American Banks Face Steeper Regulatory Hurdles in Proposed Policy Revamp

American banks may face stricter regulatory hurdles when attempting to merge with other lenders, according to a proposal from the Federal Deposit Insurance Corporation (FDIC). The proposal, which recently concluded its public comment period, aims to revamp the agency’s policy on bank merger transactions. The proposed revisions would give regulators more reasons to reject merger plans and take into account the potential effects of a bank merger on financial stability, local communities, and competition. If adopted, this proposal would subject bank mergers to increased scrutiny and make it more difficult for financial institutions to satisfy the conditions for approval.

The Biden administration has expressed concerns about current rules that allow bank mergers to harm consumers by reducing competition. The Office of the Comptroller of the Currency (OCC) has also launched its own proposal for tightening rules on potential tie-ups under the Bank Merger Act. Public comments on the FDIC’s proposal were submitted by a range of stakeholders, including academics, banking associations, consumer advocates, lawmakers, and think tanks.

Critics of the proposal, such as The Heritage Foundation, argue that the new restrictions on bank mergers are overly stringent and will impede free-market activity. They believe that the proposal gives regulators too much power and eliminates certain expedited review procedures. On the other hand, proponents of the proposal, including Acting Comptroller of the Currency Michael J. Hsu and The Greenlining Institute, welcome a stronger policy. They argue that the current framework creates an implicit presumption of approval and leads to banking sector concentration, which negatively impacts communities, especially those of color.

Sen. Sherrod Brown emphasizes the need for close scrutiny of bank mergers, particularly in terms of their impact on consumers and communities. He believes that the merger review process should prioritize the convenience and needs of the community being served. Brown also notes that the U.S. banking sector has become more concentrated in recent decades, and he urges the FDIC’s revised policy to address this trend to avoid consumer harm.

The Conference of State Bank Supervisors (CSBS) raises concerns about the proposed merger policy, stating that it would create more challenges than benefits for the banking industry, particularly for community banks. CSBS President and CEO Brandon Milhorn argues that the FDIC should focus on the specific requirements of the Bank Merger Act and establish an unbiased and objective policy that promotes healthy mergers. According to two former top FDIC executives, Sheila Bair and Thomas Hoenig, the proposed rules could impede positive merger activity and increase financial stability risks. They criticize the proposal for giving bureaucrats too much influence over mergers.

The FDIC’s proposed revised statement of policy introduces a “principles-based” approach for evaluating bank mergers. The agency will likely decline approval if any statutory factor is found lacking. These factors include competitive effects, financial and managerial resources, future prospects, community needs, financial stability, and combating money laundering. The FDIC will block mergers that create monopolies or reduce competition unless public interest benefits outweigh the anticompetitive effects. The resulting institution must also demonstrate sound financial performance, compliance with capital standards, and effective management capabilities. The proposal emphasizes the importance of meeting community needs and improving access to services and products.

Mergers resulting in a combined bank with over $100 billion in assets will face greater scrutiny to guard against the risk of financial instability. The FDIC will consider the nature and scope of operations of the resulting bank, as well as any elements that may influence the risk to the stability of the U.S. banking or financial system. This includes factors such as interconnectedness with other financial system participants and cross-border activities.

Overall, while there are differing views on the FDIC’s proposal, many stakeholders recognize the need for stronger regulations on bank mergers to protect consumers and communities. However, there is a call for careful consideration of the potential impact on the banking industry, particularly for community banks. The final decision on the policy revamp will ultimately rest with the FDIC, which will have to strike a balance between promoting competition and financial stability.