Battle of the Regulators May Leave Bank Mergers in Limbo

Mergers and acquisitions have been a mainstay of financial services, a strategic tool that helps big firms get bigger and smaller firms become, well, big.

At a high level, M&A can be seen as a direct answer to that age-old question of build vs. buy, in this case, decidedly in favor of “buy.” By putting up the cash (or the debt) to enter into a deal, a bank that snaps another, or pools resources in a merger, may gain access to technology or a desirable customer demographic that would otherwise be gained only with the passage of time and perhaps even trial and error.

Bank merger regulations seem to be headed for more scrutiny, but there also seems to be infighting among regulators, which may cloud the picture a bit surrounding the deals themselves.

As reported by sites including The Wall Street Journal, there’s at least some partisanship involved here. The Journal reported that Democratic members of the Federal Deposit Insurance Corp. (FDIC) are “pushing to review regulations” that are tied to larger bank deals.

And in a twist that has surfaced in recent days, three Democratic members had sought to set in motion a regulatory review that had not expressly been supported by FDIC Chairman Jelena McWilliams. That trio included Consumer Financial Protection Bureau Director Rohit Chopra, Acting Comptroller of the Currency Michael Hsu and Martin Gruenberg. The Journal noted that Chopra, Hsu and Gruenberg had voted in private to press for the review.

“The move by the three members is a signal that Democrats are trying to set the agenda for the FDIC and not waiting until Ms. McWilliams’s term expires in 2023,” reported the Journal.

Leaving the politics aside for a moment, it’s worth delving into the joint statement that had been issued last week by Chopra and Gruenberg. Besides the (allegedly) unilateral contention in the document that the FDIC board has approved a request for information and comment on the rules and policies tied to bank merger transactions, we find that “although there has been a significant amount of consolidation in the banking sector over the last 30 years, fueled in large part by mergers and acquisitions, there has not been a significant review of the implementation of the Bank Merger Act by the agencies in that time.”

Against that backdrop, the number of insured depository institutions with assets greater than $100 billion stood at 33 last year, compared to a single entity of that size in 1990.

Those larger firms now have 70% of total industry assets and 66% of deposits.

The FDIC, said the document, should (because it has not yet done so) “explicitly incorporate the financial stability factor into its rule or statement of policy implementing the Bank Merger Act.” That factor examines the risks to the stability of the financial system at large that might result from these mergers. In a look back to the great financial crisis of 2008, said Chopra and Gruenberg, “experience demonstrates that consideration of financial stability risk under the Bank Merger Act should not be limited to the very largest Global Systemically Important Banks (GSIBs).”

The cascade of acquisitions of failing regional banks, and the consolidations that marked the crisis last decade “arguably exacerbated concentration” in the banking system and increased long-term financial stability risk, said the note. The letter posited that consideration (and request for comment on) should be made whether any transaction that creates a financial institution with an asset base above a predetermined level (hypothetically, say, $100 billion), should be considered as posing a systemic risk concern.

“Specifically, the Request for Comment asks whether bright line minimum standards for prudential factors should be established, and if so, what minimum standards for which prudential factors,” wrote Chopra and Gruenberg.

The politics may cloud things until all of the regulators at the FDIC — spanning both political parties — get on board behind a unified approach. But the only thing that is clouded might be timing … while increased scrutiny of the mergers themselves seems a certainty.