SVB, Signature Failures Could Change How US Reviews Bank Mergers

Silicon Valley Bank and Signature Bank’s sudden collapses may drive federal regulators to recalibrate how they assess financial stability requirements in their merger reviews.

Overly stringent financial stability requirements would make it difficult for the regulators to approve mergers and potentially deter a healthy bank from considering buying a distressed bank, industry watchers say.

Two of the main bank regulators—the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—are currently reviewing how they evaluate bank mergers. The failing regional banks making headlines this week could now push them toward less prescriptive merger rules that allow more flexibility when a bank is on the brink of failure, but not quite in an emergency, said Dan Awrey, a professor at Cornell University Law School.

“There’s a clear right way to do it, which is clear rules that you then adhere to,” Awrey said. “Regulators may understand that those rules may come with costs.”

Bank consolidation opponents have been pushing for tougher financial stability requirements—such as making the size and interconnectedness of merged banks a bigger part of deal reviews.

Including those considerations in a review of a traditional merger—in which a healthy bank is buying another sound institution—can be tough. It’s even harder in a distressed situation, where the FDIC will want to quickly find a buyer for a failed bank even if it creates an even larger financial institution.

The FDIC is the agency largely tasked to review small bank mergers. The agency also is in charge of finding buyers for failed banks, as it tried to do with SVB.

The FDIC didn’t immediately respond to a request for comment.

The OCC oversees mergers involving national banks, while the Federal Reserve has responsibility for bank holding company mergers.

‘Difficult Conundrum’

Federal regulators’ review of traditional bank mergers entails assessing the level of “systemic risk” the combined bank would pose, based on their financial stability.

The regulators’ task in figuring out how to handle systemic risk in distressed bank sales—as they need to do in looking for a buyer for SVB and Signature Bank—is going to be a lot more difficult with competing imperatives, said Patricia McCoy, a professor at Boston College Law School.

On the one hand, the FDIC and other regulators are concerned about the potential risks to creating giant banks even in a distressed situation. In many instances, the buyer for a large regional bank is likely to be another large regional bank.

SVB and Signature’s failures and the regulators’ emergency programs to protect depositors highlight the systemic risks that regional banks can pose, McCoy said.

At the same time, not closing a sale on a failed larger bank poses its own systemic risks—such as runs by scared depositors at other banks—that regulators will have to consider while they review their guidelines, she said.

“That’s a really, really difficult conundrum,” McCoy said.

The FDIC’s first option in winding down a bank is to find a rival to buy the failing institution. The FDIC has a problem bank list and attempts to play matchmaker before a failure happens.

If no buyer can be found, the FDIC will set up a bridge bank to handle customer deposits and keep business operations going.

The FDIC was unable to immediately find a buyer for SVB or Signature. In both instances, the FDIC set up a bridge bank.

Sen. Bill Haggerty (R-Tenn.) said on Bloomberg Radio Monday that the FDIC rejected a potential buyer for Silicon Valley Bank prior to setting up the bridge bank.

United Kingdom officials sold SVB’s British unit to HSBC PLC.

Weighing Risk

Meanwhile, the regulators’ guidelines and rules surrounding traditional, routine bank mergers could come under heightened scrutiny after this week’s events.

Reviews of traditional mergers can frequently take months. Regulators have come under fire for not giving enough weight to financial stability and systemic risk concerns in evaluating such deals.

President Joe Biden in a 2021 executive order tasked regulators with a broad reevaluation of bank merger policy. The US Justice Department had begun reviewing the guidelines that govern the mergers of financial institutions the year before, asking the public for feedback on whether it should go beyond traditional competition factors and review deals for financial stability risks.

Biden said Monday that he would ask Congress and the regulators to “strengthen the rules for banks to make it less likely that this kind of bank failure will happen again.”

That could mean regulators reviewing a more traditional merger may look at how concentrated a combined bank’s deposits are in any one industry or region and how large a percentage of a merged bank’s deposits would be larger than the $250,000 limit for FDIC insurance, said Patrick Hanchey, a partner at Alston & Bird LLP.

Regulators may try to make a distinction between merger considerations for a normal bank sale versus a sale of a failed bank. But those distinctions can get blurry when a crisis hits, Awrey said.

Policymakers may find it’s easier to avoid a firm set of requirements in order to have more room to respond to a crisis, he said.

“This weekend shows the problem with it,” Awrey said. “There’s no clear dividing line between the two that we agree on.”