Take Two: Banking Agencies Review Guidelines for Evaluating Bank M&A Transactions

On March 25, 2022, the Federal Deposit Insurance Corporation (FDIC) officially released its Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions (current RFI)¹ that apply to merger transactions involving one or more insured depository institutions, including mergers between insured depository institutions and noninsured institutions. The current RFI comes on the heels of a near-identical RFI that was released informally on December 9, 2021 (Original RFI).² As attempted with the original RFI, the FDIC is seeking comments on the effectiveness of the existing framework for evaluating merger and acquisition transactions under Section 18(c) of the Federal Deposit Insurance Act (the Bank Merger Act). The comment period for the current RFI will end on May 31, 2022.

On April 1, 2022, Acting Comptroller Hsu, who also has a seat on the FDIC Board, delivered remarks at the University of Pennsylvania’s Wharton School of Business, indicating that the OCC is considering requiring “resolvability safeguards” for the approval of large bank mergers, due to concerns that “[w]ithout the resolvability safeguards…[he has] concerns that such mergers could result in new TBTF (i.e., too-big-to-fail) firms, which would add to financial stability risk.” ³ The OCC is considering conditioning approval of large bank mergers on “actions and credible commitments,” which would result in mergers of large banking organizations being subject to similar requirements as those applicable to US GSIBs, in terms of the OCC requiring the adoption of a single-point-of-entry resolution strategy and the holding of sufficient loss-absorbing long-term debt at the parent level.

These preliminary actions by the FDIC and the OCC demonstrate that a conscious effort is underway to make changes to the current framework for evaluating M&A transactions, especially those involving banking organizations with $100 billion or more in assets, with the potential for ultimately curtailing growth of large regional banks. Further, the FDIC appears intent on creating a role for the CFPB in approving bank M&A transactions that does not otherwise exist under the Bank Merger Act. The FDIC’s desired approach of creating such a role for the CFPB through a rulemaking, rather than through the legislative process, would allow for the CFPB to have broader reach in advancing its goals than intended by Congress, and would further complicate the approval process for bank mergers and acquisitions by adding an additional consumer protection layer in addition to the current consumer protection considerations under the Community Reinvestment Act (CRA). 

This Advisory focuses on the current RFI and the questions posed by the FDIC, which we strongly recommend that interested parties evaluate for purposes of submitting comments prior to the FDIC issuing a proposed rulemaking. Additionally, this Advisory provides a brief overview of the ongoing review of the 1995 Banking Guidelines by the Antitrust Division of the Department of Justice (DOJ), with the DOJ’s review process and approval being just as important for bank M&A transactions. Lastly, we briefly discuss the OCC’s consideration of conditions to approval of bank mergers and acquisitions involving large regional banks, and we provide a few takeaways for further consideration of the potential implications of the agencies’ actions.

FDIC (Alone) Seeking Comment on RFI

The original RFI released in December 2021 received widespread publicity when the FDIC Board’s three Democratic-appointed members purported to “approve” the release of the RFI over the objections of the FDIC’s then-Chairman Jelena McWilliams. With McWilliams’ resignation, the FDIC Board is now composed entirely of Democratic appointees: Acting Chairman Martin J. Gruenberg, Director Michael J. Hsu (i.e., the Acting Comptroller of the Currency (OCC)), and Director Rohit Chopra (i.e., the Director of the CFPB).

The Democratically aligned FDIC Board is now moving forward, with the current RFI being nearly identical to the original RFI, with only minor changes to the text. Notably, notwithstanding Acting Comptroller Hsu’s position on the FDIC Board, the OCC has not separately released a statement in support of the current RFI (which was the case with the original RFI). Additionally, the Board of Governors of the Federal Reserve System (Federal Reserve Board) has not released any public statements with respect to the current RFI or the original RFI, nor has the Federal Reserve Board released a statement on its review of merger guidelines under the Bank Holding Company Act (BHC Act) or the Home Owners’ Loan Act (HOLA).

Current RFI: Same as the Original RFI with Minor Changes

Our prior Advisory includes an in-depth discussion of the original RFI, and the current RFI is nearly identical, but there are a few key changes that are worth noting in this Advisory.

Notable questions raised for comment in the original RFI include:

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?

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?

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

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

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?

Many of the changes from the original RFI reflected in the current RFI are technical edits, but some may have a more substantial meaning. For example, several references to the “agencies” have now been replaced with references to the “FDIC,” which suggests that the FDIC is moving forward with its review of the bank merger guidelines ahead of the OCC and the Federal Reserve. The questions posed in the current RFI are the same as those posed in the original RFI, with the addition of the following questions:

• To what extent and how should the convenience and needs factor take into consideration the impact that branch closings and conditions may have on affected communities?⁴
• How should the FDIC define large insured depository institutions for the purpose of any differentiation in merger regulations or guidelines for larger depository institutions compared to merger transactions involving smaller insured depository institutions?

Analysis of Additions Under Current RFI

Role of CFPB in Bank M&A Review

The FDIC appears to be leaning towards advocating for a more prominent role for the CFPB in bank merger reviews, beyond the current practice of the banking agencies’ consulting with the CFPB on an applicant’s compliance with consumer financial protection laws. The Bank Merger Act includes the statutory factors for consideration by the federal banking agencies, and the CFPB has no statutory role in evaluating bank mergers. In practice, however, the federal banking agencies typically consult with the CFPB on the involved institutions’ compliance with consumer financial protection laws, to the extent that they are subject to oversight and supervision by the CFPB. Whether the CFPB will have a greater role in review of bank mergers will depend on whether all three of the agencies agree to do so, assuming that there is no legislation adopted amending the Bank Merger Act to include the CFPB.

In any event, before there can be any changes to the current bank merger guidelines, the FDIC will need to coordinate with the OCC and the Federal Reserve Board on an interagency rulemaking, as the agencies are allocated, and frequently share, the responsibility of evaluating bank mergers, based on the charter of the applicant whether the target is an insured depository institution and the involvement of bank holding companies in the transaction.

In the interim, the FDIC could amend its own policy statements and guidelines to create a greater role for the CFPB in mergers involving FDIC-insured depository institutions or mergers between insured depository institutions and non-insured depository institutions. But those policy statements would likely still need to be subject to notice and comment prior to being adopted as binding (consistent with the Interagency Statement Clarifying the Role of Supervisory Guidance), which means the changes the FDIC seeks are likely to be slow going even if the FDIC is prepared to go it alone.

The Definition of “Large Insured Depository Institutions”

The FDIC is now seeking comment on how to define “large insured depository institutions” for purposes of bank merger reviews. The FDIC, Federal Reserve, and OCC have previously agreed to a standard threshold of $100 billion in total consolidated assets for the applicability of enhanced prudential standards and heightened scrutiny, pursuant to the tailoring rules adopted by the banking agencies in November 2019 (Tailoring Rules).⁵ Bank mergers involving banking organizations with $100 billion or more in total consolidated assets, or that would result in a banking organization with $100 billion or more in assets, have been the target of heightened criticism and scrutiny by progressives in Congress, community advocates, and certain banking regulators, based on concerns related to competition, financial stability, consumer protection, and financial inclusion. Therefore, it was widely expected that the FDIC would seek comment on whether bank mergers involving organizations with $100 billion or more in total consolidated assets should be subject to heightened review compared to bank mergers involving smaller banking organizations. However, the new request for comment on how to define a “large insured depository institution” suggests that the FDIC may be considering a lower threshold that could capture mid-sized regional banking organizations, possibly closer to the $50 billion threshold, to be consistent with the initial threshold for applicability of heightened scrutiny under the Dodd-Frank Act. It is also possible, though less likely, that the FDIC is anticipating push back and may consider a higher threshold, perhaps at $250 billion, the statutory threshold for the mandatory applicability of enhanced prudential standards under Section 165 of the Dodd-Frank Act, as amended by the Economic Growth, Regulatory Relief and Consumer Protection Act.

DOJ’s Evaluation of 1995 Bank Merger Guidelines

While the federal banking agencies, with the exception of the CFPB, are responsible for reviewing the potential anti-competitive effects of a bank merger or acquisition under the Bank Merger Act (and the BHC Act and HOLA in the case of the holding companies of depository institutions), the Antitrust Division of the DOJ also conducts an independent concurrent review, and the DOJ’s review is just as legally important as the federal banking agencies’ review. Because the Attorney General has the authority to object to the consummation of a bank merger or acquisition transaction on anti-competitive grounds, the federal banking agencies normally will not approve a transaction pending completion of DOJ 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). In 2020, DOJ began re-evaluating the 1995 Banking Guidelines and the framework for its competitive analysis, with multiple requests for public comments issued by the agency. The questions that have been posed to the public by the DOJ in connection with its review of guidance applicable to bank mergers have focused on:

• scope of review;
• data submissions;
• agency guidance generally;
• HHI threshold for screening anticompetitive effects;
• Relevant product and geographic markets;
• Evaluating transactions in rural versus urban markets;
• Consideration of non-traditional banks in competitive analysis (e.g., online banks, credit unions and thrifts, etc.); and
• Consideration of a de minimis exception, whereby the DOJ would not conduct a concurrent review for transactions below a to be determined size.

The comment period for the DOJ’s request for public comment closed on February 15, 2022, and the public comments that have been received thus far can be found on the DOJ’s public website. The DOJ’s decisions on any changes to its review of the 1995 Banking Guidelines will be in addition to any changes to the framework for evaluating bank mergers and acquisitions under the Bank Merger Act proposed and/or adopted by the federal banking agencies. However, the banking agencies will want to make sure that the competitive review of the banking agencies results in outcomes consistent with those produced under the DOJ’s review and are consistent with any screening thresholds and new guidelines that may be adopted by the DOJ.

OCC’s Focus on “Resolvability Safeguards” for Large Regional Bank Mergers

As noted above, Acting Comptroller Hsu is focused on the financial stability considerations with large bank mergers, and specifically mergers among large regional banks that could create a new crop of “too-big-to-fail” banking organizations. Hsu recognizes that heightened scrutiny of large regional bank mergers could result in the large US GSIBs being shielded from competition, and “potentially helping to solidify their dominance in various markets.”⁶ However, Hsu has stated that there is a “gap with regards to large regional banks, which have grown in size and complexity and are at risk of becoming the new TBTF firms.”⁷ The OCC is considering subjecting large regional banks to similar resolution requirements as US GSIBs, and specifically single-point-of-entry resolution strategy and loss-absorbing long-term debt at the parent level requirements. OCC also noted that these requirements could extend beyond bank M&A transactions, and could be considered as permanent requirements for large regional banks. Hsu did not mention an asset threshold for these potential requirements, but Hsu did mention that any such requirements would require an interagency rulemaking.

The Federal Reserve and FDIC are responsible for rulemaking related to resolution plans, referred to as Living Will requirements under the Dodd-Frank Act, and the FDIC separately requires resolution plans for state-chartered insured depository institutions with $100 billion or more in total assets under the FDIC’s covered-insured depository institution rule.  Therefore, large regional banking organizations with total consolidated assets of $250 billion or more in assets or otherwise deemed to be a Category III banking organization, as well as state-chartered banks with $100 billion or more in consolidated assets are already subject to resolvability requirements. However, commitments related to loss-absorbing longer-term debt requirements being required as part of a bank M&A would add to the capitalization considerations and require additional strategy in structuring transactions, particularly where stock of the resulting entity is the primary form of consideration.

Takeaways

• The CFPB’s push for a formal role in the bank merger application review and approval process has a clear ally in the FDIC. It remains to be seen whether the FDIC will actively push for the Federal Reserve and OCC to agree to establishing a decision-making role for the CFPB under the interagency regulations implementing the Bank Merger Act.
• No changes to the current regulations can be implemented prior to an official rulemaking, and given the shared responsibility of the federal banking agencies on bank mergers, the rulemaking needs to be interagency to avoid a difference in review for bank merger transactions based on charter types.
• The OCC seems to separately be considering additional requirements for bank merger transactions related to risks to financial stability, and specifically those related to mergers of large regional banks. We would expect significant industry scrutiny over the asset threshold proposed by the OCC for requiring any such “resolvability safeguards” and any enhanced capital requirements like loss-absorbing long-term debt requirements to banking organizations that are not currently subject to such requirements under the agencies’ Tailoring Rules.
• A delay in a consensus on the effectiveness of the current bank merger framework will add to regulatory uncertainty for future bank merger transactions that are on the bounds of the factors currently being considered as part of the bank merger analytical framework (e.g., total consolidated assets, financial stability considerations, and consumer protection and financial inclusion). A delay in rulemaking or failure to achieve a general consensus among agencies could result in further delays in action on applications for larger transactions that require review by the FDIC Board, the OCC (DC), or the Federal Reserve Board.
• The FDIC may be considering a threshold lower than $100 billion in total consolidated assets for higher scrutiny under bank merger guidelines. This could result in mid-sized regional banks being subject to heightened scrutiny for bank mergers similar to that of organizations that are more than twice their size.
• The addition of the CFPB to the application review process combined with enhanced importance granted to fair lending concerns as part of the convenience and needs test will both open the door to community activists seeking to block a transaction and raise the stakes on lending commitments in community development plans.
• While the competitive review by the federal banking agencies is of importance, the concurrent review by the DOJ is also important, as the DOJ is responsible for conducting concurrent competitive analysis reviews for bank M&A transactions, and the agency sets the thresholds for M&A transactions that are deemed to not raise any competitive effects, and thereby qualify for streamlined review.

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Financial institutions seeking advice on the current 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 2022 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.