The FDIC's Tougher Policy on Mergers - Why It Matters for Banks and Fintechs

The FDIC proposed revisions last month to its existing policy on how it evaluates merger transactions that require the FDIC's approval under the Bank Merger Act (BMA). The proposed policy outlines how the FDIC would evaluate these transactions under the BMA's statutory factors relating to competition, financial resources, the convenience and needs of communities, financial stability, and money laundering, as well as other considerations that reflect FDIC policies and goals.

Earlier this year, the OCC released a similar proposal to revise its own policy. These developments come as the federal banking agencies have been reviewing their policies on mergers since President Biden's 2021 executive order on competition.

Comments on the FDIC's proposed policy are due June 18, 2024.

Key Takeaways

• The proposed policy would confirm or further develop many of the FDIC's approaches and apparent policies, including on size, complexity, and certain business models like some fintech partnerships. It generally would appear to apply more broadly, involve more detailed applications—replete with studies, appraisals/valuations—and lead to longer review times with more regulatory and public scrutiny, stricter standards, and less flexibility. Some of the elements and standards are not entirely defined or explained.
• The FDIC's policy is important because under the BMA, the FDIC reviews merger between any insured depository institution—generally banks or thrifts ("banks")—and any non-insured entity, such as a fintech or credit union. In addition, any proposed merger where the resulting bank would be an FDIC-supervised bank is covered.
• Covered transactions would broadly include mergers and consolidations, so-called "mergers in substance," and assumptions or transfers of deposits (generally, "mergers").
• The FDIC would generally require favorable findings under each of the BMA's statutory factors before approving an application and would generally recommend denial of an application where there is an unfavorable finding for one or more statutory factors.
• In addition to the BMA statutory factors, the FDIC would expect that the resulting bank would not just meet, but "better meet the convenience and needs of the community."
• The FDIC would expect to hold public hearings for applications resulting in a bank with more than $50 billion in assets or for which a significant number of CRA protests are received from the public.
• Applications involving complex, highly interconnected, and larger banks would likely find it harder to receive favorable determinations under the BMA's statutory factors.

The Policy's Scope

The proposed policy would apply to merger applications for covered transactions involving (1) any FDIC-insured bank and any non-insured entity and (2) banks where the acquiring, assuming, or resulting bank will be an FDIC-supervised entity (e.g., between a state member bank and state non-member bank where the resulting bank is a state non-member bank). Multiple applications, and therefore multiple approvals—possibly from different regulators—may be required for mergers involving a series of related transactions, such as transactions effected through interim banks.

Transactions that are "mergers in substance" would also be subject to the proposed policy. These mergers include transactions where the target is dissolved and the acquiring bank absorbs the target's assets, removing the target from competition. The policy would also apply to an FDIC-supervised bank's assumption of deposits from another bank, or any bank's assumption of a deposit from a non-insured entity, unless "an express agreement for a direct assumption has been reached," and banks seeking to transfer deposits to non-insured entities. Both assumptions of assets and deposits would be construed far more broadly under the proposed policy, if retained as written.

Reviewing Mergers

The FDIC would generally require banks to receive at least favorable findings under each of the BMA's statutory factors in order for a merger application to be approved. The FDIC would not use conditions, whether standard or non-standard, to resolve statutory factors that present material concerns, and the FDIC staff would recommend denial of applications that yield unfavorable findings under one or more of the BMA's statutory factors.

Compliance deficiencies, poor examination ratings, operational concerns, unsafe or unsound conditions, and other issues or concerns could prevent favorable findings under one or more of the statutory factors. Additionally, a "lack of sustained performance under corrective programs" and an "inability or unwillingness … to agree to proposed conditions or execute written agreements" would likely result in unfavorable findings.

The FDIC would approach the BMA statutory factors in the following ways:

1. Monopolistic or anticompetitive effects. The FDIC would not approve any transaction that may result in a monopoly. The FDIC would consider not only deposit concentrations—other indicators also could be used as proxies.
2. Financial resources. A favorable finding would require the resulting bank to reflect sound financial performance and condition. Such a finding would not apply if the resulting bank were "weaker" from an "overall financial perspective." Ability to meet capital standards would be a key, and the FDIC could impose higher capital standards as a non-standard condition. The FDIC could also consider the "financial impact" of related entities, including parent entities and any key affiliates.
3. Managerial resources. The FDIC would expect directors, officers, and, as appropriate, principal shareholders to be well qualified and capable of administering the resulting bank's affairs in a safe and sound manner, effectively implementing post-merger integration plans and strategies, and ensuring the resulting bank can comply with applicable consumer financial protection laws. Exam ratings, including the Management rating, would be considered as part of this evaluation.
4. Future prospects. The resulting bank would need to be capable of being operated in a safe and sound manner on a sustained basis. The FDIC would consider information about the acquiring and resulting banks, the "economic environment," and the "competitive landscape." The FDIC would also consider any plans for significant changes to the resulting bank's strategies, products, and financials, and would scrutinize pro formas and valuations.
5. Convenience and needs of the community to be served. A favorable finding would require the resulting bank, post-merger, to "better meet the convenience and needs of the community to be served than" the combining bank would be able to do absent the merger (emphasis in the original). Under the BMA, the benefits to the convenience and needs of the community to be served to outweigh any identified anticompetitive effects of the transaction for an application to be approved.
   • Applicants would be expected to provide specific and forward-looking information about how the merger would benefit communities to be served through, for example, expanded access to credit, lower prices and fees, introductions of new products and services, or more convenient ways to access banking services. Such claims and commitments could be included in the FDIC supervisory examinations.
   • Applicants' Community Reinvestment Act (CRA) records, consumer compliance ratings, and plans for branch locations would also be considered. Ratings of less than Satisfactory under either of these frameworks could result in unfavorable findings. Applications that contemplate a "material reduction[] in service to low- and moderate-income communities or consumers" would likely receive unfavorable findings.
   • As part of its evaluation, the FDIC could choose to hold a public hearing on the merger. The FDIC expects to hold public hearings for applications resulting in a bank with more than $50 billion in assets or for which a significant number of CRA protests are received from the public.
6. Risks to the U.S. banking and financial system. The FDIC outlines a number of elements and characteristics that it would examine when considering the risk to the stability of the U.S. banking or financial system posed by a proposed merger. A favorable finding would generally require that the proposed merger not pose a material risk to either.

   The following factors may present heightened risks and result in unfavorable findings:

   • The transaction would result in a bank with total assets of $100 billion or more.
   • The resulting bank would provide products or services for which few substitutes would exist.
   • The resulting bank's business, including its on- and off-balance sheet activities, would be highly interconnected with other financial system participants.
   • The resulting bank's organization or funding structure would be highly complex.
   • The resulting bank would engage in cross-border activities and have significant exposure to cross-jurisdictional claims or liabilities that are subject to risks relating to differing legal requirements, geopolitical events, and competing national interests.

   The FDIC further notes that it could also consider other information under this factor, such as cybersecurity and stress test results.

7. Effectiveness of AML/CFT efforts. The FDIC would evaluate the AML/CFT programs of each entity involved in submitting a merger application, including plans to integrate them following the merger. Deficiencies, gaps, or concerns identified with respect to any entity's AML/CFT programs, as well actual or potential formal or informal enforcement actions relating to AML/CFT compliance, would generally result in unfavorable findings.

Other Factors That May Alter the Process

The proposed policy also outlines how the FDIC may alter its review of merger applications under other circumstances.

• Merger applications involving non-banks. Entities considered banks under the FDI Act, but not under the Bank Holding Company Act—such as industrial loan companies, trust and credit card banks—would subject to the same statutory factors as applications for mergers between two banks, though the FDIC would modify its review to reflect each entity's business model and the complexities involved.
• Non-traditional community banks. A similar approach would be used for banks that are not "traditional community banks"—banks that the FDIC deems to be less diversified and to have a concentrated business focus or an emphasis on specialized activities, for instance, nationwide fintech partnerships. Specifically, the FDIC describes them as those that (1) focus on products, services, activities, market segments, funding, or delivery channels other than local lending and deposit taking; (2) pursue a broad geographic footprint (e.g., operating nationwide from a limited number of offices); (3) pursue a monoline, limited, or specialty business model; or (4) operate within an organizational structure that involves certain significant affiliate or other third-party relationships.
• Mergers with non-FDIC-insured entities. The FDIC would similarly submit applications for a bank to merge with an operating entity that is not FDIC-insured (e.g., credit unions, mortgage companies, financing companies, payment services providers) to the same statutory factors as applications for mergers between two banks, though the FDIC would modify its review to reflect each entity's business model and the complexities involved. The FDIC would include a review of audited financial statements and potentially independent appraisals or valuations of the non-insured operating entity.
• Interstate merger transactions. If the proposed transaction were to be an interstate merger transaction, the FDIC would also apply the additional requirements and restrictions of Section 44 of the Federal Deposit Insurance Act.