An unexpected salvo by Democratic appointees at federal banking agencies has added another complication to large and midsize bank mergers, which were already lagging in the face of regulatory delays.
Rohit Chopra and Martin Gruenberg, both board members at the Federal Deposit Insurance Corp., voted last week to launch a review of bank merger policy, touching off an unprecedented
While much of the subsequent chatter in Washington has focused on the fight’s broader implications for the FDIC, the brouhaha also threatens to throw a new wrench into the bank M&A landscape.
On Friday, House Financial Services Committee Chair Maxine Waters, D-Calif., sent a letter to Federal Reserve Chair Jerome Powell and the leaders of the FDIC and the Office of the Comptroller of the Currency requesting a moratorium — until the regulatory review is concluded — on the approval of mergers that would result in a bank holding above $100 billion of assets.
“Postponing decisions on pending mergers until the review is completed will help ensure that a regulatory landscape that promotes the ‘healthy, vibrant, and competitive banking markets’ that Chair Powell has expressed support for is put in place,” Waters wrote.
Should the agencies grant such a moratorium, four pending deals could be impacted: U.S. Bancorp’s acquisition of MUFG Union Bank; M&T Bank’s bid for People’s United Financial; First Citizens Bancshares proposed deal for CIT Group and Citizens Financial Group’s merger with Investors Bancorp.
A Fed spokesperson said in an email that the central bank has received Waters’ letter and plans to respond.
Even before last week’s fireworks, regulators during the Biden era were applying more scrutiny to proposed deals, according to lawyers and advisers who work on bank mergers.
Regulators are asking more follow-up questions, adding to the ongoing delays in deal approvals and marking a shift from their “green light” approach in recent years, said Jason Langan, an M&A advisor at the consulting firm Deloitte.
Deals involving larger banks appear to be attracting the most scrutiny. First Citizens and CIT, which would have a combined $110 billion of assets, had planned to close their deal in October. But earlier this year the two banks
Banks that are weighing becoming either buyers or sellers need to be patient, said Cliff Stanford, a partner at the law firm Alston & Bird. “They’re going to need to be able to meet these standards,” he said.
The recent drama in Washington is expected to continue slowing down a review process that has already caused delays, National Community Reinvestment Coalition CEO Jesse Van Tol said in an interview.
"It’s hard to fathom, whether it’s the Fed or someone, pausing mergers for a year as they do a policy review,” Van Tol said. “Politically, I think they’ll get hammered if they hold up deals while they figure something out.”
The Fed has spent months
But the issue blew up last week when Gruenberg and Chopra, who are part of a 3-1 Democratic majority on the FDIC board, sought public comments on how the agency should approach the topic.
Banking industry groups pushed back against the effort.
Greg Baer, president and CEO of the Bank Policy Institute, which represents many of the nation’s largest banks, criticized what he characterized as the two FDIC board members' “deeply troubling” views. Mergers are often critical for banks to invest in digital products, protect against cyberattacks and compete with less regulated fintech companies, he said.
“Even as other policymakers rightfully raise a host of consumer protection and financial stability concerns about the fintechs, this statement sets out a path that would enfeeble the banking industry in its efforts to compete,” Baer said.
The American Bankers Association, along with all of the state banking trade groups, wrote on Monday to the FDIC board, calling for “collegiality” to avoid uncertainty for the financial system and its customers.
Among the questions raised by Gruenberg and Chopra is whether regulators should focus more on financial stability risks when considering merger applications. The Democratic appointees asked whether regulators should presume that mergers that give rise to institutions of at least $100 billion of assets create broader risks to the banking system.
Jeremy Kress, a former Fed lawyer who teaches at the University of Michigan, said regulators’ current process for assessing financial stability risk is “rudimentary” and needs improvement.
Allowing regional banks to become bigger raises the chances that, if one were to fail, a megabank would need to absorb it in a process similar to major bank failures during the financial crisis, he said.
“If we want to prevent ... the four really big guys getting any bigger than they already are, we need to think long and hard about whether allowing these super-regional banks to grow any bigger is really sensible,” Kress said.
The two FDIC board members also asked for feedback on whether the Consumer Financial Protection Bureau, where Chopra serves as director, should play a formal consultative role in bank merger decisions. The CFPB supervises banks with more than $10 billion of assets for compliance with consumer protection rules, but the agency does not have a formal say in whether to allow bank mergers to proceed.
Community groups do have a say in some larger bank mergers, as they can pressure banks to make commitments that ensure low- and moderate-income communities benefit from the tie-ups. But those agreements are “not enforceable,” and banks could decide to not fulfill their promises, Kress noted.
A nonprofit group that works on those agreements, the Greenlining Institute, said it supports a bigger role for the CFPB and state attorneys general.
“We’d like this taken up by an agency,” said Rawan Elhalaby, senior program manager for economic equity at Greenlining. “I don’t think the nonprofits should be the ones playing this watchdog role.”
Waters also asked that public hearings be required under a new review process that she wants the federal banking agencies to devise.
California-based Greenlining supports the kind of moratorium that Waters is seeking, but Elhalaby said that providing public hearings on these deals could have the same intended effect.
“I do think the Fed is poised to at least wait for more public hearings and open up public comment,” Elhalaby said.
