DOJ joins OCC, FDIC in updating bank merger guidelines

After Tuesday’s flurry of regulatory action related to bank merger guidelines, attention will likely turn to some of the first merger filings expected to follow those changes, including Capital One’s proposed $35.3 billion acquisition of Discover.

The Justice Department said Tuesday it will withdraw its 1995 bank merger guidelines, saying the rules contain types of analysis that do not reflect how the agency’s antitrust division evaluates bank mergers. The Justice Department also stressed that merger guidelines issued late last year remains “her sole and authoritative statement in all industries.”

The move came the same day that the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency finalized updates to their merger guidelines.

The change in the Justice Department was ” as a result of a joint consultative process with the Department’s close partners at the Federal Reserve, the FDIC and the OCC, The Department of Justice announcement stated that. It was also “based on sound public input, the department’s experience and expertise, and developments in the market, law and economy.”

This The FDIC measure requires more details from banks seeking to merge and clarifies that the FDIC may consider concentrations beyond deposits, including small businesses and households lending when assessing the impact of the merger on competition.

The OCC regulations, which the agency said are intended to make the review process more transparent, eliminated provisions for expedited review and a streamlined merger application process.

The Department of Justice’s antitrust division investigates proposed bank mergers in an effort to preserve competition. bank allowance The document, published Tuesday, also highlighted what the department “considers to be often relevant” when considering the competitive effects of bank mergers, including examining market realities and identifying products and services that could be affected by the merger, as well as assessing whether the merger would cause “significant harm” to particular customer groups.

According to the addendum, the department can challenge the legality of a transaction after it has been approved by a banking agency, which “stays the effectiveness of the banking agency’s approval of the transaction pending review by a federal court.”

The Justice Department declined to comment beyond publication. Jonathan Kanter, the department’s assistant attorney general for antitrust, said the 1995 guidelines for evaluating overlap between branches and deposits in a potential bank merger had become outdated.

“I don’t think that’s the right, most modern, most effective way to think about concentration in banking,” he said on Monday. at the Semaphore event.

The Capital One-Discover deal is pending approval from the Fed and OCC. Capital One executives said they have also been in contact with the DOJ.

The companies argued that the deal, which would create the country’s largest credit card company, increase competitiongiving Discover, the fourth-largest card network, a boost. But opponents have taken aim the idea of ​​a bigger, stronger Capital One and the negative impact that could have on consumers.

What the updates mean for banks

According to Brian Graham, a partner at consulting firm Klaros Group, the new guidelines “increase agency discretion and reduce fixed quantitative measures.”

This means regulators’ merger decisions are becoming less predictable, increasing uncertainty in the industry.

“What will matter most here is not what is written on these pages, but how agencies actually use their powers in practice,” Graham said.

Michael D. Lewis, a partner at the Washington, D.C.-based law firm Sidley Austin, said: the move to a “more open” antitrust review could make it “more difficult to accurately assess in advance which specific products or customer segments may prove to be decisive for competitive analysis.”

Graham expects the industry will be closely monitoring the outcome of the first merger applications filed after these changes are made.

“For example, will it take longer?” he said. “Will there be anything that the industry might see as a ‘thumbs on the scale’ that will make it harder – or by extension easier – to get certain types of applications through? That will be where theory meets practice.”

Underscoring the lack of interagency cooperation, Graham noted that the OCC has provided separate sets of factors that could lead to a presumption that an application will be approved or denied, while the FDIC has not been as specific. The FDIC has not eliminated the expedited approval process, but OCC did. And while the OCC has indicated there may be a “presumption of OK” for mergers of banks smaller than $50 billion, the FDIC has not expressed the same view.

Graham said the updates create the most uncertainty for banks with assets between $50 billion and $250 billion because it is “very unclear” how their merger applications will be treated.

Concerned that the FDIC rules would only slow the merger review process and increase industry uncertainty around bank mergers, Patrick Hanchey, a partner at Dallas-based law firm Alston & Bird, pointed to aspects such as the agency’s requirement to hold public hearings for mergers that would create a bank with more than $50 billion in assets and the positive burden of proof placed on applicants to show that the merger would better meet community needs.

This last one “is an extremely subjective analysis and will be very difficult for banks to challenge,” he said in an email, adding that the FDIC could use that requirement alone to stifle merger activity.

He also said the FDIC could have gone further and broadened the scope of its competitive analysis, given the increasing competition banks face from fintech firms and nonbanks.

One positive in Hanchey’s eyes was the transparency of the OCC around mergers involving institutions with assets exceeding $50 billion, and mergers involving global systemically important banks. Rather than being “non-approvable,” these mergers will generally not be subject to “rapid” review.

Ultimately, the impact of the agency update will likely depend on the size and nature of the banks involved, Lewis said. Smaller and well-capitalized banks may benefit from the increased transparency provided by the FDIC and OCC, “but as regional banks and larger banks grow in size and complexity, those benefits will likely be offset by increased scrutiny and more demanding approval criteria, leading to less predictability and more work to get the deal across the finish line,” Lewis said in an email.

Mixed reactions

Praising the actions of the FDIC and DOJ, Jeremy Kress, a professor at the University of Michigan and a former Federal Reserve lawyer, said that regulators’ policies on bank mergers have not been significantly updated since the 1990s, even though the industry has undergone enormous changes, according to a post on the website social networking site X.

“The updates will help ensure that bank mergers are approved only when they serve the public interest and protect consumers, communities, and the broader financial system,” wrote Kress, who has advised Kanter on Justice Department reforms.

Others lamented the lack of transparency in the update and feared the changes would further lengthen approval timelines. Consumer Bankers Association CEO Lindsey Johnson said in a statement Tuesday that the trade group was “disappointed” by the FDIC and OCC’s actions and that the policy changes “further muddy the waters in an already complex regulatory landscape.”

While the updated guidance indicates that regulators “are increasingly aware that the traditional competitive analysis that banks face needs to be updated to reflect today’s financial services landscape, which includes credit unions, fintech companies and the rise of online banking,” it does not provide the transparency, predictability and more timely approvals that the industry needs, American Bankers Association CEO Rob Nichols said in a statement on Tuesday.

In addition, “it is clear that the FDIC board has not yet reached a consensus on these issues,” Nichols said. The board voted 3-2, along party lines, to finalize the rule.

“As the regulatory tsunami continues to put increasing pressure on consolidation, regulators must ensure that banks deciding to merge have clear standards for evaluating proposed mergers, that regulatory decisions are made expeditiously, and that the approval process does not reflect anti-merger bias,” Nichols said.

The Fed is stepping back

Some have highlighted the lack of coordinated action by the Federal Reserve and noted that the onus is on the central bank to follow suit.

“The fight is not over,” Kress wrote on X. “The Fed, which oversees the largest bank holding companies, has refused to update its merger framework. The OCC’s new framework, also finalized today, is too weak. And the pending Cap One-Discover deal will be the first major test of that new approach.”

However, at least one Fed governor has made it clear over the years that she believes the 1995 merger guidelines need to be updated. Michelle Bowman, already in 2022he said Digital banks, credit cooperatives and non-bank institutions should be included in the modernized market competition metric when considering bank mergers.

IN statement on TuesdaySenator Elizabeth Warren, a Democrat from Massachusetts, has slammed the Fed for its lack of action compared to other federal agencies, calling it central bank under Jerome Powell “an indecisive and ineffective regulator.”

A Fed spokesman declined to comment.

Michael Barr, the Fed’s vice chairman for supervision, told Warren during a Senate hearing in May that the central bank was working with the FDIC, OCC and DOJ on merger guidance and did not anticipate issuing a separate proposal on the matter.