The Federal Deposit Insurance Corporation’s (FDIC) proposed revisions to its bank merger review policy indicate a significant evolutionary stride in how regulatory oversight could influence the banking industry landscape. This “principles-based approach” to reviewing proposed bank mergers is poised to alter existing policies and add potential hindrances to any banks seeking to merge or purchase significant assets of another organization.
Prior to this, the FDIC evaluated merger applications based on statutory factors stipulated in the Bank Merger Act. A merger application was more likely to earn approval if it didn’t result in monopolistic tendencies or substantially lessen competition within a specific geographic region.
However, with the proposed revisions, the FDIC stance suggests an intention to evaluate mergers based on a wider array of factors beyond those outlined in the Bank Merger Act. The proposal notably focuses on transactions resulting in institutions with total consolidated assets of $100 billion or more, characterizing them as a concern due to their systemic risk.
The proposed changes assume bank mergers are fundamentally anti-competitive and those involving larger institutions are should be discouraged, a stance that raises questions regarding the current condition of the U.S. banking market and the impacts of the numerous small and under-regulated participants on the financial system’s stability.
The FDIC’s new criteria for evaluating merger applications now include a focus on the resulting bank’s size and the competitive effects it may have on its operating landscape, including competitors outside the banking industry. Such an analysis could extend to considering other products offered by the merging entities, assessing if consumers still have meaningful market choices.
The proposal also significantly heightens the process’s rigor, requiring potential completion of divestiture before approving a merger application. The slightly overbearing approach prohibits selling institutions from entering into noncompete agreements with employees of the divested entity and from enforcing existing noncompete agreements.
Among the projected impacts of the proposal are stricter scrutiny of bank mergers resulting in extended processing times, increases in the cost of merging, and the requirement for the disclosing party to demonstrate how the merger would benefit the public.
The proposal echoes sentiments expressed by the Office of the Comptroller of the Currency in January, indicating a shared regulatory skepticism around bank mergers. It’s concerning that the FDIC hasn’t addressed fundamental questions at the core of this proposal while assessing the condition of the U.S. banking market.
To understand how this proposal might unfold and its implications on the banking industry, it is worth following the deliberations over the next months.