The Federal Deposit Insurance Corporation (FDIC) is ready and eager to make some updates to the guidelines it applies when reviewing potential bank merger transactions. This comes nearly three years after President Biden encouraged federal agencies to update their guidelines to provide more robust scrutiny of bank mergers. In the wake of that presidential nudge, the U.S. Department of Justice and the Federal Trade Commission released their updated 2023 Merger Guidelines, and the OCC announced that it would be making updates to its guidelines, as well. Right on queue, the FDIC announced that its Statement of Policy on Bank Merger Transactions is up next.
The FDIC’s current Statement of Policy is a bit stale—it hasn’t been updated since 2008 (and even those updates were made before the Great Recession). The proposed updates are meant to recognize the significant changes in the banking industry that have occurred since that time, especially with respect to recent growth and consolidation of banks across the country. If—and when—adopted, the FDIC’s new Statement of Policy will help provide a glimpse into the FDIC’s current expectations surrounding potential bank merger transactions. Here is a quick rundown of what we are seeing:
- Complete Merger Applications. The FDIC wants applicants to do their part and file complete and informative Merger Applications. For instance, in addition to detailed financial projections and analyses, the FDIC also wants to see relevant studies, surveys, and reports that support the proposed transaction. Over the years, critics across the industry have accused the FDIC of using informal delay tactics to slow down its review process (e.g., by stringing applicants along with follow-up inquiries before acknowledging its receipt of a “substantially complete” Merger Application). Wherever you land on that debate, the FDIC’s new Statement of Policy should help quiet those rumors by setting better expectations for all applicants.
- Community Benefits vs. Anticompetition. The FDIC wants applicants to clearly describe how the proposed bank merger will benefit the convenience and needs of the community, especially in a situation where the transaction raises any anticompetitive concerns. Importantly, the FDIC will only approve an anticompetitive merger if the applicant can establish that the advantage to the convenience and needs of the community clearly outweighs those anticompetitive effects.The FDIC admits that this creates a heavy burden, but that it is a crucial part of its review process.
- Divestitures. In a situation where a potential transaction raises any anticompetitive concerns, the FDIC may require divestiture of branches or business lines in order to resolve those concerns – and in that case, the divestitures will generally need to happen before the FDIC will allow the transaction to be finalized. On top of that, the FDIC makes clear that it will generally prohibit the divesting party from entering into or enforcing any non-competition agreements with affected employees. As with any transaction, the parties should be mindful and strategic in structuring the transaction to minimize—or otherwise address—any anticompetitive concerns by analyzing all market participants, especially in situations with overlapping geographic markets. In that case, the FDIC notes that it may be useful to describe the influence of thrifts, credit unions, fintech firms, Farm Credit System institutions, and other online entities in those markets when addressing any anticompetitive concerns in the Merger Application.
- Financial Resources. Bigger is not always better. In fact, the FDIC has made clear that it will “not find favorably” if a proposed transaction will result in a larger, weaker institution. Rather, the resulting bank should reflect sound financial performance and condition consistent with its size, complexity, and risk profile. As part of the FDIC’s review process, it will be paying particular attention to the financial history, condition, and performance of each party, as well as the combined resources of the resulting bank (with a focus on capital, asset quality, earnings, liquidity, and sensitivity to market risk). If appropriate, the FDIC may ultimately require the resulting bank to implement higher than normal capital levels, capital maintenance requirements, liquidity or funding support, and other commitments before the FDIC will allow the transaction to be finalized.
- Managerial Resources and Integration. Don’t forget about the M in CAMELS—as part of its review process, the FDIC will also expect the resulting management team to have the appropriate capabilities, background, and experience to move the resulting bank forward in a safe and sound manner (based on its size, complexity, and risk profile). Importantly, the FDIC makes clear that management must develop and implement an effective plan and strategy to integrate the acquired bank, which really hammers home the benefit of having merging banks with shared values, visions, and operational systems.
- Future Prospects. The FDIC also wants to ensure that the resulting bank will be able to operate in a safe and sound manner on a sustained basis following the transaction. As part of its review process, the FDIC will take a realistic look at the proposed business plan (including pro forma financial projections) in light of our current economic environment, the competitive landscape, the anticipated scope of operations, and the acquiring bank’s history of integrating past mergers (among other factors). As always, the applicant’s business plan should carefully describe any anticipated changes in strategy, operations, products, services, activities, income, or expense levels.
- The Community. How are folks going to benefit from the proposed transaction? In particular, the FDIC wants to know how the resulting bank will better meet the convenience and needs of the community than would occur absent the merger. For instance, if a proposed transaction would result in higher lending limits, greater access to products and services, or reduced prices or fees, those factors would certainly help tip the scales in favor of the transaction. On the other hand, if a proposed business plan involves significant branch closings or consolidations, those factors may tip the scales the other way, especially if those branches are located in low- or moderate-income neighborhoods.
- Recent Bank Failures. The recent bank failures are top of mind, and the FDIC is aware of the impact those types of events can have on our banking system. As part of its review process, the FDIC will carefully analyze whether a resulting bank could compromise the stability of our banking system if it were to experience financial distress or (worse) a failure. There are a handful of factors that the FDIC will analyze as part of this review (e.g., the size of the banks involved, their complexity and interconnectedness with our banking system, etc.). Interestingly, the FDIC made it a point to call out any potential transaction that would involve a resulting bank in excess of $100 billion, which would be subject to “added scrutiny.” Once again, bigger is not always better.
- AML. Last but not least, the resulting bank must demonstrate that it will operate under a satisfactory AML program. As part of its review, the FDIC will take a close look at each bank’s supervisory history, along with any lingering AML deficiencies or ongoing enforcement actions. Although having a problematic AML history is not a complete dealbreaker, the FDIC has made clear that these problems are generally inconsistent with a favorable finding on the Merger Application. As always, an applicant should carefully describe its plan for integrating the combined operations into a single, comprehensive, and effective program to combat money laundering and terrorist financing.
There you have it! As always, we all have the opportunity to submit comments with respect to the FDIC’s new Statement of Policy, but act fast—the public comment period closes on May 20, 2024.
