Regulators’ Tough Approach to Bank Mergers May Have a Silver Lining

On March 8, the Federal Reserve and the Office of the Comptroller of the Currency (OCC) held a hearing on the US Bancorp-MFUG Union Bank proposed merger. During the hearing, different witnesses raised issues on fair lending, branch closures and even on MFUG’s business in Russia. This was the first public meeting for a bank merger since 2019 when meetings were held for the BB&T-SunTrust Bank deals. Also, on March 4, the Federal Reserve approved the $7.6 billion M&T Bank-People’s United Financial deal after more than one year since the banks announced the deal.

There are other bank mergers waiting for the Federal Reserve’s approval and this shows how regulators are approaching M&A in the banking sector.

Not only is the Federal Reserve taking additional time to approve deals. If other legislative proposals are passed, mergers between banks could be lengthier. Last year, Sen. Elizabeth Warren introduced the Bank Review Modernization Act of 2021 which establishes additional requirements for bank mergers and acquisitions. The proposed bill, if approved, would require the Consumer Financial Protection Bureau (CFPB) to approve a merger when one of the companies offers consumer financial products. It would also require regulators to examine the anticompetitive effects of the deal. This bill is still in the early stages of the legislative procedure, and it won’t affect pending transactions.

Additionally, the acting chairman of the Federal Deposit Insurance Corporation (FDIC), Martin J. Gruenberg, announced in February that evaluating bank mergers is a priority for 2022. Rohit Chopra, Director of the CFPB and board member of FDIC, also supports the review of the regulatory framework for bank merger reviews. These announcements are recent examples of the renewed attention to evaluating bank merger policy that stems from President Biden’s “Executive Order on Promoting Competition in the American Economy.”

But perhaps one of the most important regulatory developments is the Department of Justice (DOJ) Antitrust Division’s review of the Banking Guidelines. While these guidelines are not legally binding, they will likely be used by other regulators like the FDIC, OCC or the CFPB when they assess the anticompetitive effects of a deal, in addition of course, to DOJ.

DOJ was seeking comments from the public until Feb. 15 on a variety of issues, from the need to have specific banking guidelines separate from the horizontal merger guidelines to changes in the relevant product and geographic markets.

But the one area that could offer a silver lining to banks in this new regulatory approach to banking M&A is the inclusion of non-traditional banks in the merger analysis.

DOJ is assessing whether to include online banks and other non-traditional banks in its competitive analysis and if so, how much weight should give to them. Some of the respondents to DOJ’s request for comments suggest that online products should be considered in the competitive analysis. For instance, according to the American Bar Association Antitrust Sector, “the nature and variety of products that compete for consumer and small business banking needs is always changing and will continue to change, and the Division should not limit its analysis to products offered by banks when consumers can reasonably turn to products offered by credit unions, thrifts, and nondepository sources.”

If DOJ includes non-traditional banks in the competitive analysis, it may favor traditional banks in their merger reviews.

The Federal Reserve is also taking a more inclusive approach to new financial technology companies. Last week, the Fed announced new guidelines to assess companies’ requests to access the Federal Bank Reserve payment system and it suggested that FinTech company could be granted access after an in-depth review of each case.

There is no date for the publication of the new banking merger guidelines, but they could be released around the same time as the new horizontal merger guidelines that DOJ and the Federal Trade Commission (FTC) are working on, which may be published by the end of the year. The two guidelines will regulate different areas, but they will need to reflect the same analysis and approach to merger reviews.

Read more: FTC, DOJ to Overhaul Merger Guidelines