OCC and FDIC Each Propose Policy Statements Focused on Greater Scrutiny of Bank Merger Transactions

In recent months, the U.S. banking regulators have proposed policy statements focused on providing greater insight on the agencies’ review of bank mergers and acquisitions under the Bank Merger Act (BMA).¹ On January 29, 2024, the Office of the Comptroller of the Currency (OCC) published a notice of proposed rulemaking (OCC NPRM) to (1) amend its procedures to eliminate expedited processing and the use of streamlined application forms for bank mergers and (2) adopt a policy statement that summarizes the principles the OCC considers when evaluating proposed bank merger transactions to determine whether the statutory factors under the BMA are met. Then, on March 21, 2024, the Federal Deposit Insurance Corporation (FDIC) published a Proposed Statement of Policy on Bank Merger Transactions (FDIC SOP) that similarly summarizes the principles the FDIC considers when evaluating whether the statutory factors under the BMA are met. 

While the OCC has jurisdiction over merger transactions between national banks or federal savings associations with insured depository institutions that result in a national bank or federal savings association,² the FDIC has jurisdiction over merger transactions that result in a FDIC-supervised institution, and jurisdiction over any merger transaction involving an insured depository institution and a non-insured institution.³ This Advisory summarizes and contrasts the OCC NPRM and FDIC SOP and provides takeaways for further consideration. The comment period for the OCC NPRM will end April 15, 2024. The comment period for the FDIC SOP will end 60 days following publication of the FDIC SOP in the Federal Register.

Overview of the Policy Statements

The OCC and FDIC are proposing to adopt principle-based policy statements that memorialize each agency’s approach to evaluating the statutory factors under the BMA when evaluating proposed bank mergers and acquisitions.

OCC’s Proposed Policy Statement

Consistent with remarks made by Acting Comptroller Hsu during his speech on January 29, 2024,⁴ the OCC NPRM categorizes BMA applications received by the OCC as falling into one of three categories: (1) those that have indicators that are, in the OCC’s experience, generally consistent with “timely approval”; (2) those that are approvable, provided that concerns are adequately addressed and can be resolved in or remediated prior to approval; and (3) those that are not consistent with approval.

The OCC NPRM identifies the following indicators as consistent with approval generally and would allow for action by the agency in a timely manner:

• The acquirer is well-capitalized and the resulting institution will be well-capitalized.
• The resulting institution will have total assets less than US$50 billion.
• The acquirer has a Community Reinvestment Act (CRA) rating of Outstanding or Satisfactory.
• The acquirer has composite and management ratings of 1 or 2 under the Uniform Financial Institution Ratings System (UFIRS) or ROCA rating system.
• The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System (CC Rating System), if applicable.
• The acquirer has no open formal or informal enforcement actions.
• The acquirer has no open or pending fair lending actions, including referrals or notifications to other agencies.
• The acquirer is effective in combatting money laundering activities.
• The target’s combined total assets are less than or equal to 50% of acquirer’s total assets.
• The target is an eligible depository institution, meaning the target is well-capitalized, has a composite CAMELS rating of 1 or 2, has a Community Reinvestment Act rating of “Outstanding” or “Satisfactory,” has a consumer compliance rating of 1 or 2 under CAMELS, and is not subject to a cease and desist order, consent order, formal written agreement, or Prompt Corrective Action.
• The proposed transaction clearly would not have a significant adverse effect on competition.
• The OCC has not identified a significant legal or policy issue.
• No adverse comment has raised a significant CRA or consumer compliance concern.

The OCC NPRM also identifies indicators as raising supervisory or regulatory concerns, which the OCC’s proposal states are unlikely to be consistent with the statutory factors detailed in the BMA. Such indicators include those related to less than satisfactory ratings on the CRA, consumer compliance, UFIRS, or ROCA; BSA/AML violations; and failure to address corrective actions or multiple enforcement actions against an acquirer in a three-year period. Additionally, there may be supervisory or regulatory concerns when the acquirer is a global systemically important bank (GSIB) or a subsidiary thereof (which presumptively includes U.S. subsidiaries of non U.S. GSIBs). Interestingly, with the US$50 billion asset threshold among the list of indicators, the OCC is making it clear that US$50 billion in total consolidated assets is a significant factor that could result in a delay in action on an application. As previously noted, the OCC also is proposing to eliminate expedited processing for applications of transactions that qualify as “business reorganizations” or otherwise qualify for the agency’s streamlined application. Under the current regulations, such applications are deemed to be approved 15 days after the close of the comment period, unless the OCC notifies the filer that the application is not eligible for expedited review or expedited review is extended.

FDIC SOP

In the preamble to the FDIC SOP, the FDIC notes the ongoing review by the Department of Justice and federal banking agencies of the guidelines of bank mergers, and the agency’s support for taking an interagency approach in amending regulations under the BMA. Nonetheless, the FDIC’s SOP states that the FDIC deems it important to update its Statement of Policy Regarding Bank Merger Transactions (Current SOP), which was last published for comment in 1997 and last updated in 2008. In developing the FDIC SOP, the FDIC took into consideration comments received to its Request for Information and Comment published on March 31, 2022 to the extent relevant to merger transactions subject to FDIC approval.

In addition to updating the Current SOP to include the financial stability statutory factor added to the BMA by the Dodd-Frank Act, the FDIC SOP would provide more discussion of the FDIC’s expectations for bank merger applicants when evaluating the statutory factors under the BMA. In the proposed text of the FDIC SOP, and even more so in the preamble to the FDIC SOP, the FDIC includes a detailed discussion of the FDIC’s view that substance over form matters when determining whether a transaction between a bank and non-insured entity is a “merger” or acquisition that requires FDIC approval under Section 18(c)(1) of the BMA. As noted in the FDIC SOP, “[t]he FDIC interprets the term ‘merge’ in the BMA to encompass all transactions that result in an [insured depository institution] substantively and effectively combining with a non-insured entity, regardless of whether the transaction is structured as a merger or asset acquisition.”⁵

With respect to the evaluation of mergers and acquisitions involving banks, similar to the indicators identified by the OCC NPRM, the FDIC SOP identifies several circumstances that would likely result in an unfavorable finding related to one or more of the BMA statutory factors. The circumstances include:

• Non-compliance with applicable federal or state statutes, rules, or regulations
• An unsafe or unsound condition related to an existing or resulting insured depository institution
• Less than satisfactory examination ratings
• Significant concerns related to financial performance or condition, risk profile, or future prospects
• Inadequate management, such as significant turnover, weak or poor corporate governance, or lax oversight and administration
• Incomplete, unsustainable, unrealistic, or unsupported projects, analyses, and/or assumptions

Among other differences, the FDIC SOP compared to the OCC NPRM is less focused on timing considerations in terms of the types of applications that can be approved in a “timely” manner. Rather, the FDIC SOP is being introduced as a means to address certain feedback received through the RFI process, seek additional comments on the bank merger review process by the FDIC, and provide greater transparency on the FDIC’s considerations under the financial stability factor given its role as the receiver of failed insured depository institutions (and its recent experience with the failure of three large regional banks in 2023), as well as its view on the types of transactions that it views as requiring its prior approval under the BMA.

Comparison of OCC and FDIC’s Approaches To Evaluating BMA Statutory Factors

The OCC NPRM and FDIC SOP provide an overview of each agency’s approach to evaluating the statutory factors under the BMA. Those factors include (1) monopolistic or anticompetitive effect; (2) financial and managerial resources and future prospects; (3) convenience and needs of the community to be served; (4) risk to the stability of the U.S. banking or financial system; and (5) effectiveness of combatting money laundering activities.⁶

Although the approaches of the OCC and the FDIC to the statutory factors are generally consistent, there are some differences. Perhaps the clearest difference is that among the indicators identified by the OCC of the features of applications that are viewed as consistent with approval, the OCC proposes a threshold of less than US$50 billion in asset size for the resulting institution, while the FDIC utilizes a threshold of US$100 billion to describe where financial stability problems may arise. Other differences are reflected in language choices and emphasis. We compare the language of the two agencies’ proposals below.

Takeaways

If the OCC and FDIC adopt the proposed policy statements on bank merger transactions, the industry should expect:

• Extended processing for BMA applications under review by the OCC and FDIC to allow for heightened scrutiny under the BMA statutory factors and the supervisory record of the acquirer and the target
• Greater emphasis on transparency of the agencies review process, with the potential for public hearings for transactions that exceed certain size thresholds or that raise concerns under the convenience and needs factor
• Additional regulatory costs and expenses for BMA transactions that might have otherwise benefited from expedited processing, including internal reorganizations
• Continued heightened scrutiny of transactions that involve or will result in a banking organization with US$100 billion or more in total assets, and potentially an added requirement to submit a bank resolution plan or update to an existing plan as a condition to obtaining approval for a transaction
• New heightened scrutiny for transactions that involve or will result in a banking organization with US$50 billion or more in total assets
• Extended processing and heightened scrutiny when either or both of the merger parties have a recent record or regulatory non-compliance or a recent enforcement action with ongoing performance obligations

In a statement accompanying the FDIC SOP, FDIC Chairman Martin J. Gruenberg remarked that the proposed policy statement would update, strengthen, and clarify the agency’s approach to bank merger transactions amid a “rapid pace of change and consolidation in the banking industry today.” Despite acknowledging the need for reevaluation of the FDIC’s merger approval process, FDIC Vice Chairman Travis Hill and Director Jonathan McKernan voted against the proposal. Vice Chairman Hill suggested that the FDIC SOP “moves in the wrong direction” and possibly would make the transaction approval process “longer, more difficult, and less predictable.” Director McKernan asserted that the FDIC SOP reflects and would implement “a bias against bank mergers that is bad policy and contrary to law.”

In response to the FDIC SOP, Consumer Financial Protection Bureau Director Rohit Chopra suggested areas of further reform to “reduce concentration creep” in the banking sector, including adopting broader size and growth caps on insured depository institutions and addressing the failing bank exception in existing merger prohibitions.

The OCC NPRM and FDIC SOP follow greater scrutiny and renewed attention of bank mergers from the Biden administration, and expand upon a broader governmental effort to review the bank merger framework.¹⁴

If you have any questions regarding the OCC or FDIC proposal or would like to further discuss the implications for an insured depository institution, please contact any of the authors of this Advisory or your usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist with any questions about the proposed rulemaking, submit comments on behalf of your organization, or assist with your broader financial regulation needs.

© Arnold & Porter Kaye Scholer LLP 2024 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.