Fintech

Last week, each of the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Department of Justice Antitrust Division (DOJ) revised how they will review bank mergers. Our Financial Services and Antitrust teams highlight what banks considering mergers should know about the changes.

• Bank Merger Act (BMA) filers should anticipate increased scrutiny and a broader analysis from the FDIC, OCC, and DOJ
• Competitive-effects considerations will extend beyond deposit concentrations to nontraditional sources of competition, although the FDIC stopped short of considering certain nonbank competition, such as fintechs
• BMA filers should underscore their proposed merger’s net positive impact on the convenience and needs of the community
• The FDIC has expanded its interpretation of the BMA to encompass transactions that would not have previously required a filing
• The Board of Governors of the Federal Reserve System, the third primary federal banking regulator, did not release updated guidelines

______________________________________________________________________

On September 17, 2024, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Department of Justice Antitrust Division (DOJ) each adopted revised approaches to their reviews of bank mergers.

In separate releases, the FDIC and OCC updated and expanded their existing guidance, signaling more in-depth, holistic strategies in evaluating mergers involving insured depository institutions (IDIs) under the Bank Merger Act (BMA). The OCC simultaneously adopted a final rule eliminating its expedited review and streamlined application processes for certain bank merger applications. The DOJ, which plays a complementary role in the banking regulators’ analysis of anticompetitive effects, likewise updated its competitive-effects guidelines for reviewing mergers under the BMA and the Bank Holding Company Act of 1956 (BHC Act).

The FDIC’s final policy statement on bank merger transactions supersedes its existing policy statement first published in 1997 and last revised in 2008. In a coordinated effort, the OCC’s final rule and policy statement on business combinations amended its procedures for reviewing applications under the BMA and provides guidance for its review process. Meanwhile, the DOJ withdrew from its 1995 bank merger guidelines, opting instead to evaluate bank mergers using the general 2023 merger guidelines applicable to other industries, as described in a newly issued 2024 banking addendum to the 2023 merger guidelines.

The Board of Governors of the Federal Reserve System, which also evaluates merger applications under the BMA and the BHC Act, did not participate in this coordinated undertaking or otherwise publicly alter its existing precedent-based approach.

The DOJ will apply its standard merger analysis to all transactions subject to the BMA and the BHC Act, whereas the banking regulators’ releases apply only to mergers under the BMA. The policy statement by the FDIC, the primary federal regulator for state-chartered IDIs that are not members of the Federal Reserve System, will apply only to such IDIs. Under the updated guidance, however, FDIC-regulated institutions will now need to notify the FDIC of a broader range of transactions, including acquisitions of nonbanking assets or entities that did not previously merit a filing. While not all such transactions will require a formal BMA application, the FDIC will now determine whether such transactions constitute a “merger in substance” on a case-by-case basis. The OCC’s final rule will apply only to those institutions under its supervision, i.e., national banks and federal savings associations.

The change to the DOJ’s process became effective upon its release. The FDIC’s policy statement will take effect 30 days after its publication in the Federal Register. The OCC’s final rule will become effective on January 1, 2025.

How Will the FDIC’s, OCC’s, and DOJ’s Revised Policies Impact Merger Reviews? 

In assessing an application under the BMA, federal banking regulators have long had to consider, among other things: (1) the transaction’s monopolistic or anticompetitive effects; (2) the institutions’ financial and managerial resources and future prospects; (3) the convenience and needs of the community to be served; (4) the risk to the stability of the U.S. banking or financial system; and (5) the effectiveness of combating money laundering activities. However, banking regulators have discretion in interpreting and applying the factors. In the FDIC’s policy statement and the OCC’s final rule, the regulators clarified how they intend to construe those factors going forward.

While the DOJ technically retains the ability to independently challenge bank mergers, it has rarely done so. However, banking regulators are required to consider the DOJ’s assessment of the monopolistic or anticompetitive effects. Following its review, the DOJ’s views are provided to bank regulators in a nonpublic competitive-factors report. For many years, the DOJ conducted this analysis under the 1995 bank merger guidelines. After withdrawing from those guidelines, the DOJ will now use the same standards and theories of harm it applies to other industries, as explained by a clarifying banking-specific addendum.

Monopolistic or anticompetitive effects

Under the 1995 bank merger guidelines, the DOJ and the federal banking regulators focused primarily on commercial bank deposit concentrations of the geographic markets in which the transaction parties operated and how the proposed combination would affect the same. The DOJ, FDIC, and OCC have each indicated a move to a more multifactored approach, considering additional products and sources of competition, including nontraditional sources of competition. In prior public statements discussing the need to revisit its guidance on bank merger reviews, the DOJ had cited changes in the banking system, including “the popularization of interstate banking, financial conglomeration, online and mobile banking, and the digital transformation of the economy.”

Issued in late 2023 and substantially broader and more complex than the 1995 bank merger guidelines, the DOJ’s 2023 merger guidelines provide a robust framework with which to assess proposed mergers. The DOJ’s 2024 banking addendum highlights a number of 2023 guidelines that the DOJ views as particularly relevant to IDI mergers. For example, the addendum emphasizes those guidelines that describe the DOJ’s approach to transactions involving vertical integration, a pattern or series of acquisitions by the same buyer, and deals involving multisided platforms.

The FDIC stated that it will look at all relevant geographic markets (local, regional, and national) based on where the merging entities operate, consider all relevant market participants and their total deposits, and consider the size and competitive effects of the resulting IDI. Both the FDIC and OCC clarified that this factor is considered in combination with the convenience and needs of the community. The FDIC elaborated that this balancing may be particularly relevant in rural communities, where the needs of the community may outweigh interests in increased competition. The FDIC also expanded its competition analysis to consider credit unions, thrifts, and Farm Credit System institutions, though it declined industry participants’ requests to include fintechs and other nonbank financial services companies.

The OCC did not provide further detail on how it will evaluate competition factors, citing the complexity of the competition factor review and the involvement of the DOJ in its deliberations.

Financial resources, managerial resources, and future prospects

The FDIC separately addresses the considerations relevant to the BMA’s financial-resources, managerial-resources, and future-prospects criteria. In addition to an individual review of each of the foregoing factors, the OCC also considers all three in combination, noting their relatedness. In particular, the OCC looks at these factors in the context of the economic and operating environment and in light of the size, complexity, and risk of the institutions (a sentiment echoed by the FDIC). The OCC is less likely to approve a transaction when the resulting IDI would be less than adequate in any of these three categories. Moreover, the OCC will consider whether the acquiring institution has experienced rapid growth, a factor also considered by the FDIC, or has engaged in multiple acquisitions with overlapping integration periods, and how that may impact these factors.

Financial Resources. Achieving a resulting IDI with less financial risk than that posed by the institutions individually underpins the FDIC’s financial resources considerations. The FDIC walked back its original use of “weaker” in response to comments so as not to dissuade financially sound IDIs from acquiring less-stable institutions. Unsurprisingly, both the FDIC and OCC emphasized the resulting institution’s ability to meet capital standards. Notably, the FDIC also reiterated its ability to condition approval upon entry into written agreements specifying enhanced capital requirements.

Managerial Resources. The FDIC and OCC each dedicated substantial attention to the managerial-resources factor. Both regulators will look to management’s perceived ability to integrate the IDIs and, at a structural level, the IDIs’ compliance management systems. Among other considerations, the FDIC will evaluate the proposed management’s existing responsiveness to regulatory questions, its record of managing and overseeing rapid growth, and individuals’ backgrounds and experience (including the performance and supervisory records of IDIs in which they’ve played a role). The FDIC will also specifically consider consumer compliance ratings and Community Reinvestment Act (CRA) ratings, along with the performance of parent companies and their ability to provide support. The OCC emphasized due diligence to assess the target’s weaknesses and an analysis of the acquirer’s ability to offset such weaknesses.

Future Prospects. The FDIC and OCC will consider both internal and external factors. The FDIC will look closely at any changes being made to the resulting IDI, including to its operations, products, and services, whereas the OCC cited management’s ability to implement the resulting institution’s business plan as an important consideration. Both regulators will study the acquirer’s historical performance integrating merger targets. Both regulators will also evaluate the existing economic environment and competitive landscape.

Convenience and needs of the community

The FDIC and OCC provided additional insight into how they expect applicants to address the proposed merger’s impact on the convenience and needs of the community. Perhaps the most significant development is the FDIC’s analysis of whether an application can demonstrate that the resulting institution will better meet the convenience and needs of the community, including the filer’s commitment to doing so. While the OCC focused less on the resulting institution’s improvement in meeting the convenience and needs of the community, it notes a net positive impact is likely to satisfy this factor. Both the FDIC and OCC expect filers to provide specific examples of how the transaction will benefit the community, such as greater access to products and services, and reduced prices and fees. Both regulators emphasized consideration of the transaction’s impact on low- and moderate-income communities and will evaluate historical CRA ratings. Branch expansions, closings, and consolidations during the three years following the merger will play a role in the FDIC’s and the OCC’s analyses. The OCC also independently considers factors such as job losses and opportunities and efforts to support affordable housing initiatives.

Public input remains important because both regulators recognized the potential for public hearings and the need to consider public commentary when evaluating whether to hold a hearing. The FDIC will now presumptively require public hearings for transactions resulting in an institution with $50 billion or more in consolidated assets. Unlike the FDIC, the OCC did not adopt deal-size thresholds for presumptive hearings; instead, the OCC “will balance the public’s interest in the transaction with the value or harm of a public meeting to the decision-making process.”

Financial stability

When considering a post-merger institution’s risk to the stability of the market, the FDIC and OCC evaluate the size of the entities involved, the availability of substitute providers, the post-merger institution’s contributions to the complexity of the financial system, and the extent of cross-border activities. Both regulators will continue to analyze the institutions’ interconnectedness with the U.S. banking system. The OCC separately emphasized its consideration of the degree of difficulty of winding up the post-merger institution’s business in the event of failure or insolvency.

While the FDIC was careful to note that size alone is not dispositive, it adopted a $100 billion threshold, above which institutions will receive heightened scrutiny and can expect greater processing times. The FDIC stopped short of defining “additional scrutiny,” but noted such transactions are likely to involve additional information requests and more frequent communications with both regulators and community members. The OCC retained existing heightened standards for transactions resulting in an institution with consolidated assets of $50 billion or more and elected to not alter that threshold. The OCC also reinforced its ability to impose conditions on the approval of a merger posing financial stability risks, such as requiring asset divestitures or setting minimum capital requirements.

Combating money laundering activities

The FDIC expects that post-merger IDIs will implement effective programs to combat money laundering and the financing of terrorism. To determine this, the FDIC evaluates each institution’s general policies, procedures, and processes; anti-money laundering and counter-the-financing-of-terrorism programs; risk management programs; compliance with the Bank Secrecy Act; and remediation efforts pursuant to an outstanding corrective program. The OCC did not expand upon its policies for combating money laundering activities in its policy statement but did state that any open or pending anti-money laundering actions raised concerns for approving the merger.

How Will the OCC’s Final Rule Affect BMA Filers?

The OCC’s final rule and policy statement eliminated the streamlined application and expedited review provisions under Part 5 of Title 12 of the Code of Federal Regulations. The OCC historically accepted a “streamlined” BMA application under Section 5.33(j), which avoided open-ended prompts in favor of discrete questions. Filers eligible to file a streamlined application, along with transactions deemed a business reorganization, were subject to expedited review under Section 5.33(i), which deemed a filing approved on the fifteenth day after the applicable comment period expires (absent action to the contrary). The OCC does not expect this change to significantly alter the filing burden or timeline because, inter alia, it historically takes action on eligible filings within the 15-day expedited-review period.

The FDIC, which did not previously have a streamlined application option, has retained its unique expedited processing mechanism.

Final Thoughts and Key Takeaways

• Though not an overhaul of its existing approach, filers should expect heightened scrutiny of proposed mergers from the FDIC, OCC, and DOJ.
• The FDIC and OCC’s “new” considerations are consistent with our experience in seeking approval of transactions under the BMA.
• Potential BMA filers should be cautious to infer a lack of interagency coordination from the Federal Reserve, which often prefers to rely on precedent than to issue guidance and is responsible for reviewing mergers under the BMA and BHC Act.
• By announcing that it will apply its general 2023 merger guidelines to banking transactions, the DOJ has signaled that it intends to consider a broader range of competition theories and concerns when performing its competition review of bank deals.

---

Originally published September 26, 2024.

You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.

If you have any questions, or would like additional information, please contact one of the attorneys on our Financial Services Team or one of the attorneys on our Antitrust Team.