Understanding the emerging bank M&A policy landscape

So it's so major consideration for banks. And I know we have a new resource at ABA called the bank mergers and acquisitions, a self assessment guide that's available on our website or new resource from square patent bogs. That's that's be available to ABA members.

So we'll talk a little bit about that, but Hu, I'd love it if you could just kind of give us an overview of the policy landscape for Bank M& A right now, where are things in the, in the DOJ review and what are we you know, how, what's, what's the state, what's the state of play for bankers that are looking at potential combinations?

But we do have a very strong interest on behalf of members in a transparent and logical regulatory process and also in a process that yields timely decisions. Banks that are forced to delay their transactions during a regulatory review begin to see negative consequences for their markets, their customers.

There are employees who have to live with uncertainty prior to a transaction being approved or withdrawn, and ABA has tried on a number of cases to encourage regulators to keep a process moving and to take into account those potential impacts if they unnecessarily delay. Their review of a transaction. So those are our policy concerns and where we think we can best serve members in dealing with merger policy and the regulators.

So with that said, starting back in 2020, the Department of Justice, as you mentioned, began a review of bank merger guidelines that dated from the year 1995. And as I tell people, you know, everybody who thinks there have been no material changes in the banking or financial services market since 1995 should be very happy with those regulations. Everybody else should agree that this is a timely and necessary step. The banking agencies also play a role in The bank merger guidelines.

They partner with the Department of Justice to review the competitive impacts of a bank merger that it's expected to have on the markets. The banks in question serve and the regulators also look at other issues.

They look at the potential business outcomes for the merged bank, how strong its management is likely to be, whether it will serve the convenience and needs of its community, whether it will continue to have a good track record under the Community Reinvestment Act and under any money laundering laws and whether it will generally be financially healthy and continue as a healthy institution.

All of those things apart from the competitive impacts, are the purview of the federal credential regulator of the bank that will survive in the merger transaction. Department of Justice doesn't get involved really beyond the competitive landscape. So, there are a lot of different things to review. Another area that The agencies are concerned about since the passage of the Dodd Frank Act is a merger's potential impact on systemic risk and financial stability in the United States.

And understandably, after the events of the great financial crisis, those are concerns that we would all share and that would be of great interest, as the industry evolves with, with mergers, with de novo banks and all of the changes that that happened from time to time.

So, who among the agencies gets to hold the baton depends on what the resulting bank will be. So what FDIC has just come out with is going to apply to state non member banks, those state banks that are not part of the Federal Reserve System, but have FDIC insurance. So it will apply Not too very many of the largest banks, but it will apply to a great many community banks. And that's, you know, obviously an important focus.

It would also apply to mergers of a bank with any institution that is not. insured by the FDIC. So, for example, FDIC gets a role in reviewing bank mergers with credit unions. So, just to make sure people understand the context. On the one hand, as I said, ABA really wants merger standards and guidelines to be updated because the ones we have now are over 20 years old, and they don't really reflect competition in the financial services markets today.

On the other hand, although FDIC has acknowledged That they've injected some new uncertainty, at least temporarily into the way they'll assess mergers because they acknowledge they will look at competition in products and services beyond just deposits, which is the traditional formula for measuring competition. Now it's going to be a little more amorphous, a little more situation dependent. But we hope that this means we're ultimately moving in a good direction.

Obviously the FDIC's proposal is very new and we're still looking at the details, but those questions have already started to loom pretty large in our minds. A couple of other things FDIC is doing. They talk about the merger review requirement to assess the impact on the convenience and needs of the community served. That's been in the merger law for a long time. It's it's very standard.

It is related to but distinct from assessing the C. R. A. Track record of the banks involved because the convenience needs test is really about what the banks are going to do providing service going forward after the merger and what F. D. I. C. Has said that really caught our attention is that the merger will have to demonstrate An improvement that the merger will will result in and serving the convenience and needs of the community. That is not just a matter of doing no harm.

The merger really needs to demonstrate that the service to the community will improve that's new and the standards under which it will be judged are still not entirely clear to us. It's going to require a lot of evaluation. Furthermore, it's not clear that that really is what the Bank Merger Act contemplates. And so, you know, obviously we care that FDIC follow all the rules that Congress has laid down for judging bank mergers.

Then finally, there's a lot of new material about how to assess the impact on financial stability in the United States.

This is a requirement that was added to the merger assessment process by Dodd Frank, and particularly since the excitement of last spring, this has been very much on a lot of people's minds, not only in the merger context, of course, but how the regulators view mergers and their potential impact on financial stability is really one of the strongly evolving parts of merger policy.

The fact that F. D. I. C. thinks that they need to tighten the standards does suggest that they're skeptical of mergers. One of the directors yesterday even said that the statute expresses skepticism of mergers. Well, the statute expresses a lot of requirements that banks that propose to merge have to meet. But I think skepticism may be assuming a prejudice that really isn't there.

All that said as long as FDIC treats parties proposing to merge fairly is transparent about what it's doing and acts promptly on applications for mergers without the potential harm that could come from dragging the process out. You know, the fact that they want to look at them carefully and strictly is not in and of itself a bad thing, but transparency, efficiency in the process and fairness. Those are all essential, and we think it's what the law requires.

If the resulting bank is going to be anything else, some other federal regulator will play the role that OCC plays in those transactions. If it's a bank holding company acquiring a bank somewhere, that's approved or not by the Federal Reserve. So what the transaction structure is drives which regulator gets to.

Handle the assessment of the merger and the approval, but the agencies have typically followed common standards in all of the merger assessment aspects that they are responsible for in their various spheres of legal responsibility. So, what OCC has proposed is two amendments to its regulations where two banks are going to merge and the resulting bank is an OCC regulated institution.

Right now, smaller and simpler transactions can get automatic approval under the regulation if they file the correct paperwork and if OCC does not object within a stated period of time. The paperwork also for simpler and smaller transactions can be a streamlined application.

And in January, the acting comptroller of the currency, Michael Hsu announced publicly that they would propose to remove these automatic approvals and these streamlined applications because in his words, any merger is a significant event in the life of the bank's concern and it shouldn't be subject to automatic anything. So this is a change in the proposed regulations.

At the same time, he also announced that OCC would put out a policy statement, not breaking any new ground, supposedly, but saying, these are the standards that we apply. These are the questions we ask. These are the things that we look for. These are the things that will make your approval very likely to happen in short order. Here's some other things that are likely to hold up your deal and may very well result in it not being approved.

And so there was a proposed list of what those things are. And again, OCC says not breaking any new ground here, just putting it all in one place in one document. Mm hmm. And if I could just speak a little bit to what those factors are, I think that would be useful to the Banking Journal audience.

And obviously, that's something that most bankers who have been involved in these transactions are already familiar with, and they know to go in after cleaning up whatever problems along those lines have happened. But OCC also affirmed in its proposed policy statement that as long as there is an absence of any of those issues, there's a good chance that the transaction will be approved and approved relatively quickly. So that's one of the key messages here.

There are other standards that OCC talks about applying, at least as a general matter, which is that if the resulting bank is over 50 billion dollars in assets on a pro forma basis, it's probably not going to get approval, or at least not get approval easily. This is partly consistent with laws governing concentration of, for example, bank deposit markets, but those laws generally have a much higher threshold. So this is something that OCC does basically as a matter of its own judgment.

On the other hand, as I mentioned a minute ago, it is responsible for keeping an understanding of a mergers impact on financial stability and systemic risk. And obviously, one of the factors that is relevant to that type of risk would be the size and the complexity of the resulting institution. So not entirely divorced from the legal standards that OCC and other prudential regulators have to follow, but definitely a matter where OCC is exercising some judgment and proposes to continue to do so.

That's really the lay of the land with the latest regulatory proposals and updates. Another Interesting fact that the comptroller mentioned when he spoke about this is that he, of course, expects to continue to work with the other regulators in the Justice Department to update the guidelines more generally. We want that. ABA's advocated for that for a long time.

And he said, very interestingly, that the agencies will no longer use a simple measure of deposit market share measured through deposits at physical bank branches in a market as the test for measuring market share and competitive impact of a merger. That is, under current standards, And this goes back before 1995. Banks market share, their relevance to a particular market, was judged by the deposits they took through branches in that market.

And that meant that if you had too big a market share in your two banks, you couldn't merge without doing something to shed some of that market power. This was to avoid the merger having an anti competitive impact, limiting customer and consumer choices in the market. Sent one of the big changes since 1995, of course, is the rise of online banking and the changing roles of non bank competitors and providing financial services.

So just looking at deposits and at that, just looking at deposits and branches really is an outdated measure of the total competitive impact of banks in the market. Now, how those other market presences, online banking and non bank financial services providers, how those will be measured. There's a lot of work to do there on the part of economists and analysts and even some lawyers, but primarily those who are good at assessing the facts on the ground in judging how competitive the market is.

So while we're in, while we're in this time period where before these guidelines are released. You know, mergers continue to go through. There have been some that have been terminated because of, you know, failure to receive a regulatory yes or no, within a certain period of time.

What what is what can banks do that are considering either selling or or acquiring during this time period due to to kind of be prepared for the the legal landscape, the policy landscape that their combination might might face by the time it's announced?

They are going to have significant input into the assessment of a merger application that your bank is involved in, because they are the ones who know your bank best, who know how good your management team is, who know how good your risk management is, who are most familiar with your lending and other products markets, who are most familiar with your deposit gathering and other funding mechanisms and who will be familiar with how your branch network, assuming you have

bank branches, most members do how your branch network serves the communities. All of these details are going to be very important in the assessment of your merger application. This is not new, but anybody who has been through one of these transactions knows that one of the first places you start is with your exam team. You don't necessarily have to give them.

The whole business plan, you don't have to give them the whole application, but you better have a pretty good sense of what their reaction is likely to be. And of course, I mentioned that per the OCC is proposed policy statement. If you have supervisory issues, MRAs and MRIAs, if you have open enforcement actions that haven't yet been resolved, or if your CRA track record is not at a very high level, then.

Frankly, I think you'd be very well advised to consider taking whatever time you need to bring those all those factors up to a high level so that your regulators can't find fault with the way you're running your bank. There's one other thing that you mentioned at the top of the podcast, Evan, that we've recently put in place.

The Squire Patton Boggs Law Firm, one of the major financial services law firms in the U. S., came to us and proposed to prepare a written product that we could distribute free of charge to members, which includes a checklist of regulatory issues. It's pretty high level it's intended to be used by a wide range of banks and there's a significant amount of commentary, sort of an owner's manual that goes along with it to help you understand the regulatory issues and background.

It is as up to date as we can make it. Obviously this is an evolving landscape and we'll do our best with Squire Patton Boggs' assistance and cooperation to keep it updated for our members. But we wanted to make it available for people who perhaps didn't have a lot of experience in the M&A space who maybe were not a very large institution with a large staff experienced in these issues and to help people just get a sense of questions they should begin to ask themselves.

financial operations, payment operations and so forth. For those who may not have embarked on this road in the past or have not recently, we thought that this would be a very useful to give some familiarity to chief executive officers and even bank board members.

But usually folks undertaking one of these transactions Will put someone in charge of the project, whether that's the chief financial officer or chief risk officer, if the bank has that separate role or someone else that senior management believes can deal with the sort of relatively complex, relatively infrequent, but nevertheless, really significant transaction for the future of their institution. So we thought that it would be useful for people in that position.

And, you know, what, what is on the name tag of that individual is going to vary a lot from bank to bank. But in seeing banks of all sizes go through merger transactions, there's usually somebody who ends up with that role and ends up with that leadership responsibility. That's the person we were hoping to help, particularly if this was. You know, maybe their 1st rodeo or the 1st the last of a few trips around around the track.

Obviously. The the FTC does not have a role in assessing bank mergers generally, but the you know, we've got these, you know, folks from who represent the neobrand icy and movement and who are in leadership positions there and who have, you know there, there seems to be a lot of this push throughout the administration on assessing, you know, Assessing combinations through, you know, just volumes of volume in the market versus you know, analysis of

consumer welfare, which used to be kind of the standard for several decades. How are we seeing the broader? this broader revised approach to antitrust enter the the bank merger sphere, policy sphere. And is that something that, you know, how, and is that something that banks need to be on the lookout for as they consider their own potential combinations in the near future?

It's not the only one, but it is a critical one, because going back to, you know, over 100 years ago, The impact of mergers on competition has been a very big deal in US law and in the laws of countries in Western Europe and really all over the, the world, or at least the part of the world that operates on free market principles. So it's not really a surprise that this sort of thing would get scrutiny.

And particularly when the institutions involved are very large and are already perceived as having significant market power. Market power is a matter of perception to some extent and I'm not an economist, but I do understand why the question gets asked if you suddenly discover that you have no longer have a diverse financial services industry. Number one, you may see a lot of detriments and number two, you may realize it's very hard to sort of turn back that clock.

and develop a more diverse and more dispersed industry. That is to say that although FDIC, ABA does not take positions on individual bank mergers, we certainly understand the public policy implications that go along with a competitive impact review. With respect to the community benefit agreements, those are not necessarily directed at competitive impact per se. They may be more directed at commitments under Community Reinvestment Act programs.

Commitments under the so called convenience and needs test in the statute, which is, is related to CRA performance, but it really is distinctive. And the way Acting Comptroller Hsu spoke about it was the CRA analysis is really about your history. of CRA compliance and CRA activities. The community needs and benefits assessment is really about the future of what your combined bank is likely to do for the communities. It serves. Are you going to close a lot of branches?

Is going to be a big question there and community benefit agreements address things like branch closures, address things like investment in a small business lending, particularly in communities that may have seen a relative lack of credit for their small businesses housing finance for low and moderate income homeowners and home buyers. They, they tend to focus on goals like that.

And At least at times, institutions have thought it was in their interest to be proactive in dealing with the kinds of community groups that tend to shepherd these efforts and advocate for them on behalf of the communities they're in. So I think we'll continue to see that. I think we'll see that pretty much regardless of ideological you know, details of one administration versus the next.