelena McWilliams (or at least consideration by the FDIC Board at a formal Board meeting authorized by Chair McWilliams), the questions posed in the RFI are indicative of the priorities and general views of the FDIC Board members in support of the RFI, and specifically the Director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra, who has prioritized the reform of bank merger guidelines to be more inclusive of considerations related to consumer financial protection.

Nevertheless, until Congress and the federal banking agencies work out their partisan differences, the broader banking community will remain caught in the political and regulatory cross-fire and the resulting chill on deal-making will likely continue.

While the focus of this advisory is the RFI and the potential implications for bank mergers and acquisitions (M&A), the sections below discussing the background framework for analyzing bank mergers and the current vacancies at the federal banking agencies are included to demonstrate how the RFI has served as a lightening rod for partisan politics to disturb precedent related to consideration of bank merger applications, as well as operations of boards of a federal agency comprised of persons appointed by different political parties, and ultimately threaten the independence of the federal banking agencies.

Background on the Framework for Analyzing Bank Mergers

The federal antitrust laws generally apply to banks in the same manner as they apply to other sectors, however, there are special procedures that apply to the competitive review of bank mergers and acquisitions, pursuant to the BMA, the BHC Act, the Home Owners’ Loan Act, and the regulations and guidance promulgated thereunder. The federal banking agencies, with the notable exception of the CFPB, are responsible for reviewing the potential anti-competitive effects of a bank merger, but the Antitrust Division of the Department of Justice (DOJ) also conducts an independent concurrent review. To allow for a timely review and to reduce the regulatory burden on the banking industry, in 1995, the banking agencies and the DOJ developed the Bank Merger Competitive Review Guidelines (1995 Banking Guidelines). The 1995 Banking Guidelines include, inter alia, things like screens to identify proposed mergers that clearly do not have significant adverse effects on competition.

At the time of President Biden’s July 2021 Executive Order, the DOJ had already been reviewing its 1995 Banking Guidelines and overall approach to bank mergers for over a year, having first sought public comment on revisions to the 1995 Bank Guidelines in September 2020.⁵ While the federal banking agencies may have been involved in the DOJ’s initial review, for example in considering the potential competitive effects of technology and nonbank financial competitions on community banks,⁶ the Executive Order had a chilling effect on the approval of bank mergers and acquisitions, at least by the Federal Reserve Board—especially those involving large banking organizations.

Vacancies at Federal Banking Agencies and Partisan Fighting Are Causing Delays in Regulatory Approvals and Rulemakings

Although the Biden Administration has since filled several vacancies at the federal banking agencies—for example, in late November 2021, President Biden announced that Federal Reserve Board Chairman Jerome Powell would be re-nominated as Chairman and Governor Lael Brainard would be nominated to Vice Chair—several key vacancies still remain, including the Comptroller of the OCC, the FDIC Vice-Chair, and the Vice Chair of Supervision and Regulation at the Federal Reserve Board.

While the nominations for leadership at the Federal Reserve Board were in flux, the largest merger applications pending at the agency were put on hold, with a seven month stretch of no Federal Reserve Board approvals on bank mergers involving banking organizations with $100 billion or more in assets.

Further compounding this problem, on December 10, 2021, Congresswoman Maxine Waters, Chairwoman of the House Financial Services Committee, sent a letter to the leadership of each of the federal banking agencies, calling for a halt on approvals of any merger or acquisition applications that would result in a banking organization having more than $100 billion in total assets until a new framework is in place.⁷

Interestingly, the Federal Reserve, seemingly unmoved by such political pressure, approved three bank merger applications on December 17, 2021, including one involving a resultant banking organization with $100 billion in total assets that had been under Federal Reserve Board consideration since December 8, 2020.⁸ Unfortunately, these approvals are likely not indicative of the Federal Reserve Board resuming the processing of applications within the standard timeframes of 60 to 90 days of receipt of a complete application, particularly for mergers that would result in banks with over $100 billion in assets.

Over the past few days, there has been a wave of events and public statements that indicate that the FDIC Board, which is currently comprised of appointees from the Obama, Trump and Biden administrations,⁹ is not functioning as a cohesive unit in evaluating the framework for analyzing the competitive effects of potential bank mergers.¹⁰ This activity is suggestive of a larger power struggle over the direction of the FDIC while FDIC Chair McWilliams, a Trump appointee, remains as Chair.¹¹,¹² CFPB Director Chopra, who serves on the FDIC’s Board, has been a particularly active participant in this power struggle.

The CFPB has no statutory support regarding BMA and BHC Act rule-making and was not specifically mentioned in the Executive Order as part of the review of the bank merger guidelines under the BMA and BHC Act,¹³ but Director Chopra has publicly stated that “promoting competition...[is] a key priority for [his] work as Director of the Consumer Financial Protection Bureau and as a Board Director of the Federal Deposit Insurance Corporation.” ¹⁴,¹⁵ As discussed further below, Director Chopra appears to be representing the interests of the CFPB through the agency’s director seat on the FDIC Board.

While Republican Senators, including members of the Senate Banking Committee, are evaluating options to restrain Director Chopra and Director Martin J. Gruenberg in their attempt to overrule the actions of Chair McWilliams, the Acting Director of the Antitrust Division of the DOJ,¹⁶ along with progressive Democrat Congressmembers,¹⁷ have publicly supported Director Chopra’s efforts with respect to the RFI.

RFI and Potential Role of the CFPB in Evaluating the Competitive Factor in Bank Mergers

The RFI, “approved” by the FDIC Board, was published on the CFPB’s website on December 9, 2021, with an accompanying joint statement by CFPB Director Rohit Chopra and FDIC Director Gruenberg. The widespread publicity over the internal FDIC discord seems to have drawn far more attention than the RFI itself. Nevertheless, the RFI (i) responds to President Biden’s Executive Order calling for a review of bank merger oversight, (ii) reflects the current focus of three of the FDIC board members, and (iii) signals a potentially greater role of the CFPB in the federal banking agencies’ evaluation of bank mergers. Accordingly, while it may take some time for the RFI to procedurally see the light of day, it is worth considering its contents. Notable questions raised for comment in the RFI include:

1. What, if any, additional requirements or criteria should be included in the existing regulatory framework to address the financial stability risk factor added to the BMA and BHC Act by the Dodd-Frank Act?

• Are there specific quantitative or qualitative measures that should be used to address financial stability risk that may arise from bank mergers?
• If so, are there specific quantitative measures that would also ensure greater clarity and administrability?
• Should the Agencies presume that any merger transaction that results in a financial institution that exceeds a predetermined asset size threshold, for example $100 billion in total consolidated assets, poses a systemic risk concern?

2. To what extent should the convenience and needs factor be considered in acting on a merger application?

• Is the convenience and needs factor appropriately defined in the existing framework?
• Is the reliance on an insured depository institution’s successful Community Reinvestment Act (CRA) performance evaluation record sufficient?
• Are the convenience and needs of all stakeholders appropriately addressed in the existing regulatory framework?
• To what extent should the convenience and needs factor take into consideration the impact that branch closings and consolidations may have on affected communities?
• To what extent should the agencies differentiate their consideration of the convenience and needs factor when considering merger transactions involving a large insured depository institution and merger transactions involving a small insured depository institution?
• To what extent should the CFPB be consulted by the agencies when considering the convenience and needs factor and should that consultation be formalized?

3. Does the existing regulatory framework create an implicit presumption of approval?

• If so, what actions should the agencies take to address this implicit presumption?

4. To what extent should standards differ for the consideration of merger transactions involving a small insured depository institution?

• Should the regulations and policies of the agencies be updated to differentiate between merger transactions involving a large insured depository institution and those involving a small insured depository institution?

In addition to these questions in the RFI, Director Chopra included a few additional questions in a CFPB blogpost titled “How Should Regulators Review Bank Mergers?”, again signaling a potential larger role of the CFPB in consideration of bank mergers:

1. How should bank regulators implement the law requiring review of a merger’s impact on families and businesses in local communities?
2. Should financial institutions that routinely violate consumer protection laws be allowed to expand through acquisition? How might regulators rely on reports by federal and state consumer protection authorities to make this determination?
3. How should banking regulators make sure that a merger does not increase the risk that a bank is too big to fail or otherwise disrupt the economy if it faced financial distress?
4. Should there be more clarity and simplicity in the merger review process by establishing thresholds where banks of a certain size will receive heightened scrutiny?

Under the current statutory and regulatory framework, the CRA provides the public with several opportunities to provide formal input on bank mergers, including (i) during the public comment period of banks’ CRA evaluations and (ii) during the public comment period of a bank merger in connection with consideration of the convenience and needs factor under the BMA, BHC Act, and HOLA. In evaluating bank merger applications, the federal banking regulators normally consult with the CFPB on banks’ records of compliance with consumer financial protection laws and regulations, but such consultation is normally through interagency nonpublic discussions and the sharing of nonpublic supervisory information. Under Director Chopra, it seems that the CFPB is seeking to have a more public facing role in bank mergers, including by having input on the potential competitive effects of a merger or acquisition.

If and when the RFI is published in the Federal Register, a comment period will be open for sixty days. There will then be many additional steps before any formal changes to the framework for evaluating bank mergers are finalized: the FDIC Board must come to some consensus; the FDIC, OCC and the Federal Reserve Board must find consensus to ensure consistency among the agencies’ regulations pertaining to bank mergers; and the Attorney General must be consulted. Whether the CFPB will have a role in the review of the competitive factor will depend on whether the leadership at the FDIC, OCC, and Federal Reserve Board consider the CFPB’s involvement warranted and worth codifying in the regulations implementing the BMA, BHC Act, and HOLA, or related guidance.

Outlook

The many contradictory statements and actions by the federal banking agencies, and politics threatening the independence of the federal banking agencies, have led to regulatory uncertainty that has delayed bank M&A transactions among the larger institutions and, at a minimum, has created confusion throughout all tiers for the industry.¹⁸

Although asset size has increasingly become a distinguishing feature for bank merger review, as well as other key regulatory initiatives, those asset tier distinctions have been mandated by statute, including under the Dodd-Frank Act as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act. It is unclear whether the banking agencies have the legal authority to draw sharper distinctions between asset tiers than those that already exist. For example, an application for a transaction that would cause the combined organization to cross $100 billion in assets currently enables the federal banking agencies to seek information on the ability of the combined organization to meet enhanced prudential standards with respect to enterprise risk management and liquidity and capital management, including stress testing capabilities.

The federal banking agencies have a great deal of discretion as to how much follow-up information may be requested after applications are submitted, and past practice indicates that the applicants for the largest transactions are impacted the most. Although new regulations and regulatory guidance could further expand or define the scope of this review, at some point that expansion might go beyond the existing statutory criteria and would require legislative action similar to the Dodd-Frank Act approach to amending the BMA and BHC Act to add the financial stability factor, or to add asset thresholds for the applicability of enhanced regulation and supervision.

It is far too early to predict the outcome of the interagency squabble over the RFI and adjustments to the bank merger review framework that may result, but, in the absence of legislative initiative, a number of potential consequences should be considered:

1. Delay on Actions for Bank Mergers Subject to Federal Reserve Board, FDIC Board, or OCC (DC) review, especially those involving a constituent bank with $100 billion or more in assets.

• Currently, there is little risk of application processing delay for M&A transactions involving community banking organizations (and certainly for those with under $10 billion is assets), but any changes to the DOJ’s 1995 Banking Guidelines or the federal banking agencies’ bank merger guidelines could impact the industry as a whole and result in heightened scrutiny of bank M&A deals of all asset sizes. In any event, longer processing periods are expected, as the federal banking agencies will want to develop a detailed record to support public or congressional scrutiny of decisions on bank M&A transactions, particularly those involving larger institutions.
• There is also less of a risk for applications and notices that can be handled on a delegated basis by the Federal Reserve Banks or regional offices of the FDIC and OCC, as well as applications and notices that qualify for post-notice procedures, in the absence of new rulemaking.

2. The CFPB becoming more involved in prudential and safety and soundness issues through the CFPB Director’s role as a director of the FDIC Board.

• With the RFI, Director Chopra has suggested that he is willing to go beyond the traditional lines of supervision and enforcement of consumer financial protection. Director Chopra, as a member of the FDIC Board and a member of the FFIEC, will have insight into the rulemaking process for prudential and safety and soundness operations.
• To the extent the CFPB pushes for a greater role beyond its statutory authority, we can expect litigation from the private sector bringing the CFPB’s authority into question as was seen during the Obama administration.
• Republican Senators have written to President Biden urging him to rebuke Directors Chopra and Gruenberg “for their attempt to politicize the FDIC and compromise its neutrality and independence by disregarding its bylaws and its historical practice of conducting agency business through the chairman.” Republicans on the Senate Banking Committee are considering options to deter such efforts, including requiring reconsideration of President Biden’s nominations for leadership of the federal financial regulatory agencies. The Senate Banking Committee Republicans are also asking for President Biden to replace Director Gruenberg, an Obama appointee, on the FDIC Board.¹⁹

3. Most of the recent criticism of the existing framework has focused on the financial stability statutory factor added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the potential loss of public benefits claimed to result from mergers among the nation’s largest banks, and the claimed need of higher scrutiny of bank mergers involving banking organizations with total assets of $250 billion or more.²⁰ However, progressive Democrats’ focus on the $100 billion asset threshold for consideration of heightened scrutiny and regulation in bank M&A transactions could be an attempt to rollback provisions of the Economic Growth Act, which opened the doors for mergers of regional banks by raising the threshold for mandated applicability of enhanced prudential standards from $50 billion to $250 billion, while providing the Federal Reserve Board with the authority to apply enhanced prudential standards to banking organizations with $100 billion in assets on a tailored basis.²¹

• The fact that progressive advocates’ commentary focuses on the 30 or so banking intuitions near or above $100 billion in assets rather than the top five largest banks by total assets in the nation reflects continued disagreement among policy makers as to where the greatest risks within the industry may lie. If the federal banking agencies would like to see community banks strengthened, the industry would benefit from clear action and supporting statements from the banking agencies that would ease regulatory burden and facilitate consolidation where community banks elect to combine with themselves or with their larger mid-size banking peers.

4. For now, mergers among community banks may experience a progressive lengthening of processing time frames, but should not face any heightened regulatory opposition resulting from the recent RFI or public statement discussed above. However, should a new merger rulemaking process progress, which would seem inevitable despite the FDIC Board’s infighting, all levels of the banking industry are likely to be impacted. Transactions involving larger institutions and combinations resulting in the crossing of existing statutory thresholds will require a significantly greater level of planning and evaluation given the difference of views that has come to light and the ongoing transition in leadership at the banking agencies.

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Financial institutions seeking advice on the RFI, any of the developments discussed in this Advisory, or general M&A planning should contact any of the authors of this Advisory or their usual Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.