FDIC, OCC find stakeholders hard to please with merger review guidelines

Gruenberg Hsu
Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., center, and Michael Hsu, acting director of the Office of the Comptroller of the Currency, right, arrive for a House Financial Services Committee oversight hearing on May 15. The FDIC and OCC have taken comment on their respective bank merger review guidelines, but comments reflect divergent views about what the revisions are meant to accomplish.

Bloomberg News

WASHINGTON — The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency’s revisions to their respective bank merger review guidelines have garnered criticisms and praise from stakeholders with radically divergent views about what merger reviews are supposed to promote or prevent.

Jeremy Kress, business law professor at the University of Michigan and former attorney at the Federal Reserve, wrote a comment letter in support of the elevated scrutiny in the FDIC proposal versus that put forward by the OCC because it would give regulators a freer hand to prevent mergers that result in unfavorable levels of competition for consumers.

“Bank mergers are not inherently objectionable,” he wrote. “Some mergers — particularly among small community banks — can be socially beneficial. The Proposed [statement of policy] is generally well designed to flag proposed mergers that pose the greatest risk of societal harm for closer scrutiny while allowing unobjectionable mergers to continue receiving swift approval.”

Kress said the FDIC proposal rightly requires banks to affirmatively prove their consolidation will better serve their communities, automatically subjects mergers that would result in an institution of above $100 billion of assets to higher scrutiny and relies less on the Herfindahl-Hirschman Index and more on holistic evaluation of a transaction. The HHI measures market concentration and is used to assess the competitive effects of mergers. But industry experts and policymakers have argued that the HHI is outdated for bank mergers because it narrowly focuses on local deposit markets and fails to account for the broader and more modern context of banking competition, including the rise of digital banking and non-bank financial institutions.

But opponents of the FDIC proposal argue the vague standards presented by the agency could hinder beneficial mergers and make it harder for stronger banks to acquire weak ones. Sheila Bair and Thomas Hoenig — the former chair and vice chair of the FDIC, respectively — said in a comment letter that the proposal oversteps the original intent of the Bank Merger Act, which they say only requires agencies to prevent monopolies or substantially anticompetitive effects. 

The former regulators argue this gives the FDIC too much discretion to block transactions for unclear reasons. They also note that the largest existing firms achieved such size through the current lower standards, meaning higher scrutiny could prevent other firms from becoming large and complex.

“[Banks] seeking to achieve a similar scale through merger should be required to meet the competitive, financial, and service standards currently in place, but they should not be held to a higher standard than apply to systemically important [banks] already in operation,” they wrote. “To do otherwise will lead to a two-tier banking system in which the largest are protected from new entrants and allowed to grow ever larger and systemically important while the second tier are throttled from competing at a higher level.”

The Bank Merger Act of 1960 mandates that the primary federal regulator overseeing the resulting institution of a merger must grant approval of the transaction. By law, the FDIC is required to consider any effects on competition, future prospects of the institutions, money laundering compliance, community needs and financial stability in evaluating each merger. 

The FDIC last published the statement of policy on bank merger transactions for comment in 1997 and subsequently revised it in 2002 and 2008. OCC’s guidelines have not been updated since 1996.

The Bank Policy Institute — a trade association that represents the largest U.S. banks — urged the FDIC to withdraw the proposal because of the expansive power that the guidelines would confer to the agency. Merging entities under the law should only need to meet community needs, rather than improve them, BPI said, adding that the FDIC’s proposal to scrutinize mergers that create entities with over $100 billion of assets could effectively cap growth and innovation within the banking sector. 

“Many parts of the proposed policy statement contradict sound policy, and certain parts exceed the FDIC’s statutory authority,” they wrote. “The effect would be significant, as neither potential acquirers nor targets would begin the costly and risky process of announcing a transaction and applying for regulatory approval if a regulator with approval authority has issued a policy statement indicating that disapproval was likely or even a meaningful possibility.”

As federal prudential regulators, the FDIC and OCC often work hand-in-hand with similar goals, but tend to work with banks that cut very different profiles. The OCC regulates nationally chartered institutions, meaning it has a pivotal role in approving mergers of or by the largest banks — including the pending acquisition of Discover by Capital One. The FDIC, on the other hand, oversees state-chartered banks that are not members of the Federal Reserve System, meaning the mergers it reviews tend to involve smaller institutions.

Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, has also urged the OCC to strengthen its bank merger review processes, saying mergers involving large institutions should automatically trigger closer scrutiny. Brown cited Capital One’s proposed acquisition of Discover as an example of why the current OCC proposal needs to be strengthened. Other Democrats like Sen. Elizabeth Warren, D-Mass., have criticized regulators — particularly the OCC — for being too permissive in approving bank mergers in the past.

The OCC’s proposal drew less criticism from the banking industry than the FDIC’s. Hu Benton, senior vice president and policy counsel at the American Bankers Association, said in a letter to the OCC regarding the proposal that the ABA supports the OCC’s goal to increase transparency and update assessment guidelines, but asked the OCC to make certain tweaks. 

The ABA expressed concern with OCC’s proposed revisions that would eliminate a clause permitting automatic approval of a merger application 15 days after close of the comment period, unless the OCC manually removes the filing from the expedited process.

“ABA urges OCC to retain these procedures to avoid imposing unnecessary regulatory burdens without justification and with no material improvement in meeting the [Bank Merger Act’s] statutory objectives,” they wrote. “The recent statements by banking agency principals and other senior policy spokespersons leave one skeptical that many applications that would qualify under the current streamlined procedures will be approved within the same 15-day period after comments close.”

Acting Comptroller of the Currency Michael Hsu previously announced that the OCC would remove the provision, saying bank mergers require the OCC to make an affirmative decision.  

But proponents of heightened scrutiny on bank mergers criticized the OCC’s proposal for not doing enough to prevent harmful bank mergers from taking place. 

In its comment letter, consumer advocacy group Public Citizen supported the OCC’s proposal to include financial stability as a consideration in merger reviews but urged for additional metrics to assess systemic risk. They stressed that the public interest should play a more significant role in merger assessments, advocating for public hearings for large mergers — they suggested those over $100 billion — and a presumption against public benefit unless clearly demonstrated.

“Executives seek mergers to enhance profits, and that may be through reducing costs or raising prices to the detriment of the public good,” they wrote. “The OCC should not approve a merger where the agency itself cannot enumerate the public benefits (as opposed to restating the institutions’ promises).”

Kress likewise said the OCC’s revisions would only codify the agency’s current practices, which he said do not go far enough. 

“The Proposed Rule appears to merely codify the OCC’s existing — and excessively lax — bank merger framework that has permitted numerous problematic mergers within the past two years alone,” he said. “Acting Comptroller Hsu voted for the FDIC’s Proposed Policy Statement as a member of the FDIC Board of Directors [and] I strongly urge the OCC to amend its Proposed Rule to more closely resemble the FDIC’s Proposed Policy Statement.”

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