Big-bank merger review threatens to upstage rivals
Banks and others told the FDIC that additional scrutiny over large bank mergers with more than $100 billion in assets has the potential to derail the Biden administration’s plan to increase industry concentration and boost competition.
Federal Deposit Insurance Corp. sent out a comprehensive information request in March on potential changes to its merger review process. The effort—the result of a review of the bank merger approval process by the Justice Department—as well as President Joe Biden’s 2021 executive order asking federal agencies to increase competitiveness in the US economy.
Questions about whether bank deals involving at least $100 billion in assets should be ruled out based on “systemic risk” concerns dominated comment letters submitted as of June 1. Banks and others also expressed concerns about the ability of the Consumer Financial Protection Bureau. Extended role in review of deals.
Establishing a denial presumption would place the burden of proof on banks to prove that a major merger would not pose a risk to the broader US financial system. But such an approach could make it harder for regional and other mid-level banks to achieve the scale needed to compete with the largest U.S. banks — the exact opposite of what the FDIC is trying to achieve.
“The largest banks will have fewer challenges to their dominant position in markets across the country, and they will hold a significant competitive advantage,” said former FDIC chair Sheila Baer and former FDIC vice president Thomas Hoenig in a joint letter.
Barr led the FDIC during the 2008 financial crisis and has long advocated raising capital standards on the largest banks to prevent a repeat of the government bailouts that marked that period. Hoenig also advocated raising capital for the largest banks.
‘check the box’
Critics of the FDIC’s current merger review process say it has become a largely “check-the-box” exercise as the agency scrutinizes the details of proposed deals, said University of Michigan Ross School of Business professor Jeremy Kress, a former Federal Reserve attorney said in one. Comment sheet.
“This permissive approach to bank consolidation is not what Congress intended” when it gave regulators the responsibility to review bank deals under the Bank Holding Companies Act and the Bank Mergers Act, Kress said.
Federal banking regulators have not blocked the merger since 2003, Kress noted.
He said that instead of assuming that a deal should happen, the FDIC and other regulators should tell banks why their deal should happen.
This is especially true for deals in excess of $100 billion, which the FDIC may define as “systemic risk.”
The FDIC primarily monitors and reviews mergers involving small and medium-sized banks. The Fed and the Office of the Comptroller of the Currency monitor bank holding companies and large national banks, respectively.
But the FDIC will also be responsible for liquidating a newly formed large bank if it fails. So the agency should focus on all bank mergers, regardless of where the regulator takes the lead, the Center for American Progress, a progressive think tank, said in a comment paper.
‘distorted effect’
Large regional banks with a simple business model may offer an alternative to the largest globally systemically important banks (GSIBs) operating in the US, such as JPMorgan Chase & Company and Bank of America Corp.
Piper Sandler’s managing director Thomas W. Killian said in a letter to the FDIC, but believed that any bank mergers worth more than $100 billion should be ruled out, adding that the medium-sized bank is “potentially on M&A”. There will be a cooling effect”.
He said banks at or near the $100 million limit would decide against making deals, which would make it harder for them to compete against global giants.
“The adverse effect would be to further concentrate large bank M&A among the eight existing GSIBs in the US or invite foreign GSIBs to develop further in the US,” Killian said.
Barr and others questioned whether a $100 billion bank would represent a true systemic risk. Barr and Hoenig said in their letter that a $100 billion bank would account for less than 0.3% of total US banking assets, so the deal involving the two such banks would pose no threat.
In addition to competition concerns, focusing on mergers worth more than $100 billion would be against Congressional intent, industry lobbying group Bank Policy Institute said in a comment letter.
The Dodd-Frank Act and other banking laws already set thresholds for regulators to reject proposed mergers, which include deals where a bank will hold 10% or more of total US bank deposits.
“A radically different counter rule (or a rule that has the same practical effect) would contradict Congress’s considered decision about reasonable limits on bank mergers,” said General Counsel Greg Rozanski, senior associate at BPI and executive Brent Tzarks of America. The director of the Mid-Size Bank Coalition said in the letter.
CFPB role?
Supporters of tougher merger reviews also called for an increased role for the CFPB in approving or rejecting deals.
The FDIC questioned whether the CFPB should be consulted on an evaluation of the “convenience and needs” of the proposed merger, particularly with regard to compliance with consumer protection laws.
Although the CFPB has no formal role in the bank merger review process, the Center for American Progress said it should be consulted on any deal. Kress further argued that the CFPB should be able to “block bank mergers on the grounds of public interest”.
CFPB director Rohit Chopra, a former Federal Trade Commission member, has made increasing competition from financial services a key goal of his CFPB tenure. She also pressed for an investigation into merger review policies as a member of the FDIC’s board of directors, which resulted in a fight in which former FDIC Chair Jelena McWilliams, a Trump appointee, resigned.
Even though the CFPB sits on the FDIC board of directors, the American Bankers Association, in its comment paper, opposed giving the agency a separate role in reviewing the merger.
ABA Chief Economist Sai Srinivasan and Policy Advisor Hu A Benton said doing so would be “in addition to existing considerations, inconsistent with the Bank Merger Act and beyond the scope of the CFPB’s own authorized legislation.”
