Banking and Finance Law Daily Wrap Up, TOP STORY—FDIC seeks comment on regulatory framework for bank merger transactions, (Mar 28, 2022)

By Nicole D. Prysby, J.D.

Citing significant changes in the banking industry over the past three decades, the FDIC released an RFI requesting input regarding the effectiveness of the existing regulatory framework in meeting the requirements of the Bank Merger Act.

The Federal Deposit Insurance Corporation (FDIC) released a request for information (RFI), seeking input 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, including a merger between an insured depository institution and a noninsured institution (FIL-11-2022). The FDIC is interested in receiving comments regarding the effectiveness of the existing framework in meeting the requirements of the Bank Merger Act (BMA). Comments are due within 60 days of publication in the Federal Register.

According to the FDIC, significant changes over the past several decades in the banking industry and financial system necessitate a review of the existing regulatory framework and its effectiveness in implementing the Bank Merger Act. The Bank Policy Institute (BPI) issued a statement arguing that banks are competing against FinTechs and Big Tech companies that often have higher market share and less oversight: no on-site examiners, no capital and liquidity requirements and far fewer data privacy restrictions. BPI urged the FDIC to ensure that it does not undermine the goal of a competitive banking marketplace by denying banks the opportunity to compete with FinTechs on fair terms.

Reasons for review. The RFI explains the reasons for the review. Decades of consolidation and growth in the banking industry have significantly reduced the number of smaller banking organizations and increased the number of large and systemically-important banking organizations. In 1990, there was one insured depository institution with assets greater than $100 billion. That number increased to 33 by 2020 and while insured depository institutions with total assets of more than $100 billion comprise less than one percent of the total number of insured depository institutions, they hold about 70 percent of total industry assets and 66 percent of domestic deposits. In addition, the FDIC has a responsibility to promote public confidence in the banking system, maintain financial stability, review proposed mergers, and resolve failing large insured depository institutions, and the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the BMA to include a financial stability factor. A reconsideration by the FDIC of the framework for assessing the financial stability prong of the BMA and focused attention on the financial stability risks that could arise from a merger involving a large bank is warranted, because the failure of a large insured depository institution would present significant challenges to the FDIC’s resolutions and receivership functions and could present a threat to the financial stability of the U.S. Finally, a recent Executive Order (“Promoting Competition in the American Economy”) instructed U.S. agencies to consider the impact that consolidation may have on maintaining a competitive marketplace.

FDIC questions. The RFI includes 10 questions, as summarized below:

• Question 1. Does the existing regulatory framework properly consider all aspects of the BMA as currently codified?

• Question 2. What, if any, additional requirements or criteria should be included in the existing regulatory framework to address the financial stability risk factor included by the Dodd-Frank Act?

• Question 3. To what extent should prudential factors (for example, capital levels, management quality, earnings, etc.) be considered in acting on a merger application?

• Question 4. To what extent should the convenience and needs factor be considered in acting on a merger application?

• Question 5. In addition to the HHI, are there other quantitative measures that the federal banking agencies should consider when reviewing a merger application?

• Question 6. How and to what extent should specified factors (e.g., lack of competition between the merging parties) be considered in determining whether a particular merger transaction creates a monopoly or is otherwise anticompetitive?

• Question 7. Does the existing regulatory framework create an implicit presumption of approval?

• Question 8. Does the existing regulatory framework require an appropriate burden of proof from the merger applicant that the criteria of the Bank Merger Act have been met?

• Question 9. The BMS provides an exception to its requirements if the responsible agency finds that it must act immediately in order to prevent the probable failure of one of the insured depository institutions involved in the merger transaction. To what extent has this exception proven beneficial or detrimental to the bank resolution process and to financial stability?

• Question 10. To what extent would responses to Questions 1-9 differ for the consideration of merger transactions involving a small insured depository institution?

CFPB request for comment. As previously reported (see Banking and Finance Law Daily, Dec. 10, 2021), an earlier request for comment on this topic caused a controversy. On December 9, 2021, Consumer Financial Protection Bureau Director Rohit Chopra issued a Request for Public Comment on the BMA, prompting a quick response by the FDIC that the request had not been approved by the FDIC, and there was no valid vote by the FDIC Board of Directors and no request for information and comment had been approved by the agency for publication in the Federal Register.

Companies: Bank Policy Institute

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