US FDIC Requests Comment On Bank Merger Oversight Framework – Finance and Banking

Marion Steward

On March 25, 2022, the Federal Deposit Insurance Corporation
(“FDIC”) issued a Request for Information
(“RFI”) on the regulatory framework that applies to
merger transactions involving one or more insured depository
institutions.1 The long-expected RFI solicits
comment on the effectiveness of the existing framework under the
Bank Merger Act (“BMA”)2 and is likely to
result in the issuance of a proposal that would change aspects of
the framework.

Comments must be received by May 31, 2022. In this Legal Update,
we provide background on the framework for bank mergers and
summarize the RFI.

Background

The Bank Merger Act generally requires the responsible federal
banking regulator to approve any merger involving an insured
depository institution, including certain asset purchases and
liability assumption transactions. The FDIC generally is the
responsible agency for mergers where the resulting institution is a
state nonmember bank or state savings association or any
participant is a noninsured institution. Notably, the BMA does not
apply to acquisitions of or by insured depository institutions
(which may be subject to other federal law, such as the Bank
Holding Company Act, Change in Bank Control Act or National Bank
Act) or the acquisition of a nonbank subsidiary, such as a
broker-dealer or fintech.

Prior to approving a merger, the responsible agency must (a)
ensure that notice of a proposed transaction be published; (b)
request a report on competitive factors from the Attorney General
of the United States for merger transactions involving
non-affiliates; (c) not approve any proposed merger that would
result in a monopoly or produce substantial anticompetitive
effects; and (d) consider certain additional factors, such as the
financial and managerial resources and future prospects of the
existing and proposed institutions, the convenience and needs of
the community to be served, the risk to the stability of the United
States banking or financial system, and the effectiveness of any
insured depository institution involved in the merger at combatting
money laundering.

The FDIC and the Office of the Comptroller of the Currency
(“OCC”) have issued regulations and guidelines that
address the BMA and, with the Federal Reserve Board, maintain an
Interagency Bank Merger Act Application form for use by applicants.
Further, the US Department of Justice reviews bank mergers under
the general antitrust laws and issued Bank Merger Competitive
Review Guidelines in 1995 to define and expedite the competitive
review process required by the BMA. This is a more limited review
after the banking agencies have conducted their analysis under the
BMA.

Impetus for the RFI

The FDIC asserts in the RFI that industry changes over the past
several decades may have affected the effectiveness of the
agency’s merger oversight framework under the BMA, and,
therefore, the agency is requesting comment on the effectiveness of
the framework. The FDIC specifically notes the following changes as
precipitating the RFI:

  • The consolidation and growth of the banking industry, which has
    significantly reduced the number of smaller banking organizations
    and increased the number of large and systemically important
    banking organizations

  • The federal banking agencies’ responsibility to promote
    public confidence in the banking system, maintain financial
    stability, review proposed mergers and resolve failing large
    insured depository institutions

  • The Dodd-Frank Wall Street Reform and Consumer Protection Act
    (“Dodd-Frank Act”) amendment to BMA to include a
    financial stability factor for the first time

  • A recent executive order instructing US agencies to consider
    the impact that consolidation may have on maintaining a competitive
    marketplace

First, the FDIC believes that the growth of the banking industry
may warrant a change in the regulatory framework for reviewing
merger transactions. For example, the FDIC asserts that while
insured depository institutions with total assets of more than $100
billion comprise less than one percent of the total number of
insured depository institutions, these hold about 70 percent of
total industry assets and 66 percent of domestic deposits.
Consolidation also has contributed to the economic landscape of
insured depository institutions with assets less than $100 billion.
Over the same 30-year period, the number of institutions with
assets less than $10 billion has declined from 15,099 in 1990 to
4,851 in 2020, a reduction of approximately 68 percent.

Next, the FDIC emphasizes the need to update its monitoring
obligations for the merger transaction process. The Dodd-Frank Act
amended the BMA to require consideration of the risk posed to the
stability of the US banking or financial system by a proposed bank
merger. According to the FDIC, from a financial stability
perspective, efforts to improve the resolvability of large banks
have almost exclusively focused on Global Systemically Important
Banks (“G-SIBs”). However, as the number, size and
complexity of non-GSIB large banks has risen, the FDIC believes
this warrants reconsideration of the framework for assessing the
financial stability prong of the BMA. The agency highlights that
there is a need to focus attention on the financial stability risks
that could arise from a merger involving a large bank. The FDIC is
particularly concerned that the failure of a large insured
depository institution would present significant challenges to the
FDIC’s resolutions and receivership functions and could present
a threat to the financial stability of the United States.

Lastly, President Biden signed an Executive Order on Promoting Competition in the
American Economy on July 9, 2021 (“Executive
Order”). The Executive Order instructs federal agencies to
consider the impact that consolidation may have on maintaining a
fair, open and competitive marketplace and on the welfare of
consumers. With respect to the banking sector, the Executive Order
specifically directs the attorney general, in consultation with the
chair of the Federal Reserve Board, the chair of the Board of
Directors of the FDIC and the comptroller of the currency, to adopt
a plan for the revitalization of merger oversight under the BMA,
among other competition laws.

RFI Questions

The RFI contains 10 multi-part questions on the effectiveness of
the existing BMA framework, which we have reproduced at the end of
this Legal Update. Some of the questions are broad, open-ended
inquires on the BMA framework. However, others foreshadow a
potentially radical change to the way in which the FDIC will think
about merger oversight. For example:

  • Question 2 asks if the FDIC should 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.

  • Question 3 asks if the FDIC should consider prudential factors
    or set “bright line minimum standards” for prudential
    factors as part of the merger application review
    process.3

  • Question 5 asks if the FDIC should adopt quantitative measures
    in addition to the Herfindahl-Hirschman Index.

  • Question 6 asks if the FDIC should take actions to address what
    some at the FDIC perceive as an implicit presumption of approval
    for merger applications.

  • Question 9 asks if there are attributes of the resolvability
    framework for US G-SIBs, such as a Total Loss-Absorbing Capacity
    (“TLAC”) requirement, that should be put into place to
    facilitate the resolution of a large insured depository institution
    without resorting to a merger with another large institution or a
    purchase and assumption transaction with another large
    institution.

  • Question 10 asks if the FDIC should differentiate its merger
    policy for transactions involving large vs. small depository
    institutions.

These questions imply that the FDIC is considering wide-ranging
changes that would fundamentally alter the BMA framework and could
prevent mergers that otherwise would have been approved.

Takeaways

Any proposal from the FDIC is likely to face substantial
opposition from industry participants and other stakeholders. This
is particularly likely because the FDIC’s actions would raise
the bar only for mergers involving banks, meaning that mergers
between two nonbanks would remain subject only to the already less
restrictive general antitrust laws while banks would be subject to
much more restrictive requirements.

Additionally, it is notable that the Federal Reserve Board and
OCC did not join the FDIC’s RFI, even though the comptroller of
the currency serves as a member of the FDIC’s board of
directors and voted in favor of issuing the RFI. If the FDIC were
to materially alter the BMA framework without the involvement of
the other banking regulators, then there would be different merger
standards based on the somewhat arbitrary distinctions among
charter types. Further, the comptroller of the currency recently
indicated that he is considering conditioning mergers involving
larger regional banks on compliance with specific prudential
standards, such as the external long-term debt requirement in the
TLAC rules.4 This action would not require the
involvement of the FDIC and could further complicate merger policy
for US banks.

Finally, the lead-up to the issuance of the RFI involved certain
members of the FDIC’s board of directors attempting to issue
the request without the consent of the chair.5 This
resulted in the resignation of the FDIC chair and illustrates the
diverging views with respect to merger policy in Washington. Any
action (or perceived inaction) by the FDIC is likely to draw
congressional scrutiny and could face judicial challenge, depending
on the process.

The 10 RFI Questions

Question 1. Does the existing regulatory
framework properly consider all aspects of the Bank Merger Act as
currently codified in Section 18(c) of the Federal Deposit
Insurance Act?

Question 2. What, if any, additional
requirements or criteria should be included in the existing
regulatory framework to address the financial stability risk factor
included 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 FDIC 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?

Question 3. To what extent should
prudential factors (for example, capital levels, management
quality, earnings, etc.) be considered in acting on a merger
application? Should bright line minimum standards for prudential
factors be established? If so, what minimum standard(s) should be
established and for which prudential factor(s)?

Question 4. 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
performance evaluation record sufficient? Are the convenience and
needs of all stakeholders appropriately addressed in the existing
regulatory framework? To what extent and how 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 FDIC differentiate its 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 FDIC when
considering the convenience and needs factor and should that
consultation be formalized?

Question 5. In addition to the HHI, are
there other quantitative measures that the federal banking agencies
should consider when reviewing a merger application? If so, please
describe the measures and how such measures should be considered in
conjunction with the HHI. To what extent should such quantitative
measures be differentiated when considering mergers involving a
large insured depository institution and mergers involving only
small insured depository institutions?

Question 6. How and to what extent should
the following factors be considered in determining whether a
particular merger transaction creates a monopoly or is otherwise
anticompetitive?

Please address the following factors:

(a) The merging parties do not significantly compete with one
another;

(b) Rapid economic change has resulted in an outdated geographic
market definition and an alternate market is more appropriate;

(c) Market shares are not an adequate indicator of the extent of
competition in the market;

(d) A thrift institution is actively engaged in providing
services to commercial customers, particularly loans for business
startup or working capital purposes and cash management
services;

(e) A credit union has such membership restrictions, or lack of
restrictions, and offers such services to commercial customers that
it should be considered to be in the market;

(f) There is actual competition by out-of-market institutions
for commercial customers, particularly competition for loans for
business startup or working capital purposes; and

(g) There is actual competition by non-bank institutions for
commercial customers, particularly competition for loans for
business startup or working capital purposes.

With respect to the preceding factors, how and to what extent
should the activity of current branches or pending branch
applications be considered?

Question 7. Does the existing regulatory
framework create an implicit presumption of approval? If so, what
actions should the FDIC take to address this implicit
presumption?

Question 8. Does the existing regulatory
framework require an appropriate burden of proof from the merger
applicant that the criteria of the Bank Merger Act have been met?
If not, what modifications to the framework would be appropriate
with respect to the burden of proof?

Question 9. The Bank Merger Act provides
an exception to its requirements if the responsible agency finds
that it must act immediately in order to prevent the probable
failure of one of the insured depository institutions involved in
the merger transaction. To what extent has this exception proven
beneficial or detrimental to the bank resolution process and to
financial stability? Should any requirements or controls be put
into place regarding the use of this exemption, for example when
considering purchase and assumption transactions in a large bank
resolution? Are there attributes of GSIB resolvability, such as a
Total Loss-Absorbing Capacity (TLAC) requirement, that could be put
into place that would facilitate the resolution of a large insured
depository institution without resorting to a merger with another
large institution or a purchase and assumption transaction with
another large institutions?

Question 10. To what extent would
responses to Questions 1-9 differ for the consideration of merger
transactions involving a small insured depository institution?
Should the regulations and policies of the FDIC be updated to
differentiate between merger transactions involving a large insured
depository institution and those involving a small insured
depository institution? If yes, please explain. How should the FDIC
define large insured depository institutions for these
purposes?

Footnotes

1 87 Fed. Reg. 18,740 (Mar. 31, 2022), https://www.federalregister.gov/documents/2022/03/31/2022-06720/request-for-information-and-comment-on-rules-regulations-guidance-and-statements-of-policy-regarding.

2 12 U.S.C. § 1828(c).

3 This question is notable because courts have held
that banking regulators may not add requirements for acquisitions
in the absence of congressional authorization. See, e.g.,
Security Bancorp v. Federal Reserve
, 655 F.2d 164, 168 (9th
Cir. 1980) (“Since Congress has chosen not to make such a
requirement, we hold that the Board cannot create one under the
guise of managerial resources.”).

4 Please see our Legal Update on the Acting
Comptroller’s statement: https://www.mayerbrown.com/en/perspectives-events/publications/2022/04/shifting-sands-new-prudential-standards-for-larger-regional-banks-under-consideration-by-us-occ.

5 See, Rohit Chopra, How Should Regulators
Review Bank Mergers?
, CFPB (Dec. 9, 2021); Jelena
McWilliams, A Hostile Takeover of the FDIC, WSJ (Dec.
15, 2021).

Visit us at
mayerbrown.com

Mayer Brown is a global legal services provider
comprising legal practices that are separate entities (the
“Mayer Brown Practices”). The Mayer Brown Practices are:
Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited
liability partnerships established in Illinois USA; Mayer Brown
International LLP, a limited liability partnership incorporated in
England and Wales (authorized and regulated by the Solicitors
Regulation Authority and registered in England and Wales number OC
303359); Mayer Brown, a SELAS established in France; Mayer Brown
JSM, a Hong Kong partnership and its associated entities in Asia;
and Tauil & Chequer Advogados, a Brazilian law partnership with
which Mayer Brown is associated. “Mayer Brown” and the
Mayer Brown logo are the trademarks of the Mayer Brown Practices in
their respective jurisdictions.

© Copyright 2020. The Mayer Brown Practices. All rights
reserved.

This
Mayer Brown article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.

https://www.mondaq.com/unitedstates/financial-services/1182560/us-fdic-requests-comment-on-bank-merger-oversight-framework

Next Post

Governor Chris Sununu, State Officials, Business Owners Hold Press Conference to Promote InvestNH Housing Fund

Concord, NH – Today, Governor Chris Sununu, Business and Economic Affairs Commissioner Taylor Caswell, and local business owners held a press conference to highlight the importance and need for Governor Chris Sununu’s historic $100M InvestNH Housing Fund that will go before the Joint Legislative Fiscal Committee at their April 15, […]