Tom Curry
Momentum is building at the federal level to reevaluate and modernize how bank mergers are evaluated by federal banking regulators. Competition and market power have emerged as key concerns.
Starting in July 2021, when President Joe Biden issued an executive order instructing U.S. agencies to consider the impact consolidation may have on competition, the Antitrust Division of the U.S. Department of Justice has initiated its review process. The Federal Deposit Insurance Corp. also voluntarily began its own review of the interagency bank merger guidance. Acting FDIC Chairman Martin J. Gruenberg cited bank mergers as a key FDIC priority, noting that the last such review occurred 25 years ago.
Christine Docherty
As discussed in Nutter’s Dec. 28 column in this newspaper, Chairman Gruenberg’s action follows the adoption of a controversial bank merger Request for Information by a majority of the FDIC’s board earlier that month. Board members sought public feedback on the 1995 joint guidelines on the competitive review process issued by the DOJ and the federal banking agencies.
Congress also has been active. Senator Elizabeth Warren (D-MA) and Rep. Jesus “Chuy” Garcia (D-IL) announced the reintroduction of the Bank Merger Review Modernization Act in September 2021. This bill would, among other things, require Consumer Financial Protection Bureau approval when at least one applicant offers consumer financial products, only allow institutions with an “outstanding” rating in two of their three last Community Reinvestment Act exams to merge and require that regulators examine the anticompetitive effects of a proposed merger on individual consumers and small businesses.
Tim Rennie
Regulators Query Competition
This increased legislative and regulatory scrutiny of the competitive effects of bank mergers may have an impact on future merger activity. Some common themes are starting to emerge among the antitrust regulators and the federal banking agencies.
Under the Bank Merger Act and, with the exception of item 4 below, the 1995 joint guidelines, the federal banking agencies are currently required to consider: (1) whether the merger would substantially lessen competition or tend to create a monopoly in any banking market; (2) the effects of the merger on the convenience and needs of the communities to be served; (3) the financial and managerial resources and future prospects of the institutions involved; and (4) the extent to which the merger would result in greater or more concentrated risk to the stability of the U.S. banking or financial system.
The FDIC’s December RFI requested comment on what factors should be considered in evaluating whether a merger will have an anticompetitive effect. The RFI specifically asked whether rapid changes in the economy may have made the use of a geographic market definition outdated and what potential alternative market definitions should be considered. Regulators also asked whether market share adequately represents the extent of competition in the market and the competitive impacts of thrifts, credit unions, out-of-market institutions and non-bank entities. The RFI shares the DOJ’s December 2021 request’s goal to ensure that the guidelines “reflect current economic realities [and]…ensure Americans have choices among financial institutions.”
Significantly, the FDIC’s RFI also requested comment on the approach for evaluating the convenience and needs of the community to be served by a proposed merger. Among the topics raised: whether an “unsatisfactory” Community Reinvestment Act record is an appropriate standard; whether this factor should take into consideration the impact branch closures and consolidations may have on affected communities; the extent to which the agencies should differentiate their considerations when evaluating transactions involving large versus small banks; and whether and how the CFPB should be consulted.
Federal Changes Could Impact Mass.
Federal Trade Commission Chair Lina M. Khan reflected the RFI’s themes in her recent comment on the DOJ request. She highlighted the need for the guidance to be sensitive to the ways a merger could “affect competition to serve the financing needs of new and small businesses and local communities.” Among other things, she suggested that the guidelines should consider the mix of banks – both large and small – that will be in a market post-transaction, differences in quality between products offered by local community banks and non-traditional lenders, ways a bank merger review might “capture variations in lending behavior toward small businesses,” preferences of some consumers for local branches and the impact on competition of branch closures.
Changes at the federal level may also have an impact at the state level. The Massachusetts commissioner of banks also is required to consider whether competition among banks will be unreasonably affected by a proposed merger.
A feature of the Massachusetts law also may inform revisions to the federal guidelines. In determining whether public convenience and advantage will be promoted, the commissioner considers whether the applicant has made a showing of “net new benefits.” The term is defined to include consideration of initial capital investments, job creation plans, consumer and business services and commitments to maintain and open branch offices within the institution’s CRA assessment area, among other factors. These factors are similar to those the FDIC identified in its RFI.
It is likely that a revision of the bank merger guidelines will be proposed in the near term given the emphasis the Biden administration’s antitrust regulators and the FDIC are giving to competition.
Thomas J. Curry and Christine A. Docherty are partners in Nutter’s corporate and transactions department. Timothy J. Rennie is an associate in Nutter’s corporate and transactions department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.
