FDIC’s Bank Merger Overhaul Leaves Midsize Lender Deals in Limbo

The Federal Deposit Insurance Corp. is eyeing quicker reviews for mergers involving troubled banks, but healthier midsize lenders looking to make deals in tough times are likely to get more scrutiny.

Mergers intended to stave off a bank failure that could prove contagious would get expedited treatment under the FDIC’s proposal released March 21. But any less-critical deal that would result in a bank with more than $100 billion in total assets would face more questions.

Regulators across the Biden administration have been beefing up their antitrust enforcement, and the effort to more heavily scrutinize bank mergers gained extra impetus after a trio of midsize lenders collapsed last spring. The FDIC’s proposal marks the agency’s attempt to thread a needle in its merger policy, supporting banks that are weighing deals to keep them from going under, while also looking out for consumers who could be harmed by industry consolidation.

But that presumption against big-bank mergers in the proposal could have consequences the regulator didn’t predict: critics say it will create extra hurdles for midsize and regional banks looking to do deals that could boost stability in the financial system. Many midsize banks already meet the FDIC’s $100 billion threshold, and deals among even those below $100 billion can easily cross it.

“What I worry about is normal-course consolidation is very difficult, if not close to impossible, whereas the emergency mergers can and will continue,” said David Sewell, a partner at Freshfields Bruckhaus Deringer LLP and a former Federal Reserve Bank of New York assistant vice president.

Midsize Bank Pressures

Midsize and regional banks face proposed increased capital requirements and other regulatory costs, as well as market pressures from collapsing commercial real estate loans.

For some banks, buying up competitors may be a way of shoring up their balance sheets against those pressures before they get to the brink, Sewell said.

“We’re at risk of creating a system where the only time bank mergers happen is in an emergency,” he said.

FDIC Vice Chairman Travis Hill, a Republican who opposed the proposal, said the final version should explicitly state that deals meant to shore up weaker but still-functioning banks would be viewed favorably.

“There may be instances in which a strong large bank purchasing a weak large bank would be quite helpful from a financial stability perspective,” Hill said, citing JPMorgan Chase & Co.'s acquisition of First Republic Bank last year.

Administration Push

The FDIC’s proposed rewrite of its merger policy is part of an effort across the Biden administration to beef up antitrust enforcement.

In the banking space, the Office of the Comptroller of the Currency unveiled a proposal in January that was largely similar to the FDIC’s. The Federal Reserve is also expected to update its merger policy.

At the Justice Department, the antitrust division in June announced a review of its bank merger policy with the goal of toughening it, following a series of bank failures last year that led to further consolidation.

Hanging over the merger policy reviews is Capital One Financial Corp.‘s $35 billion proposed acquisition of Discover Financial Services, which would create the largest US credit card company by loan volume. The deal faces stiff opposition from some Democratic lawmakers and consumer groups.

Crisis Response

Recent efforts to strengthen bank merger reviews stretch back to the 2008 financial crisis, when Washington Mutual and hundreds of other federally insured banks went under or were acquired.

Congress introduced a financial stability prong to the merger review process in the 2010 Dodd-Frank Act, its major financial regulatory law following the crisis, and also imposed restrictions on deposit concentrations.

The FDIC and OCC’s merger policies would incorporate those concerns into the official deal review process for the first time.

“This proposal represents a reorientation to strengthen bank merger oversight and rectify some of the weaknesses that have become apparent over the past decades,” said Jeremy Kress, a professor at the University of Michigan’s Ross School of Business and a former Fed attorney.

The failures of Silicon Valley Bank, Signature Bank, and First Republic last March provided an added impetus to toughen reviews of mergers.

“With this proposal they’re trying to better prepare themselves to deal with financial stability considerations and provide clarity to the public in how they approach it,” said Amber Hay, a partner at Arnold & Porter LLP and a former Fed attorney.

The FDIC in its policy wants to holistically assess a proposed bank merger’s potential effects on financial stability, local communities, and competition. In the past, regulators looked mainly at mathematical models of industry concentration and banks’ compliance ratings under the Community Reinvestment Act, an anti-redlining law.

The new policy would mark a notable shift towards considering how local communities and other stakeholders are affected by a deal — rather than merely looking at concentration calculations, said Todd Phillips, a professor at Georgia State University’s Robinson College of Business and a former FDIC attorney.

The new focus on broader benefits will make getting approval for a deal more complicated, even for smaller banks.

“The way this FDIC will be acting, it’s not going to be permitting big mergers anytime soon,” Phillips said.

Merger Pathways

Underscoring the FDIC’s challenge is that some deals meant to increase financial stability “end up resulting in a bigger firm that is less stable,” said Graham Steele, who until recently served as the Biden Treasury Department’s assistant secretary for financial institutions.

New York Community Bancorp Inc. picked up Signature Bank’s assets after its 2023 failure, just a few years after it acquired Flagstar Bank in a deal that was initially opposed by the FDIC. NYCB switched to a federal charter and eventually won OCC approval for the transaction.

NYCB recently had to be rescued itself by an investor group led by former Treasury Secretary Steven Mnuchin and former Comptroller of the Currency Joseph Otting, in part because of steep losses in its commercial real estate portfolio, but also because of problems integrating Signature and Flagstar into its operations.

By contrast, regulators quickly approved Banc of California’s July acquisition of the larger PacWest Bancorp, which was shaken by the overall jitters around the regional bank sector last year. The deal resulted in a bank with fewer assets than PacWest had on its own, but with a more stable future, Kress said.

Under the new policy, should it go final, approvals for deals like PacWest-Banc of California should remain viable, he said, pushing back on critics.

“If there is a socially beneficial merger that has to happen for financial stability purposes, there are certainly ways to make those happen on a timely basis,” Kress said.