Regulators assigned homework to two large bank acquirers as part of their recent respective deal approvals.

As part of the Federal Reserve's approval of Bank of Montreal's Chicago-based unit BMO Harris Bank NA's purchase of San Francisco-based Bank of the West, BMO committed to updating its resolution plan, more commonly known as a living will. The provision would require the company to file an interim update to its resolution plan to both the Fed and the Federal Deposit Insurance Corp. within six months after the transaction closes, outside of the bank's normal time frame for updating its living will every three years. The company is scheduled to file its next plan in July 2024.

Just three months ago, regulators required U.S. Bancorp to do the same with regard to its acquisition of MUFG Union Bank NA. U.S. Bancorp also must submit an update to its living will to the Fed and the FDIC within six months of deal closing, ahead of its scheduled July 2024 update. Further, the approval was announced in conjunction with an advanced notice of proposed rulemaking regarding large bank resolvability.

Industry experts tabbed the provisions as unique but necessary for regulators to feel comfortable approving large deals. The new provision showcases regulators' focus on ensuring the safety and soundness of the largest banks operating in the U.S. following significant mergers, they said.

"The regulators have clearly created a new trend that makes interim updates of resolution plans part of merger approvals," said Margaret Tahyar, partner and head of the Financial Institutions practice at Davis Polk & Wardwell LLP. "It's one factor in how they are getting comfortable with larger deals."

Size matters

The largest banks operating in the U.S. and certain other organizations are required to submit resolution plans to regulators as part of the Dodd-Frank Act. The living wills lay out "the company's strategy for rapid and orderly resolution in the event of material financial distress or failure of the company," according to the Fed's website.

Regulators' focus on resolvability as part of M&A is likely partly motivated by the uncertain economic environment and possibility for a downturn in the near future, said Joseph Silvia, member at Dickinson Wright PLLC who advises financial institutions on M&A, regulation and other topics. However, the size of these transactions likely played a larger role, Silvia said.

BMO's deal held a value of $16.30 billion at announcement and was the largest U.S. bank deal announced in 2021. U.S. Bancorp's purchase of Union Bank held a deal value of $7.97 billion at announcement and followed the BMO deal as the second-largest U.S. bank deal announced in 2021.

"Generally, as institutions grow in size, complexity, and/or geographic scope, the Federal Reserve, and others in the regulatory community, tend to focus on what that means going forward from a supervisory perspective. One significant aspect of that is the resolution planning framework, especially in larger deals," Silvia said.

While regulators may include this in more large bank deal approvals going forward, it is simply more work for the acquirer and does not impact the merits of a deal.

"It's not a controversial matter. It's not likely to cause problems for them. It's not going to interfere with the benefit they expect to derive from the transaction," said John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics.

Why deals are taking longer

Regulators' focus on living wills is just one part of their greater scrutiny of bank M&A over the past few years. Many deals — particularly the largest ones — have experienced prolonged closing timelines due to that increased scrutiny.

BMO's purchase of Bank of the West has been pending for more than 400 days, making it the second-longest pending U.S. bank deal currently. When the companies announced the deal in December 2021, they projected it would close by the end of 2022. With all regulatory approvals finally in tow, the companies now expect it to close Feb. 1.

"It's a little bit later than I think management originally guided to when they announced the deal," said Mike Rizvanovic, research analyst at Keefe Bruyette & Woods. However, "to my knowledge, there wasn't a significant amount of scrutiny on it — certainly not some of the public's comment that we heard on the TD deal."

Though BMO's deal faced a slight delay, Rizvanovic believes it was a "relatively smooth process" for the companies, likely because of the structure of the deal.

"It wasn't purchasing a public company," he said. "So that's probably what made it a little bit different in terms of the type of scrutiny that you might see from regulators. ... You could think of it being somewhat like an asset sale, from one large financial institution to another, as opposed to a public company being taken over."

Aside from resolution plans, other factors taking precedence in regulators' review of transactions include public comments, Community Reinvestment Act issues, financial managerial factors, public or nonpublic enforcement actions, and ensuring banks are sufficiently capitalized, Silvia said.

"Smaller transactions, more plain vanilla transactions, where you don't have significant assets, you don't have perhaps interstate banking issues, [or] you don't have branch closing issues — those are relatively streamlined, and those get done pretty quickly," Silvia said. "But it does seem that slightly larger deals, up through deals like this where they're pretty significant, are taking a little bit longer to get through the process."