United States: Bank Regulators Focus On Financial Stability Factor To Reevaluate Large Bank Mergers

In 2021, banks, including regional banks, engaged in significant levels of merger activity as they sought, in large part, to gain efficiencies of scale in order to enhance offerings and thus compete with larger institutions. The total deal value for bank mergers and acquisitions in 2021 reached a 15-year high, including 13 announced deals with values above $1 billion.¹ However, greater regulatory scrutiny has slowed large bank merger activity in the first quarter of 2022, with only one deal announced with a value above $500 million.²

Bank regulators have recently engaged in steps to reconsider their historical review processes for mergers, citing, among other items, the financial stability factor added to the Bank Merger Act and the Bank Holding Company Act by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") as a basis for their current reform efforts.

For the Bank Merger Act, Dodd-Frank's statutory language requires that the regulator consider "the risk to the stability of the United States banking or financial system" when assessing a proposed transaction, while for deals subject to the Bank Holding Company Act, Dodd-Frank mandates that the Federal Reserve Board consider "the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system."³ Regulators generally have applied these statutory requirements by considering risks with respect to the stability of the U.S. banking or financial system as a whole; for example, the Federal Reserve Board, in its order approving the merger of BB&T Corporation and SunTrust Banks, Inc., noted, "[a]n organization's size is one important indicator of the risk that the organization may pose to the U.S. banking or financialsystem. [. . .] In this case, the Board has considered measures of the combined organization's size relative to the U.S. financial system, including the combined organization's consolidated assets, consolidated liabilities, total leverage exposure, and U.S. deposits."⁴

The use of the financial stability factor as pretext for further reconsideration and potential revision of bank merger regulatory review processes appears inconsistent with this historical "impact on the U.S. economy" approach, and indeed may be adverse to that historical approach by inhibiting regional and superregional banks from effectively competing with the largest U.S. financial institutions.

OCC and FDIC Regulatory Activities

On April 1, 2022, Michael J. Hsu, the Acting Comptroller of the Currency, spoke before the Wharton Financial Regulation Conference regarding the resolvability of large regional banks.⁵ In his speech, he points to a gap in resolvability for so-called "large regionals,"⁶ which are not subject to the heightened resolvability requirements that apply to the eight U.S. global systemically important banking organizations ("U.S. GSIBs"). Expressing a concern about financial stability if a large regional needed to be resolved, Hsu suggests that large regionals be subject to resolvability requirements similar to those applicable to the U.S. GSIBs, including adopting a single-point-of-entry ("SPOE") resolution strategy, requiring sufficient bail-in-able long-term debt at the parent (so-called total loss-absorbing capacity or "TLAC"), and ensuring "separability."

Hsu acknowledges in his speech that it "made sense" that these requirements were initially placed only on GSIBs. However, because large regional banks are significantly larger and more complex than they were a decade ago, even though large regional banks do not need to be "subject to the full set of resolvability requirements for GSIBs," Hsu suggests that the aforementioned three approaches would give the government more options in order to plug "a gap in our financial stability defenses."⁷

Hsu notes that "[m]any of the reforms needed to effectuate those changes on a permanent basis would have to be done by the Federal Reserve and FDIC and would require rulemakings." However, in the interest of time, Hsu suggests that in order to oblige large regional banks to adopt these requirements sooner, the Office of the Comptroller of the Currency ("OCC") is reviewing and contemplating an interim alternative option, which is to "condition approval of a large bank merger on actions and credible commitments to achieving SPOE, TLAC, and separability."⁸ Hsu reiterated many of these points in a speech at Brookings on May 9, 2022.⁹

Hsu's speech comes on the heels of several recent developments related to bank mergers. On July 9, 2021, President Biden issued a sweeping Executive Order on Promoting Competition in the American Economy ("Executive Order") asking for the "revitalization of merger oversight" and more extensive scrutiny of bank mergers. See Debevoise In Depth here. Additionally, on March 25, 2022, citing the Executive Order, the Federal Deposit Insurance Corporation ("FDIC") published a request for information soliciting comments regarding the application of the laws, practices, rules, regulations, guidance, and statements of policy that apply to merger transactions involving one or more insured depository institution. Both Hsu and the FDIC point to their authority to regulate on issues impacting financial stability as the reason behind the suggested or contemplated changes to the agencies' approaches to bank mergers, as Dodd-Frank added financial stability as a factor in bank merger review.¹⁰ Hsu's suggestion in his speech alluding to certain "actions and credible commitments" regarding resolution actions is one way in which the OCC could give effect to the financial stability factor in its merger review.¹¹ Although expressly focusing on large regionals or "superregionals," there is no numerical test cited by Hsu that would preclude regional banks engaging in material transactions from becoming subject to at least a less stringent version of this approach.

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Footnotes

1 See Seay, Lauren, Ali Shayan Sikander & Zuhaib Gull, S&P Capital IQ, After Topping $75B in 2021, Bank M&A Shows No Signs of Slowing Down (Jan. 13, 2022).

2 See Seay, Lauren & Ali Shayan Sikander, S&P Capital IQ, Increased Regulatory Scrutiny Puts Pause on Large Bank M&A (Apr. 14, 2022).

3 Codified to 12 U.S.C. § 1828(c)(5) (Bank Merger Act); 12 U.S.C. § 1842(c)(7) (Bank Holding Company Act).

4 Federal Reserve Board, FRB Order No. 2019-16, "Order Approving the Merger of Bank Holding Companies" (Nov. 19, 2019) at 55 (emphasis added).

5 Hsu, Michael J., "Financial Stability and Large Bank Resolvability," Wharton Financial Regulation Conference 2022, Philadelphia, PA (Apr. 1, 2022).

6 Although Hsu does not define "large regional," he points to four large regionals today as having total consolidated assets of greater than $500 billion.

7 Hsu, supra note 5, at 6.

8 Id.

9 Hsu, Michael J., "Bank Mergers and Industry Resiliency," Remarks at Brookings, Washington D.C. (May 9, 2022).

10 These developments may be responsible for slowing the pace of large bank M&A thus far in 2022. See, e.g., Seay & Sikander, supra note 2.

11 See also Greg Baer, Bill Nelson and Paige Paridon, Financial Stability Considerations for Bank Merger Analysis, Bank Policy Institute (May 16, 2022) (Setting out a proposed framework with multiple factors for federal regulatory agencies to apply when assessing the change in financial stability resulting from a proposed merger).

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