At a glance
- The US has moved to clean up bank M&A rules to make the system more transparent and clean up historic loopholes
- The OCC’s enhanced powers to scrutinise bank mergers at $50bn and above could establish a de facto size threshold and introduce new factors, such as job losses, into the evaluation process
- The proposals are unlikely to affect community banks for now, but consolidation is predicted to continue in the longer term
In a quirk of US banking rules, certain bank merger applications are deemed automatically approved in the US by the 15th day unless the regulator says otherwise. The Office of the Comptroller of the Currency adopted this rule in 1996 and it is part of a system the regulator wants to modify.
On January 29, the OCC published a call for evidence that aims to remove this loophole and introduce a proposed policy statement that explains the general principles for reviewing bank applications.
It also plans to publish data on bank mergers subject to OCC review in a research-friendly, publicly accessible format on OCC.gov later this year. The most significant of the OCC’s proposals is buried deep within the consultation paper — it suggests that the OCC should scrutinise bank mergers of $50bn and above.
In the call for evidence, the OCC lists what it considers to be good indicators for a successful merger application. One of them is that the resulting institution will have total assets of less than $50bn.
These measures are part of what acting comptroller of the currency Michael J. Hsu calls its efforts to “create clearer guidelines” for market players. In a speech that accompanied the publication of the proposals, he said: “Merger applications exist along a spectrum. Some have significant deficiencies. Others are straightforward because the acquiring bank is a model of safety and soundness and has earned the trust of the community and its supervisors.
“The majority lie somewhere in between and require varying degrees of scrutiny and multiple rounds of inquiry. The transparency provided in our proposed policy statement effectively proposes chalk lines demarcating these three groups.”
His speech does not mention anything about the $50bn threshold, yet does briefly say the OCC is working with the Federal Reserve, Federal Deposit Insurance Corporation and Department of Justice to update its “analytical framework” related to bank mergers. Hsu goes on to ask if the number of banks in the US — currently about 4500 — is the right one. The backdrop for all of this work is tougher scrutiny from bank regulators concerning capital adequacy rules and how managers handle risk.
How rules may affect bank M&A
A regulatory note from US law firm Morgan Lewis points out that the OCC’s proposal regarding its review of Bank Merger Act filings is, to a degree, simply a codification of existing agency practice and views.
But it also lays out the possible consequences of the OCC’s enhanced powers to apply greater scrutiny to bank M&A deals at $50bn and above.
The note says that, if adopted, the rule could set a de facto size threshold for mergers of up to $50bn in total assets, which contrasts with the $100bn threshold related to financial stability set by the Federal Reserve.
The Fed introduced tougher capital requirements under Basel III rules in response to the collapse of regional banks such as Silicon Valley Bank in March 2023.
These say that all lenders with at least $100bn of assets should maintain a longer-term layer of debt to absorb any losses in times of stress.
The Morgan Lewis note adds the proposal “somewhat ominously” introduces the possibility that the OCC, and perhaps the federal banking agencies more broadly, may now consider new factors in a merger application.
These could include job losses or reduced job opportunities, which the OCC previously stated it would not consider as part of evaluating a merger application.
Christopher Wolfe, managing director, North American banks at Fitch Ratings, says it is “interesting” the OCC proposals were not jointly announced with the Fed and FDIC, as usual.
He adds: “While we cannot speak for the OCC, it appears a line is being drawn at $50bn, although it is not clear as to why that threshold was chosen. As proposed, it will certainly raise the bar for a large deal to pass muster. It will be hard to find a bank above that threshold where everything is perfect on all fronts. When you take a step back from all this, one question to ask is: what should the US banking system look like?”
Which banks will be affected?
The US has a more diffuse banking system compared to other developed economies, with its many community banks embedded in local communities. According to a note from Fitch Ratings, the vast majority of these have less than $15bn in assets and have been consolidating for a long time.
This is rooted in greater competition for deposits and higher expenses stemming from technology and competitive pressures. Their strengths lie in relationship-driven banking and knowledge of local markets, while their weaknesses stem from more limited products and geographic reach compared to regional banks.
Wolfe does not think the OCC proposals will accelerate the consolidation of community banks. “What is really holding back bank M&A is the lack of certainty on asset performance and depressed share prices,” he says.
“Together, the merger math just does not work for bank M&A right now. As we conveyed in our report on community banks, once the fog on asset performance and equity valuation dissipates, we think consolidation will pick back up to trend.”
The global financial crisis accelerated consolidation among US banks, with a 4 per cent average annual reduction in the number of commercial banks in the period since 2011.
Fitch Ratings points out that if this trend carries on under the conservative assumption of a 3 per cent attrition per year, the US is likely to see an additional 26 per cent reduction in the number of banks by 2030.
Right focus
A report published by Boston Consulting Group in mid-January stated that “consolidation is an obvious and important consideration, especially in the US and Europe”. But it also warned that regulators must “consider the trade-offs between the level of competition and banking stability”.
Saurabh Tripathi, senior partner and global leader of the financial institutions practice at BCG, said the OCC is looking at the right issue.
“The US has more than 4500 banks and another 4760 credit unions, despite consolidation. In the medium term, such fragmentation is not sustainable, especially with expected regulatory tightening,” he says.
“So, this proposed transparent approach for bank mergers and acquisitions by the OCC is a welcome step as it could indeed help drive the right mergers and acquisitions forward expeditiously.”
