New bank-merger regulations could be undone if Biden loses in November

By Steve Gelsi

Larger deals would be scrutinized more closely under proposed rules on reviewing bank mergers

A freshened-up review process for bank mergers, proposed by federal regulators, may only go into effect if President Joe Biden is re-elected in November, analysts said Friday.

The 93-page proposal from the Federal Deposit Insurance Corp. would provide for closer scrutiny of dealmaking by institutions with more than $100 billion in assets and for the incorporation of forward-looking assessments of community impact, competition and other factors. It would also likely result in more public hearings on merger applications.

The planned rule changes come at a time when banks are facing pressure to merge as a way to handle exposure to office-space loans and other industry headwinds.

Against this backdrop, last year's FDIC-brokered acquisition of Signature Bank by New York Community Bancorp Inc. (NYCB) has run up against a shortage of capital, because NYCB reached a size with the acquisition that triggered stronger balance-sheet requirements.

Also read: New York Community Bancorp's stock crushed on surprise loss, dividend cut and cost of two loans

The rule proposal also comes as regulators review the blockbuster $35 billion acquisition of Discover Financial Services (DFS) by Capital One Financial Corp. (COF).

TD Cowen analyst Jaret Seiberg said that the proposed FDIC rules, which were approved Thursday, will likely take most of 2024 to be adopted.

"The long-term intent is to require that deals improve communities and the merging banks rather than ensuring that they comply with the law. That probably requires a Biden win," Seiberg said.

The Republicans on the FDIC board voted against the measure, Raymond James analyst Ed Mills noted.

"This draft adds to the pressures on bank deals and follows efforts by other regulators to implement stricter rules," Mills said. "The Thursday draft rule was issued on a 3-2 vote, with the board's two Republican members voting against it - making it unlikely to get implemented if Republicans retake the White House in November."

While the rules are intended to protect competition among banks and keep fees as low as possible for bank customers, bank-industry representatives have been mostly critical thus far.

"The FDIC's proposal reinforces an alarming trend among federal policy makers of discouraging [merger and acquisition] activity," said Gregg Rozansky, senior associate general counsel for the Bank Policy Institute, an industry group. "Banks considering mergers - and their customers and employees - need a clear, transparent and predictable review process, and this policy statement would enshrine the opposite."

Jonathan Kanter, assistant attorney general for the antitrust division of the U.S. Justice Department, said at a panel talk Thursday that existing methods of reviewing mergers are outdated.

"We'd be doing ourselves a disservice and the public a disservice if we simply limited our analysis to a paint-by-numbers approach that looks at bank deposits and geographic branch overlaps," he said. "We need to take a step back and ask ourselves, how does competition work in this market if two banks are merging?"

In what Kanter described as a "flexible" approach, regulators will weigh the different services and areas where merging banks compete and consider whether the transaction threatens to harm competition.

Rohit Chopra, director of the Consumer Financial Protection Board and a member of the FDIC's board, said the proposed rules are intended to make the reviews of mergers faster and more predictable, because the current process is often "completely draped in mystery about how the agencies will look at the application."

The new regulations are also intended in part to prevent the U.S. banking system from becoming as consolidated as the systems in China and Europe, where a handful of banks dominate the market.

At last check, the U.S. had about 4,135 banks insured by the FDIC.

"I really worry that we've been lurching toward a European or Chinese market structure here. I think there's been a sense of, 'Let's go there, because we can create all these efficiencies,'" Chopra said.

A healthier market structure allows small and midsize banks to be successful and does not give larger players an unfair competitive advantage, he said.

"I like the idea of there being a lot of heterogeneity and not a kind of consolidation creep," Chopra said.

Randy Benjenk, a corporate lawyer and partner at Covington, disagreed with the argument that the new review rules would create more clarity.

"Acquirers want to know what they're buying and what assets they might need to divest to pass antitrust muster, and the FDIC is making that much harder to know up front," Benjenk said in an email to MarketWatch.

The FDIC is also proposing a "very low bar" for holding public hearings on mergers.

"Public hearings can be a distraction for management teams that are focusing on integration planning and generally do not add useful information that regulators can't get through the written comment process," Benjenk said.

The FDIC proposal is the latest in a series of major banking overhauls carried out by the Biden administration, including the Basel III endgame proposal to require more capital on bank balance sheets.

Other efforts now under way include one to crack down on fees, as well as an update of the Community Reinvestment Act to protect access to banking in less privileged communities.

Also read: Feds wrap up overhaul of Community Reinvestment Act and give banks more time to comply

Also read: Fed cop Michael Barr defends higher capital requirements as bankers bristle

-Steve Gelsi

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03-23-24 0932ET

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