Will Biden’s Regulators Totally Redefine Bank Mergers in 2022?

Financial institution mergers face two big potential hurdles from Washington: The revision of bank consolidation policy by the Justice Department and the spate of new people in (or nominated for) top positions at all three major bank regulatory agencies. Smaller deals could get a pass.

Something like a perfect storm may be forming in the bank mergers and acquisitions area during 2022, as the Biden administration continues to pursue a transition in federal antitrust policy that it launched in mid-2021 with a wide-ranging executive order targeting economic concentration in many industries.

The broad outlines of the administration’s policy push were laid out in a call for public comment published in mid-January 2022 by the Antitrust Division of the Department of Justice and the Federal Trade Commission.

“Recent evidence indicates that many industries across the economy are becoming more concentrated and less competitive — imperiling choice and economic gains for consumers, workers, entrepreneurs and small businesses,” the document states. “These problems are likely to persist or worsen due to an ongoing merger surge that has more than doubled merger filings from 2020 to 2021.” The comment period closes March 21, 2022.

This came in the wake of something of a “palace revolution” at FDIC over bank merger guidelines and a rapidly shifting political balance at the Federal Reserve.

The greatest impact will likely fall on mid-tier institutions, since the megabanks are already precluded from bank acquisitions under existing regulations. In general, no financial institution can hold over 10% of total U.S. deposits nor 10% of financial assets. At present there is no limit on the acquisition of nonbank financial companies, leading to organizations like JPMorgan Chase becoming serial fintech acquirors.

How far down the banking food chain any changes go remains to be seen. Special rules could be devised for community banking organizations.

Credit unions are not impacted by federal merger guidelines in their own combinations, though there have been increasing calls for more formally weighing their activities when determining the competitive situation in a given geographic market.

“We see the most risk for deals resulting in banks with more than $500 billion of assets, though there is risk for smaller deals. We also see a risk of a moratorium on merger approvals as regulators revamp merger rules.”

— Jaret Seiberg, Managing Director, Cowen Washington Research Group

“We are in a period of transition to a new standard for merger approvals, where there is a greater focus on how deals affect the convenience and needs of the community and whether they increase systemic risk,” observes Jaret Seiberg, Managing Director, Cowen Washington Research Group.

Much will hinge on how heavily new rules consider the impact of fintech competition and the increasingly digital flavor of American banking. A good deal of the rhetoric about bank mergers still concerns issues about the impact of combinations on the number and location of branches(i.e. creation of “branch deserts”) and the impact on the unbanked and underbanked.

In a preemptive strike the Bank Policy Institute published a detailed paper, “Do Bank Mergers Create ‘Banking Deserts’? The Evidence Indicates No,” in mid-January 2022. Among its points was a section indicating that in recent years branch closures have occurred as frequently among banks not involved in mergers as among merging institutions. This, of course, also plays into the whole debate regarding whether branches remains necessary to customer service.

Bank M&A is a topic of major interest for Rep. Maxine Waters (D.-Calif.), Chairman of the House Financial Services Committee, and Sen. Elizabeth Warren (D.-Mass.), an influential member of the Senate Banking Committee. So the volume of debate will be quite audible.

Policy Disagreement Leads to Boardroom Brawl

There are several interconnected pieces to the federal merger review situation, specifically concerning banking.

First, there is an ongoing review by the Justice Department of standards for bank mergers that actually began towards the end of the Trump Administration.

The specific focus of that effort is the 1995 Bank Merger Competitive Review Guidelines, which, in spite of their vintage, remain the current standards for evaluating the specialized field of bank mergers. In mid-December 2021 the Justice Department Antitrust Division announced that it wanted additional public input on new questions by Feb. 15, 2022.

Playing out simultaneously is a most unusual development, even by standards of current political behavior. In December 2021 new CFPB Director Rohit Chopra and the other Democratic members of the FDIC board — Martin Gruenberg and Michael Hsu, the Biden-selected Acting Comptroller of the Currency — backed publication of a request for comments on merger policy by FDIC that followed the general Biden line on mergers and concentration.

FDIC Chairman Jelena McWilliams, a Trump-appointed official serving out her term, opposed publication of the request. Chopra went ahead and published a statement about merger policy on the CFPB website. FDIC retaliated with a statement repudiating publication of the document “…purportedly approved by the FDIC, requesting comment on bank mergers. … No such document has been approved by the FDIC.”

Following an uncharacteristically public showdown, McWilliams subsequently resigned, effective Feb. 1, 2022. Official publication of the contested document is anticipated sometime in February now.

Merger Debate to Gather Momentum:

2022 will see a period when policy on bank mergers will be under the microscope, most likely following the outlines of what was published under CFPB’s authority.

What makes this especially interesting is that traditionally M&A fell to the prudential regulators, those dealing in safety and soundness issues. It’s a sign of Chopra’s activism that he’s pushing the envelope.

Now, over a year after taking office, President Biden has the opportunity to assemble a bank regulatory array more to his liking. With McWilliams leaving, he can now appoint an FDIC head, and he has announced nominations for open Federal Reserve seats, including the post of Vice Chairman for Supervision, for which former Fed board member Sarah Bloom Raskin has been named, subject to Senate confirmation.

Assuming all nominees are confirmed, there will be five Biden appointees on the seven-member Fed board. Cowen’s Jaret Seiberg sees this as a risk for bank mergers, in the long term.

How the Bank M&A Debate Is Shaping Up

Already, the debate is developing a strong activist CFPB flavor, in keeping with Chopra’s stance when he served as an FTC commissioner.

“I’m especially interested in feedback on a couple of issues,” Chopra wrote. “First, the law requires that regulators review a merger’s impact on families and businesses in local communities. But how should this work in practice? For example, should financial institutions that routinely violate consumer protection laws be allowed to expand through acquisition? ”

Chopra raised the specter of mergers that create institutions that could pose systemic risk by virtue of their size. He suggested that guidelines could be tailored to become more intensive as the size of a proposed merger increased.

“Under the federal banking laws, a bank’s ability to merge with or acquire another bank is a privilege, not a right.”

— Rohit Chopra, Consumer Financial Protection Bureau

A key issue that Chopra and Gruenberg brought out in an FDIC meeting was how evaluation of the impact of each deal would hinge on satisfaction of community convenience and needs. Specifically they suggested that longstanding use of Community Reinvestment Act performance might not be sufficient in the future.

The Potential Impact for Smaller Institutions

In his analysis Seiberg thinks it is possible that a special carveout for community bank combinations could be structured as bank merger policy is reviewed. Politically this would be expedient, he indicated, because it would disengage many bankers from smaller organizations who would otherwise likely line up against reform of merger guidelines in general. Body count matters on Capitol Hill.

For many smaller institutions, M&A has become an exit plan for aging leadership teams and ownership groups that have no clear succession program. In addition, mergers have long been a means for smaller institutions to bulk up to be able to afford spending on technology and compliance, among other areas.

Taking the smaller institutions out of the picture leaves fewer institutions in the spotlight of the policy review, but the politics will still likely grow hot.

“Progressives are pushing for tougher reviews for even smaller deals, with a focus as low as $50 billion of assets,” wrote Seiberg. Among the merger results they dislike is the loss of major bank headquarters when one takes over another.

He also predicted that the Biden regulators would view deals involving banks with at least $250 billion of assets negatively.

“Team Biden could consider [large] transactions to carry a presumption that they increase systemic risk. This means it would be dependent on the bank to demonstrate why the deal does not represent a systemic risk.”

— Jaret Seiberg, Managing Director, Cowen Washington Research Group

A major question mark is to what degree communication between bank regulators and institutions will continue to be confidential in the early stages of deals. It’s well known that there is a sort of ritualized dance that goes on between officials and bank representatives behind the scenes, and that is part of the reason that no merger has been disapproved for decades. The undoable deal never “officially exists.”

In a comment letter to the Justice Department, Elizabeth Warren criticized this state of affairs, calling for open and transparent disclosures. Whether that becomes part of any formal guidelines or simply a policy shift, could have a huge effect on how deals get done.

Whatever happens, the CFPB and Chopra will come out of this debate with more power.

“We expect the CFPB will be given a formal role in assessing convenience and needs,” wrote Seiberg. “It will operate similar to how the Justice Department assesses competition. That will elevate consumer compliance and the power of the CFPB. To us, this could be one of the most potent reforms as the CFPB is the most political of all the agencies.”

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