Growing Bank Antitrust Scrutiny Threatens Effort to Ease Mergers

The Justice Department’s plans to stiffen bank merger reviews will potentially complicate bank regulators’ efforts to shore up ailing regional banks through consolidation.

Following the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank, some top bank regulators have acknowledged a need to use mergers to boost smaller lenders.

But the regulators’ desire to improve financial stability through deals may run headlong into renewed antitrust scrutiny of bank mergers. That could potentially chill deals at a time when uncertainties cloud the industry’s outlook.

The DOJ’s antitrust division “is modernizing its approach to investigating and reporting on the full range of competitive factors involved in a bank merger,” said Assistant Attorney General Jonathan Kanter, the division’s leader, in a June 20 speech at the Brookings Institution.

“The conflicting signals are not going to encourage” banks to do deals, said Keith Noreika, the chairman of Patomak Global Partners’ Banking Supervision & Regulation Group and a former acting comptroller of the currency.

Updated Criteria

The DOJ’s antitrust division no longer plans to negotiate divestitures as banks’ concessions for merger approval, Kanter said. The division instead will look to file more thorough reports with federal banking regulators to highlight the competitive factors at play in a proposed merger, such as fees, branch locations and interest rates.

The Justice Department’s revised policy on bank mergers is similar to how it approaches merger mitigation in other industries. Kanter has previously said he’d much rather block an anticompetitive merger than negotiate a complex divestiture, noting that such remedies can sometimes fail to maintain competition.

Kanter said the antitrust division retains the authority to sue to block mergers that the bank regulators saw fit to approve.

“Assistant Attorney General Kanter’s speech reflects that the agency leadership’s deep skepticism about resolution of competitive concerns via divestiture settlements has reached transactions in the banking industry,” said Leslie Overton, a former antitrust division official and now a partner at Axinn, Veltrop & Harkrider.

Failed Bank Fallout

Meanwhile, Treasury Secretary Janet Yellen and Acting Comptroller Michael Hsu have sounded more open to bank deals, particularly following the recent bank failures.

The federal banking regulators and the Justice Department have been working to rewrite existing bank merger guidelines.

“The recent turmoil has increased the urgency of these efforts,” Hsu told the House Financial Services Committee in May. “It also presents an opportunity to shape a more competitive, more community-oriented, and more resilient banking system.”

The conflict between the Justice Department and the bank regulators stems from a difference in the factors they have to consider when reviewing mergers.

For the antitrust division, competition law is the guiding star. Bank regulators have to weigh issues such as financial stability and the convenience and needs of the communities banks serve.

Sometimes those goals don’t align, and that can present a problem, said Todd Phillips, an independent financial regulatory consultant and a former Federal Deposit Insurance Corp. official.

“I do see friction in that Kanter is just concerned about competition. The regulators and Yellen have to be more concerned about financial stability overall, the ability of supervisors to do their jobs,” he said.

The potential for a Justice Department suit to block a merger means bank regulators will have to clearly articulate why they overrode competition concerns in approving a deal, said Kathryn Judge, a professor at Columbia Law School.

“This may be justified when there is a pressing concern about the health of a bank, but it doesn’t give them complete freedom to ignore a well-reasoned advisory opinion,” she said.

Slowed Pipeline

The potential conflict and uncertainty in bank merger reviews makes it less likely that large banks will pursue deals, said Amber Hay, an Arnold & Porter LLP partner and former Federal Reserve official who was involved in merger reviews.

2023 is already shaping up to be a slow year for bank mergers, despite the turmoil in the banking industry that would trigger merger possibilities.

According to S&P Global Market Intelligence, there were only 32 announced bank mergers through May 31, down from 66 in the same period last year.

The deals that were announced have been smaller. The aggregate value of the deals totaled $580.2 million in the first five months of 2023, compared with about $3 billion in the year-ago period, S&P said.

“We’re seeing generally large bank transactions hold back because of the regulatory uncertainty,” Hay said.