FDIC’s Bank Merger Review Proposal Takes Heavy-Handed Approach

The Federal Deposit Insurance Corporation’s proposed revisions to bank merger transaction policy, if adopted, would substantially alter existing statement of policy and add additional hurdles for banks looking to consolidate or purchase substantially all assets of another business.

In March, the FDIC stated its intent to update, strengthen, and clarify its policies and expectations regarding bank mergers to reflect statutory and market changes since its last update in 2008. If adopted, the proposal would replace the FDIC’s current statement of policy and implement a principles-based approach to its review of proposed bank mergers.

However, the proposal appears to be designed to provide the FDIC with greater latitude in evaluating bank mergers rather than assess whether existing factors used to evaluate proposed mergers continue to be relevant given current delivery of financial services.

Today, merger applications are evaluated under the statutory factors set forth in the Bank Merger Act: monopolistic or anticompetitive effects, financial and managerial resources and future prospects, convenience and needs of the community to be served, risk to the stability of the US banking or financial system, and effectiveness of combating money laundering activities.

Section 18(c)(5) of the BMA prohibits the FDIC from approving a merger transaction that would result in a monopoly, would be an attempt to monopolize the business of banking in the US, or would substantially lessen competition in any section of the country, unless the benefits to the public clearly outweigh the anticompetitive effects.

The FDIC evaluates competitive effects within local geographic markets. By proposing a more principles-based approach, the FDIC is signaling its intent to evaluate mergers based on a wider, and potentially more elastic, range of factors beyond those historically applied under the Bank Merger Act. The proposal also targets transactions resulting in institutions of $100 billion or more in total consolidated assets as systemic risk concerns.

The FDIC’s new approach skirts the question of whether the US market is overbanked, and the prevalence of numerous small and under-regulated participants in the market impacts the stability of the financial system. Instead, the proposal presumes bank mergers are inherently anticompetitive and those involving larger institutions are fundamentally bad and should be discouraged—if not implicitly banned.

Whether assessments of “relevant markets” and “convenience needs” should continue to be based on the brick-and-mortar presence of banks is an equally important question. Another is whether increasing regulatory compliance risks and costs require that smaller banks seek merger partners to obtain operating efficiencies to address them.

The FDIC considers concentrations in both geographic and product markets when assessing the anticompetitive effects of a merger. Although it has relied on deposit concentration measures and the resulting change in those measures to evaluate the impact of proposed transactions, it now proposes to consider concentrations in specific products or customer segments, the volume of small business or residential loan originations, or activities requiring specialized expertise.

The proposal broadens the FDIC’s evaluation to consider the size and competitive effects of the resulting bank—potentially including non-bank market participants—that may operate on a regional or national basis. When relevant, the analysis might also incorporate other products offered by the merging entities and consider whether consumers retain meaningful choices in the market.

Under the current policy, merger applications might be conditioned on an applicant’s agreement to divest certain lines of business, and applicants have been allowed to propose divestiture to mitigate anticompetitive concerns. The new proposal is more onerous—the FDIC could require a completed divestiture before approving a merger application.

Also, it will now generally prohibit selling institutions from entering into noncompete agreements with employees of the divested entity and from enforcing existing noncompete agreements with those entities.

We expect the proposal to:

• Increase scrutiny of bank mergers, resulting in extended processing times as both the buyer and the seller will be analyzed under the BMA’s statutory factors and records of supervisory compliance
• Increase costs of bank mergers, as additional communication, including potentially complex market analyses, will be required between applicants and the FDIC to address evolving standards and the heightened scrutiny on applications much earlier in the process
• Result in continued analysis of transactions that involve or will result in a bank with $100 billion or more in total assets with the potential for new levels of analysis for transactions that result in banks with $50 billion or more in total assets
• Result in enhanced scrutiny if any party has a history of regulatory non-compliance or a recent enforcement action
• Require additional application disclosure by the parties demonstrating how the merger would benefit the public

The proposal, like that offered by the Office of the Comptroller of the Currency in January, shows that regulators share a skeptical view of bank mergers. It’s disappointing that the FDIC hasn’t addressed fundamental questions at the core of its proposal and reevaluated the state of the US banking market.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Thomas J. Delaney is partner at Norton Rose Fulbright’s corporate, M&A, and securities practice.

Mike Keeley is partner at Norton Rose Fulbright’s corporate, M&A, and securities practice.

Steven Constantin is an associate at Norton Rose Fulbright’s corporate, M&A, and securities practice.

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