PwC | Financial Serveces Update – FDIC Proposes Changes to Bank Merger Policy

➔ What happened? On March 21st, the FDIC proposed revisions to its bank merger review policy for the first time since 2008. The revisions resulted from a request for information (RFI) issued by the FDIC in 2022. Separately, CFPB Director Rohit Chopra spoke on revitalizing bank merger review and Acting OCC Comptroller Michael Hsu issued a statement supporting the FDIC’s proposal. The OCC proposed its own revised bank merger review framework in February.

➔ How does the proposal change existing policy? The proposal includes a new section on “jurisdiction and scope” outlining the types of applications that would require FDIC approval. It separately discusses five statutory factors the FDIC considers when evaluating a bank merger application, along with an affirmation that the evaluations are  forward looking and principles-based, rather than including specific metrics or standards as requested by some RFI commenters:

◆ Financial stability risk: The FDIC’s assessment of this factor would focus on the size of the entities involved in the transaction, the availability of substitute providers for any critical products or services, the resulting institution’s degree of interconnectedness with and contribution to the complexity of the US financial system, and the extent of the resulting institution’s cross-border activities. The proposal states that a resulting institution with $100 billion or more in assets is more likely to present potential financial stability concerns and thus will be subject to added scrutiny. It also notes that the FDIC will consider it “in the public interest” to hold a hearing for mergers resulting in an institution with over $50 billion in assets or if the application receives a significant number of Community Reinvestment Act (CRA) protests.

◆Competitive effects: The discussion of this factor explains that the FDIC would not approve a merger that would substantially lessen competition, unless the transaction is “clearly outweighed in the public interest” such as cases to prevent a bank failure. It also clarifies that the FDIC intends to look beyond concentrations of deposits as per the existing policy and would also evaluate concentration in other products and segments, such as small business or residential loans. It also specifies that the FDIC may require divestitures to advance a merger, which would need to occur before it is completed.

◆Financial and managerial resources: The FDIC will look closely at the financial condition of each individual applicant and the resulting institution including capital adequacy, asset quality, and liquidity risk – including reliance on uninsured deposits and contingency funding strategies. The proposal notes that the FDIC may impose higher non-standard capital requirements depending on the resulting institution’s anticipated risk profile. Managerial resource considerations include supervisory history such as responsiveness to supervisory recommendations and enforcement actions.

◆Anti-money laundering (AML) effectiveness: The FDIC will look at each institution’s record of AML compliance, including their overseas operations. The proposal also notes that significant unresolved deficiencies or outstanding enforcement actions would be “generally inconsistent with a favorable resolution of this factor.”

◆Convenience and needs of the community: The proposal specifies that the application must demonstrate that the resulting institution would ”better meet” the convenience and needs of the community than the applicants would separately, such as through higher lending limits, greater access to products, services, and facilities, new or expanded
products or services, reduced prices and fees, and greater convenience for customers.

➔ What’s next? The proposal seeks feedback on 39 questions, on topics including policy structure, appropriate levels of transparency, approach, and definitions. Comments are due 60 days following publication of the proposal in the Federal Register or approximately by the end of May.

PwC’s Take:

Consistent with the OCC’s proposal on its bank merger review process, the FDIC’s proposal largely codifies existing practices and adds transparency to its expectations for merger applications. While the proposal does not take the OCC’s approach of bucketing factors into “consistent with approval” and “inconsistent” approval categories (see Our Take), both agencies’ focus areas and expectations are generally similar. Both proposals are also more explicit in their skepticism of mergers involving larger banks, albeit with very different thresholds – the OCC considering an acquisition by a global systemically important bank to be “inconsistent with approval” and the FDIC setting a $100 billion threshold for “additional scrutiny.” Nonetheless, they are aligned in the underlying message: with greater size comes a greater burden of proof that a merger or acquisition will benefit customers without detrimental risk or competitive effects.

A nod to last year’s bank stress. The FDIC’s $100 billion threshold reflects growing concerns around banks with between $100 billion and $250 billion in assets stemming from last year’s bank failures as well as concerns about such banks managing an increased risk profile as they grow. The policy also flags bank failure prevention as a potential exception to public interest considerations but highlights overreliance on uninsured deposits and non-core funding sources – key factors in last year’s bank stress – as detrimental for approval.

The proposal provides a clearer rubric as to what “good” looks like. Although the FDIC’s updated policy declined to set explicit metrics or standards across all of the statutory factors, it provides more specific insight into all the areas that will be evaluated. This gives banks greater ability to pre-emptively assess the viability of potential mergers and make the necessary adjustments to increase their chance of success. In particular, the policy makes clear that applications would need to make a strong case for a positive impact on customers. Further, banks with between $50 to $90 billion in assets that are considering mergers should be planning ahead as to how the combined institution will operate as a larger bank with integrated technologies, AML compliance, and liquidity risk management. Such banks will also need to carefully consider – and demonstrate – their plans for the necessary board and senior management resources to effectively oversee the new institution’s expanded risk profile and more complicated operations.

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