Modernization of U.S. Bank Merger Review Process Begins | Skadden, Arps, Slate, Meagher & Flom LLP

On September 17, 2024, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued official policy statements regarding the examination of transactions under the Bank Merger Act (BMA). FDIC policy statement (relevant to mergers where the surviving bank is a state-chartered non-member bank) and OCC policy statement Published on the same day the Department of Justice (DOJ) announced its decision (regarding mergers where the surviving bank is a national bank) withdrawal from 1995 Bank Merger Guidelines — guidelines that have been relied upon for nearly three decades to assess the competitive impacts of bank mergers and that provide a safe harbor for transactions that do not exceed certain deposit-based market share concentration levels. 2023 Merger GuidelinesWhat had been criticized as an overly aggressive and broad-ranging approach to antitrust enforcement has now become “the single, authoritative disclosure across all industries,” according to the Justice Department. The Justice Department has issued a comment How these guidelines apply to future bank mergers.

Collectively, these coordinated actions represent a notable development in bank merger policy. However, they raise more questions than answers, most notably that the Federal Reserve Board (the primary agency that approves bank holding company mergers) was not part of these actions.

Below are 10 takeaways from these developments. Other implications and implications will emerge as these developments are better understood by the industry and considered in the context of the proposed transactions.

1. The Justice Department’s withdrawal from the 1995 Bank Merger Guidelines disrupts an interagency approach that has been in place for decades. For the past three decades, the DOJ and banking regulators have generally coordinated in antitrust review of bank mergers. The 1995 Bank Merger Guidelines provided a mechanistic and predictable approach focused on deposit market share in predefined geographic banking markets. Such regulatory alignment has facilitated review and approval of bank mergers and prevented the DOJ from challenging transactions in court after banking agency approval.

With the DOJ’s withdrawal from the 1995 Bank Merger Guidelines and adoption of the more enforcement-focused 2023 Merger Guidelines—as well as statements from leadership at the DOJ, OCC, and FDIC, but not the Federal Reserve Board, that bank mergers will be reviewed using a broader and less predictable set of analytical approaches—it is unclear how regulators will approach bank merger antitrust reviews going forward. Even without disagreement among regulators on the competitive impacts of transactions, there is a greater risk of lack of coordination across agencies, leading to longer merger review times and difficulties structuring transactions that will be approved reliably.

2. The Federal Reserve Board’s silence is striking. The Federal Reserve Board has not issued new guidance on its approach to bank merger reviews and has not withdrawn from the 1995 Bank Merger Guidelines. Past statements from directors and staff indicate that the Federal Reserve Board does not actively plan to change its approach to bank merger reviews. Banking regulators have generally not approved a merger transaction without consensus among the other approving regulators. Given that the Federal Reserve Board, the primary regulator of bank holding companies, plays a central role in reviewing significant bank merger transactions, a potential disconnect between the Board and other regulators raises questions about the processing of applications.

3. Audits on major bank mergers will continue. The policy statements formalize banking regulators’ current approach to applying increased scrutiny to transactions involving large banks. The FDIC will apply increased scrutiny to transactions that result in a bank with more than $100 billion in assets, while the OCC will apply increased scrutiny to transactions where the recipient is a global systemically important bank (G-SIB) (or a subsidiary thereof), the resulting entity has $50 billion or more in assets, or the merging parties are of similar size (well., union of equals).

4. Banks can expect longer application review processes, including greater use of public meetings and the repeal of expedited OCC merger review procedures. The DOJ’s withdrawal from the 1995 Bank Merger Guidelines would lead to more involved and time-consuming competitive analyses by both applicants and banking institutions and potentially less interagency coordination, all of which could lengthen review times. Policy statements indicate an increased use of public meetings for large bank mergers, which could lead to logistical delays associated with setting up meetings, lengthen processing times, and cause banking institutions and merging parties to spend more time with the public on the merits of the merger. The OCC also repealed its expedited merger review procedures, but the impact of this change is limited to larger transactions that are generally not eligible for expedited procedures.

5. The FDIC may impose greater obligations to meet the needs and convenience of the community to be served. In evaluating the “convenience and needs” factor under the BMA, the FDIC considers that “the merger between (banks) is a combination of the (banks) better To demonstrate this, applications must provide “specific and forward-looking information” and “any request and commitment made to the FDIC to support an evaluation of the anticipated benefits of the merger may be included in the (consent order).” This “better” standard is likely to raise questions about the legal basis and how the FDIC will apply it in practice.

6. Enforcement actions and unresolved compliance issues continue to risk derailing mergers. The policy statements capture banking regulators’ long-standing position that enforcement actions against a buyer could prevent approval of a merger. The OCC’s policy statement states that multiple enforcement actions against a buyer in the prior three-year period could prevent a merger, and both policy statements state that pending enforcement actions could also potentially prevent an approval. The statements are silent on whether open investigations provide a sufficient basis for a banking regulator to reject a merger application, but regulators may be more reluctant to approve a transaction while a significant investigation is ongoing.

As for outstanding compliance issues, these will continue to be problematic, as will the significant number of open issues requiring attention (MRAs). Timely approvals will largely depend on there being no significant weaknesses in the areas of anti-money laundering, fair lending, and consumer compliance. In this regard, the policy statements do not reflect a change from current practice.

7. There will be more checks on integration. Banking regulators are increasingly asking applicants detailed questions about their integration plans, particularly regarding technology and operating systems, customer account migration, human capital issues, and various back-office functions. They are also reviewing applicants’ records of integrating previous acquisitions. The new policy clarifications reflect many of the concerns regulators have raised during the application process in recent years. Specifically, the OCC’s policy clarification notes that applications involving acquirers who have made multiple acquisitions with overlapping integration periods are less likely to be approved. For mergers of two similarly sized institutions, the OCC believes that the integration is more likely to result in further changes to the combined bank and should be reviewed more closely by the OCC.

8. The new guidance addresses transactions that merit greater financial stability scrutiny. The new policy statements provide guidance on items that could lead to a determination that a proposed transaction would adversely affect the stability of the U.S. banking or financial system. The FDIC does not consider the size of the merger parties to be the “sole basis” for determining that a transaction poses increased U.S. financial stability risks, but transactions involving institutions with $100 billion or more in revenue are expected to be subject to “additional review” in the form of “requests for additional information, more frequent interviews and correspondence with applicants, and additional meetings and discussions with regulators and community groups.” The OCC declined to set $100 billion as a threshold for its financial stability analysis, but described a combined bank’s total assets of less than $50 billion as an indicator of a transaction that “will tend to withstand easier review” and is “more likely to be approved quickly.”

9. A history of rapid growth and poor financial projections will lead to approval hurdles. Applications from buyers who have experienced recent rapid growth should be subject to increased scrutiny and are less likely to be approved, according to the OCC. Similarly, applications that include incomplete, unsustainable, unrealistic or unsupported financial projections are problematic. According to the FDIC, such projections will likely result in adverse findings in the FDIC’s review of various statutory factors.

10. More attention may be paid to anticipated job losses and employment issues in merger reviews. The BMA requires consideration of the impact of a proposed merger on the “amenity and needs” of the communities to be served. This is a forward-looking test, and banking institutions have traditionally considered a range of data points, from proposed branch closures to changes in product and service offerings. The BMA does not explicitly require consideration of job losses, a point the OCC acknowledges in its policy statement. However, the OCC and FDIC’s policy statements make clear that the impact of a proposed merger on employment is important to understanding how the transaction will serve the amenity and needs of the community. Going forward, acquirers should expect to provide quantitative information or other detailed information about job losses or reduced employment opportunities, to the extent known or knowable.