The Federal Deposit Insurance Corp.'s proposed changes for reviewing bank mergers are likely to further dampen banks' deal appetite and prolong regulatory reviews.
In a Statement of Policy released March 21, the agency codified what factors it intends to use to evaluate bank mergers and took steps to increase transparency for their reviews. A number of industry experts believe the changes create uncertainty, extend regulatory reviews, reduce bank M&A appetite and open up confidentiality risks.
"It will both slow transaction approval down and potentially reduce the number of transactions that even get proposed," said James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group. The FDIC's new document "doesn't give any clarity on anything," Stevens said in an interview.
The proposal will have a particularly "chilling" effect on regional bank M&A as the regulator singled out deals resulting in banks with more than $100 billion in assets as warranting increased scrutiny, according to Raymond James managing director and Washington policy analyst Ed Mills.
Mills said the proposed changes once again indicate that federal regulators think that anything big is bad.
"We would expect that we ultimately will see consolidation among these banks, but the timing and regulatory hurdles are set to increase," Mills said in a note to clients.
The proposal could have a further-reaching impact and "trickle all the way down" to deals resulting in institutions with just $10 billion in assets, according to Stevens.
"It adds more uncertainty, not less, and it demonstrates a negative attitude towards those transactions that will, on the margins, cause fewer of them to be proposed," Stevens said.
The proposal comes as US bank deal activity is already extremely limited, with announcements in 2023 falling to their lowest yearly total since at least 2000. Activity has remained subdued this year, with just 27 announcements through March 26.
More tedious application process
The specific deal attributes the FDIC laid out as drawing more scrutiny will probably extend approval timelines, as will heightened expectations for the application process. In the statement, the FDIC emphasized that banks should meet with the agency in pre-filing meetings before submitting applications and ensure their applications are "substantially complete" when they are turned in.
"It does just call for more information to be provided in the application, more detailed and nuanced information, so that in itself will take applicants longer to put together," Patrick Hanchey, a partner at Alston & Bird LLP who advises on bank M&A, said in an interview.
The regulator is also seeking increased disclosures related to community needs and details on the pro forma institution's plans to expand or consolidate its branch footprint within the first three years of a merger closing.
The FDIC is looking to shift the burden surrounding the Community Reinvestment Act (CRA), Hanchey said.
"The statement of policy will require banks to prove that the combined institution will better meet the needs of the community, and that's a burden that the bank has in filing its application," Hanchey said. "Whereas under the existing regulatory framework, it's really up to a commenter or protester to prove that the combined bank will not meet the needs of the community."
That proposed change also comes as the agencies recently updated CRA guidelines, potentially making it harder for banks to receive satisfactory scores.
"If you're not going to pass muster on the CRA test, then you're also not going to pass muster on the new merger and acquisition review process," Hanchey said.
Uncertainty overshadows transparency
The FDIC hopes to improve transparency around mergers by releasing approval orders for all deals, which include details on the agency's review of statutory factors, a summary of any CRA protests and any provisions imposed. But industry experts are worried that the FDIC's intention to release statements regarding their concerns with withdrawn applications, intended to provide insight for the public and future applicants, poses confidentiality risks.
"The unintended consequence there would be ... if that's ever invoked, the FDIC would have to be extremely careful about causing negative reaction within the banking industry as a whole," Hanchey said. "In my mind, it's the same logic as to why we don't publicize banks' CAMELS ratings."
Between 2004 and 2023, applicants have withdrawn 116 applications, or 5.4%, at their own discretion, according to the FDIC. Hanchey suggested instead disseminating the information in an anonymized way, such as when the FDIC has published interpretative letters.
More broadly, the increased uncertainty the proposal invites could have a yearslong impact on bank M&A.
"Although the proposal is designed to provide more transparency and speed up the process, there inherently would be a multiyear delay before any transparency is reflected in markets and in the meantime there would be lots of uncertainty about the path forward for transactions," David Portilla, partner at Davis Polk & Wardwell LLP who advises banks and nonbanks on M&A, regulation and more, wrote in an email.