WASHINGTON — Bank regulators are undergoing a revamp of bank merger rules, and large regional banks are squarely in their crosshairs.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have sent strong signals in recent months that mergers involving large regional banks will get more scrutiny in the future than they have in the past. That includes public hearings about the community benefit of the merger, as well as strengthened requirements that larger merged banks have enough assets to unwind without a government bailout.
Those moves have unsurprisingly led to significant pushback from banks, who say that discouraging mergers among larger regionals would prevent anyone from competing with the country’s largest institutions.
But underlying that normal push-and-pull between regulators and those they regulate, financial policy experts say that the bank merger review is a way to pass more stringent capital rules onto large regional banks without going through a formal rulemaking process.
Regulators have specifically mentioned that large regional banks in mergers should think about Total Loss Absorbing Capital (TLAC) requirements that are imposed on the country’s largest banks, requiring them to hold assets that would allow them to resolve without needing help from the government.
“I think that’s the endgame here, TLAC rules for large regional banks by regulation that’s broadly applicable” said Jeremy Kress, an assistant professor in business law and co-faculty director of the Center on Finance, Law & Policy at the University of Michigan.
Acting Comptroller Michael Hsu, in particular, has called for more scrutiny on large regional bank mergers involving more than $100 billion in assets. In a speech in early April, Hsu said that the OCC is looking to incorporate resolvability into its bank merger review process.
Right now, Hsu said, a large failing regional bank would likely be sold to one of the country’s largest globally systemically important banks, or GSIBs.
While that would solve the immediate problem of avoiding a bank run, it’s not a perfect solution, he said.
“From a broader financial stability perspective, a GSIB would be forced through a shotgun marriage to be made significantly more systemic, with minimal due diligence and limited identification of integration challenges, which for firms of this size are significant,” Hsu said. “In addition, with the resulting increase in the concentration of banking — of making one of the biggest firms even bigger and more systemic — trust in the resolution process and in the government’s ability to proactively manage such situations would likely erode, just as it did over the course of 2007 when a series of such shotgun marriages were carried out.”
Other potential requirements include a “single point of entry” resolution requirement, where only a parent company would file for bankruptcy, or be taken into receivership, while subsidiaries could continue to function, and a the idea of “separability,” where regional banks would identify lines of business they could quickly spin off, “ideally over a weekend.”
Hsu isn’t alone, however. Acting FDIC Chairman Martin Gruenberg, who is leading the agency for the third time after a partisan scuffle on the FDIC board led to the resignation of Jelena McWilliams, pointed to resolvability challenges with large regionals in a
“I have been increasingly concerned that the attention that has been given to the failure of global systemically important banks since the financial crisis, while entirely appropriate, may have obscured the risks associated with the failure of a large regional bank and permitted an unjustified sense of confidence to develop that the failure of such an institution would not be challenging,” Gruenberg said.
The FDIC, in its request for comment on its bank merger policy framework, asked if “any merger transaction that results in a financial institution that exceeds a predetermined asset size threshold, for example $100 billion in total consolidated assets, poses a systemic risk concern?”
Banks have pushed back against the idea that large regionals should need resolvability requirements such as TLAC.
The Bank Policy Institute, whose members include large regional banks, said that requirements designed for the country’s largest globally systemically important banks shouldn’t be applied to other banks just based on size. Large regional banks can be less complex and less risky than their GSIB counterparts, the trade group argues, and a one-size-fits-all approach wouldn’t make large regional banks more easily resolved if they get in trouble.
“GSIBs generally have material operations in numerous jurisdictions and big trading operations outside of their bank subsidiaries, and those two characteristics present resolution challenges that SPOE and TLAC resolve both elegantly and effectively," said John Court, general counsel and head of regulatory affairs at the institute. "Importantly, those are not characteristics of large regional banks, and so SPOE and TLAC don’t make sense for those firms. Attempts to require it is akin to putting a square peg in a round hole and just hammering at it."
Aside from costs associated with a higher regulatory burden, a more stringent approval system could cut into the economics of a merger in other ways, said Bao Nguyen, a partner in Skadden's Financial Institutions Regulation and Enforcement Group.
“In any merger, cost and operating efficiencies are going to be key," he said. "What that does, if you can't effectuate a merger in a relatively reasonable period of time, you begin to actually eat into the organization, people leave, they go find other jobs because they want security.”
While the FDIC and OCC have created some traction in rolling large regional resolvability into its broader bank merger review process, the big open question is how the Federal Reserve will fit into Gruenberg and Hsu’s vision.
While Michael Barr’s nomination to serve as the Fed’s vice chair for supervision has been approved by the Senate Banking Committee, he awaits confirmation by the full Senate. Until then, experts say it will be difficult to make long-lasting changes to the bank merger review process with the Fed’s regulatory operations understaffed and without a full-time leader.
“Rulemaking is especially difficult when there’s no vice chair for supervision at the Fed,” Kress said.
