Bank mergers are expected to face increased scrutiny after the Federal Deposit Insurance Corporation (FDIC) Board of Directors approved a Final Statement of Policy (Final SOP) to its Bank Merger Transaction guidelines, finalized on September 17.
The board also voted 3-2 in favor of the FDIC considering small business and residential loan originations when evaluating a merger’s competitive effects.
Under the Bank Merger Act (BMA), the FDIC is one of three agencies charged with evaluating bank merger transactions and prohibiting any that would result in a monopoly. The new guidelines, which determine how the FDIC evaluates merger transactions, supersede the last policy update, circa 2008, known as the 1995 bank competitive review guidelines.
“The Final Statement of Policy on Bank Merger Transactions approved today by the FDIC Board updates, strengthens, and clarifies the FDIC’s approach to evaluating transactions subject to its approval under the Bank Merger Act,” FDIC Chairman Gruenberg said.
The new rules governing bank merger evaluations will, for the first time, make the size of the bank created by a merger a factor in determining which deals receive further scrutiny from the FDIC.
Also on Sept. 17, the Office of the Comptroller of the Currency (OCC) finalized updates to its own merger guidelines, and the Department Of Justice (DOJ) withdrew from the 1995 bank merger guidelines.
New Restrictions
The Final SOP notes that the FDIC, “expects to hold a hearing for any application resulting in an insured depository institution (IDI) with greater than $50 billion in assets or for which significant CRA protests are received.”
Additionally, the Final SOP notes that transactions resulting in a large IDI of more than $100 billion or more will be subject to added scrutiny.
“By 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,” Consumer Financial Protection Bureau (CFPB) Director and FDIC Board member Rohit Chopra shared in prepared remarks.
Chopra added that bank mergers and consolidation in recent decades have eradicated many small and mid-sized relationship banks. In 1990, the top 10 banks controlled 15% of banking sector assets; today, they control 53%. Citing CFPB historical data, more than fifteen thousand banks with less than $100 billion in assets (in 2023 dollars) controlled 85% of the market in the 1990's, and now that number is down to 4,500 banks that control 29% of the market.
Chopra also brought up the debate surrounding JPMorgan Chase’s acquisition of failed First Republic Bank, in May 2023, which resulted in an accrual of $173 billion in loans and approximately $30 billion of securities. Going forward, those deals will undergo heightened regulatory scrutiny.
“We should fix the failing bank exception to existing merger prohibitions,” Chopra said. “It makes little sense to allow such an acquisition unless there are no other willing bidders or no other means of executing an orderly wind down.”
Chopra discussed other mergers such as TD Bank’s proposed acquisition of First Horizon, and news of a proposed merger of two large credit card players, Capital One and Discover.
Non-Bank Acquisitions & Mergers
According to the Final SOP, merger applications that involve an entity that is not FDIC-insured are subject to the same statutory factors as any other merger application, including credit unions and mortgage companies.
However, it’s later stated that the FDIC will also consider the “nature and complexity of the non-insured entity, its scale relative to the existing [insured depository institution] IDI, its current condition and historical performance, and any other relevant information regarding the entity’s operations or risk profile.”
The FDIC will review audited financial statements (covering at least three years, unless the entity’s operating history is shorter) and assess any deferred tax assets or liabilities, intangible assets, contingent liabilities, and any recent or pending legal or regulatory actions. Further, independent appraisals or valuations may be necessary to support the projected value of any business (or assets) expected to be transferred from the operating non-insured entity to the resultant IDI through the merger transaction.
A similar approach would be used for banks that are not non-traditional community banks — banks that have a concentrated business focus or an emphasis on specialized activities, like nationwide fintech partnerships. The FDIC describes them as those that:
- Focus on products, services, activities, market segments, funding, or delivery channels other than local lending and deposit-taking;
- Pursue a broad geographic footprint (e.g., operating nationwide from a limited number of offices);
- Pursue a monoline, limited, or specialty business model; or
- Operate within an organizational structure that involves certain significant affiliates or other third-party relationships.
