What are the implications of the new rule?
Bank mergers face tougher scrutiny as the US Office of the Comptroller (OCC) of the Currency reveals plans to scrap the automatic approval rule for certain applications if the OCC misses the 15-day deadline post-public comment period.
Michael Hsu, the interim comptroller of the agency, addressed the nuanced nature of merger applications during a speech at the University of Michigan’s School of Business. “Merger applications exist along a spectrum,” he said. “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.”
According to a Bloomberg report, the proposal seeks to clarify the criteria for the OCC’s approval or rejection of applications for business combinations. Factors under consideration include financial condition, size, competition, financial-stability risk, and the responsiveness of bank management to supervisory directives.
The OCC’s initiative aligns with pledges by regulatory bodies like the Federal Reserve to intensify the scrutiny of bank mergers, the report said. In July, key Justice Department antitrust lawyers indicated mulling over a revamp of how they evaluate bank transactions. This response follows the collapses of several midsize lenders last year and the subsequent consolidation. Notably, Silicon Valley Bank, Signature Bank, and First Republic Bank experienced failures in March and May of 2023.
Reviewing current processes and impact
The regulator is aiming to enhance the merger application process and transparency to foster a diverse and dynamic banking system, according to Hsu. Additionally, the agency aims to refine competition analysis beyond retail deposits as a metric for assessing market power.
Smaller banks have urged regulators to grant exceptions to their merger deals, citing their modest size, simplified structures, and limited systemic risk.
“Too often, the bank merger framework prevents or unnecessarily delays mergers among small community banks, especially those located in sparsely populated markets,” the Independent Community Bankers of America said in a 2022 letter to the Federal Deposit Insurance Corp.
Randy Benjenk, a law partner at Covington & Burling, observes that the already intricate approval process may become more challenging with the OCC’s proposal. He suggests that fewer merger applications may result, as the policy statement potentially deters prospective deals.
Ian Katz, a financial-policy analyst at Capital Alpha Partners, anticipates varied impacts from the proposal.
“On one hand, having a better idea of what will get a thumbs up or thumbs down from regulators should be helpful to banks that are thinking of doing deals,” Katz said. “But if the list is too long or too inflexible, it could discourage deals. I don’t think it’s clear yet whether this will tilt more one way or the other.”
The OCC’s proposal awaits public commentary before potential adoption.
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