Megabank Deals to Get Even Tougher Review From Key US Regulator

The biggest banks are effectively barred from engaging in merger activity following the 2008 financial crisis, but a new proposal from a federal banking regulator is making that restriction even more explicit.

The Office of the Comptroller of the Currency, which approves mergers involving nationally chartered banks, is “unlikely” to find that a deal involving a so-called global systemically important bank would meet the agency’s standards, the OCC said in a proposed policy statement this week. The policy would apply to major banks such as JPMorgan Chase & Co. and Bank of America Corp. and their subsidiaries, which Basel Committe on Banking Supervision guidelines find essentially “too big to fail.”

The policy puts to paper what the industry long presumed about the regulator’s reluctance to approve megabank deals, and specifically outlines OCC skepticism about mergers resulting in a bank with $50 billion or more in assets. It signals an increased focus on concentration risk at the OCC after the collapse of several midsize banks last year.

“That’s a pretty remarkable development in my mind,” said David Sewell, the co-chair of Freshfields Bruckhaus Deringer LLP’s US fintech group.

Post-Crisis Limits

The collapse of Lehman Brothers during the 2008 financial crisis led to a string of bank mergers that created banking behemoths whose failure could topple the entire financial system. In response, the 2010 Dodd-Frank Act said no single financial company could hold more than 10% of the combined liabilities of all other financial companies in the US, essentially setting a cap on the relative size of the biggest banks.

The restriction, outlined in Section 622 of the law, was intended to guard against the biggest banks becoming even bigger.

Since then, most of the largest US banks have been on the sidelines of bank merger activity, outside of JPMorgan Chase & Co.’s emergency takeover of a failing First Republic Bank last May.

Up until now, however, the ban on big bank mergers outside of a calamity had been more of a tacit understanding than a written policy—even with Dodd-Frank’s concentration restrictions on the books, Sewell said.

‘Chalk Lines’

The focus on concentration is part of a broader proposed policy statement from the OCC setting out what acting Comptroller of the Currency Michael Hsu called “chalk lines” for approving bank mergers in a Jan. 29 appearance at the University of Michigan’s Ross School of Business.

The OCC said it will also cast a wary eye on any deals where a target bank is less than half the size of the acquiring bank’s total assets.

Alongside those tests, the OCC is proposing to eliminate expedited reviews of bank mergers, including a 1996 rule stating that any deal is considered approved if the OCC remains silent 15 days after a comment deadline ends.

Read More: Bank Mergers Face Tougher, Slower Process Under OCC Proposal

“The OCC is signaling that it will be tougher. But it is also trying to give guidance to institutions about what they’ll be looking at,” said Patricia McCoy, a professor at Boston College Law School focused on financial services regulation.

Simple mergers are likely to have a clear path to approval even under the new proposed standards, she said.

“There are the straightforward cases where the acquirer is the model of safety and soundness,” McCoy said.

‘Resolvability’ Focus

The Federal Deposit Insurance Corp. and the Federal Reserve are also reviewing bank merger policy after the mid-size bank crisis last year. The Justice Department’s antitrust division is ramping up its own scrutiny of bank mergers amid an administration-wide antitrust push, with a focus on competitive factors at play in proposed tie-ups.

But banking trade groups said the OCC’s focus on bank size was misplaced.

“Bank mergers should not be evaluated based on arbitrary asset thresholds—regulators must consider holistically financial, competitive, managerial and other relevant factors involving banks of any size,” American Bankers Association President and CEO Rob Nichols said in a Monday statement. Banks and others will have 60 days to weigh in on the OCC’s proposal after it’s published in the Federal Register.

Dan Awrey, a professor at Cornell University Law School focused on financial regulation, said a too-heavy focus on bank concentration may not be the best way to measure whether a proposed merger would have a positive benefit on the industry and on the communities the banks serve—particularly with the growth of nonbanks such as independent mortgage lenders and fintechs.

“Ideally, you’d want to explore more granular market-by-market measures and incorporate the growing presence of non-bank intermediaries in many of these markets,” he said.

Hsu said it’s still possible for a big bank merger to go through under the OCC’s policy statement. Banks would have to prove they wouldn’t pose a threat to the broader financial system should something go wrong.

“To me what’s really important is resolvability. Every large bank needs to be resolvable. They need to be able to fail in an orderly way without extraordinary government support,” Hsu said in a question-and-answer session about the statement.