Bank Merger Talks to Offer Clues to Stricter Scrutiny of Deals

The Office of the Comptroller of the Currency’s Friday bank merger symposium is expected to provide a clearer picture of potential changes to how regulators review proposed bank tie-ups as they consider toughening the process.

While the symposium isn’t expected to result in any new policy, it may provide a glimpse into changes that the OCC, the Federal Reserve, the Federal Deposit Insurance Corp., and the Justice Department will make to bank merger reviews, said Patricia McCoy, a Boston College Law School professor.

“It’s one step down the road,” McCoy, who will appear on a panel discussing public benefits, said.

Critics of the current bank merger review process say it has been too lenient, with few bank mergers rejected over the decades. In some instances, banks have been required to sell off assets to prevent market concentration.

Banking trade groups say the process works well, however.

“The existing framework comprehensively takes account of each of the enumerated statutory factors and serves as the foundation of a rigorous and coordinated bank merger review process,” the Bank Policy Institute, the Consumer Bankers Association, and the Mid-Size Bank Coalition of America said in a May 2022 letter to the FDIC.

Merger reviews typically look at the potential for a corporate tie-up reducing competition in a specific market and the potential consumer harm—or benefit—that could follow.

The current process has resulted in better capital and liquidity, and improved management, at merged institutions, according to the trade groups in their letter. Deterred deals would’ve resulted in weaker banks, they said.

Biden’s Crackdown

The Biden administration kicked off a broad reconsideration of antitrust policy in July 2021 with an executive order that instructed regulators and the Justice Department to overhaul their consideration of bank deals.

DOJ, which reviews bank mergers concurrent with other agencies, had begun its own comprehensive review of 1995 banking merger guidelines a year earlier.

As part of that, it asked interested parties if it should review bank deals for financial stability risks, an idea vigorously opposed by banking trade groups. Financial stability, management practices, and other factors are reviewed by banking regulators, while the DOJ looks at broad antitrust compliance.

The DOJ has also asked the public to weigh in on the merits of changing calculations for challenging bank mergers, and whether it should set a size threshold for blocking deals.

After the Biden administration’s order was issued, the FDIC released its own request for information from banks and other interested parties on the bank merger review process in March 2022, following a period of vigorous opposition from its then-Republican chair, Jelena McWilliams.

The OCC hasn’t release its own request for information. But Acting Comptroller of the Currency Michael Hsu, who sits on the FDIC’s board, has supported the FDIC’s information request.

Who Benefits?

One area that could change is the way regulators evaluate convenience and public benefits, McCoy said.

Currently, that review focuses on branch counts and other numerical factors. Banking trade groups say the approach works fine. They point to the fact that, although the total number of US banks fell from 14,434 in 1981 to 4,377 in 2020, the total number of branches more than doubled over the same period.

But McCoy and others say that focus should change. Regulators should examine whether the cost savings that banks promise will flow from mergers are passed on to consumers, for example, instead of looking at how many bank branches and online options result.

“Mergers are not providing cheaper products,” McCoy said.

Another factor that regulators may look at, down the road, is whether bank mergers result in institutions that are too big to manage, a concern raised recently by Hsu. Most bank mergers are between smaller institutions, which may not be worrisome, but large regional banks getting together may present issues.

Despite the renewed focus on bank mergers, nothing has yet changed on the ground. Regulators haven’t stopped any recent deals, including a recent approval of Bank of Montreal’s $16.3 billion deal for Bank of the West.