How Mixed Messages from Biden Regulators Are Muddying M&A Waters in 2024

Of the three key traditional banking regulators, the Comptroller's Office and the Federal Deposit Insurance Corp. have shown their cards — which differ in key respects. Meanwhile, the Federal Reserve has been mum. How federal merger policy ultimately evolves could influence the future shape and structure of the banking business.

High-profile successes — and failures — of antitrust enforcers have dominated business headlines during the Biden Administration, as the president has made antitrust policy a central component of his economic agenda. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) have been actively revamping merger policy by bringing more aggressive challenges, finalizing new merger guidelines, and proposing changes to the approval process for proposed transactions.

Until recently, however, bank mergers had remained largely unaffected by this antitrust renaissance. President Biden called attention to bank mergers and acquisitions in a 2021 Executive Order. He encouraged the “revitalization of merger oversight” under the Bank Merger Act and the Bank Holding Company Act, two of the main laws governing bank merger review.

In response the DOJ and the Federal Deposit Insurance Corp. (FDIC) both issued requests for information on the topic. However, the bank merger review process has mostly remained business as usual, with the exception of larger transactions.

Antitrust enforcers in the Biden administration and Biden-appointed regulators at the federal banking agencies have focused in their public remarks on size as a key source of risk to both competition and financial stability. Mergers of large banks have faced lengthy approval timelines.

At least one high profile transaction — Toronto-Dominion Bank’s proposed acquisition of First Horizon Corp. — was called off after lengthy delays. Others, such as U.S. Bancorp’s acquisition of MUFG Union Bank and Bank of Montreal’s acquisition of Bank of the West, were approved only after the merging parties agreed to conditions relating to their prudential standards and resolution planning that had not been imposed in prior cases.

The focus on bank mergers and acquisitions may be accelerating in 2024.

In January, the Office of the Comptroller of the Currency (OCC) unveiled a slate of proposals to “improve [its] bank merger applications processes and transparency.” A few weeks later, Capital One announced it would acquire Discover in what would be the fifth-largest bank merger in U.S. history.

And in late March, the FDIC joined the fray when its Board of Directors voted 3-2 in favor of issuing a Proposed Statement of Policy on Bank Merger Transactions. If adopted, the statement could lead to tougher review of bank mergers by FDIC-supervised firms.

However, the agencies may not be on the same page.

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A Deeper Dive on FDIC’s Proposed Bank Merger Policy Statement

Both proposals would increase scrutiny on mergers resulting in banks with over $50 billion in assets, but the FDIC proposal would go further in several areas.

“The FDIC proposal includes tougher standards than OCC’s for how the agency analyzes a merged bank’s ability to meet the convenience and needs of its communities.”

For example, the FDIC proposal includes tougher standards than the OCC’s for how the agency analyzes a merged bank’s ability to meet the convenience and needs of the communities it serves.

Historically, that standard has been a key consideration for banking agencies. For decades, the agencies have focused on an acquiring bank’s record of compliance with the Community Reinvestment Act and fair-lending laws. Under the FDIC proposal, the agency would credit this factor only if the combined bank can better meet the convenience and the needs of the community than the merging parties did before the transaction.

As FDIC Vice Chairman Travis Hill noted in his dissenting statement opposing the change, that could be a tough standard to meet.

“Burden-shifting can make a big difference for a legal regime,” Hill pointed out. “[T]here may be examples of mergers in which (1) the merger would benefit the convenience and needs of the community to be served but (2) the applicants are unable to prove that . . . to the satisfaction of the FDIC.”

The FDIC’s proposal also expands the federal banking agencies’ well-established approach to evaluating a bank merger’s effects on competition. Specifically, the proposal calls for consideration of competition across a wider range of product markets relative to the current approach that looks primarily at deposit market share.

In addition, merging parties would be required to complete divestitures before consummating transactions, waive or decline to enter non-compete agreements for employees of divested entities, and submit materials considered by each parties’ board prior to the transaction.

All of these proposed requirements could substantially slow down a process that’s already become notoriously long.

The FDIC proposal largely follows the federal banking agencies’ existing approach to analyzing the remaining factors that must be considered: the merging parties’ financial and managerial resources, their record of effectiveness in combatting money laundering, the future prospects of the combined organization, and the transaction’s effects on financial stability.

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Even here, however, the FDIC’s proposal is stricter in several key areas than the current framework.

First, the FDIC proposal would subject mergers resulting in an institution over $100 billion in assets to added scrutiny. By contrast, the current approach presumes that mergers resulting in a bank under $100 billion in assets would not harm financial stability.

Consumer Financial Protection Bureau Director Rohit Chopra, a member of the FDIC Board of Directors who voted in favor of the proposal, went even further in remarks discussing the proposal. He said that “[b]y codifying this [$100 billion threshold], boards of directors and management at large firms can understand that the likelihood of approval of megamergers will be low.”

Second, the FDIC proposal would clarify that tighter regulations on larger firms are not enough to offset a transaction’s effects on financial stability. That’s at odds with prior statements on some transactions by the Federal Reserve Board and OCC.

Third, and finally, the FDIC is proposing to place additional emphasis on the resolvability of the merged bank were it to fail. It is likely that an updated resolution strategy may be required in connection with larger bank applications.

Read more about strategic issues:

How Will the Rethinking of Bank Merger Policy Be Sorted Out?

In light of the FDIC and OCC proposals, banks considering a merger should pay close attention to how the ultimate standards evolve. Key issues to watch as the new bank merger landscape takes shape include:

• Does the Fed get involved? The Federal Reserve Board has regulatory responsibility for reviewing applications to become — or acquire — a bank holding company and for supervising holding companies, regardless of whether the underlying bank is regulated by the Federal Reserve, the FDIC or the OCC. This broader jurisdiction has historically given the Federal Reserve an outsized role in determining the direction of bank merger policy, but the Fed has yet to release proposed changes to its merger policy framework. Pressure to act may build now that both the FDIC and the OCC have released proposals.

But it is unclear what the Fed’s appetite will be to take on another controversial issue. The central bank is already managing the backlash to its Basel III Endgame capital proposal from last summer.

• Will the agencies update their joint Bank Merger Guidelines? Both the FDIC Proposal and OCC Proposal acknowledge that there’s ongoing work to review the 1995 Bank Merger Guidelines.

However, at a panel held the same day the FDIC’s proposal was issued, CPFB Director Chopra and Assistant Attorney General for Antitrust Jonathan Kanter gave no hints that action on this front is imminent. Absent further developments, whether and how the DOJ applies generally applicable merger guidelines to bank transactions will take on increased importance.

• Will the OCC and FDIC harmonize their proposals? Acting Comptroller Michael Hsu supported the FDIC proposal despite its notable differences from the OCC’s. It remains to be seen whether the agencies will attempt to align their approaches.

Any changes to the OCC’s proposal will bear particular significance with the financial stability analysis. While the FDIC’s proposal is somewhat stricter than the OCC’s in this regard, the FDIC tends to supervise smaller banks than the OCC. Very few banks that are over $100 billion in assets would be considering a transaction of that size.

The OCC’s proposal is open to public comment until April 15, and the FDIC’s proposal will be subject to comments for 60 days from the date of its publication in the Federal Register [still to come at the time of this article being published]. Given the apparent areas of disagreement between the agencies, public feedback on the proposals may help guide the regulators as they attempt to harmonize their approach.

About the Authors
This article comes from four attorneys at Freshfields Bruckhaus Deringer LLP: David Sewell, partner; Alison Hashmall, partner; Nathaniel Balk, associate; and Ellen Lawrence, associate.

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