Regulatory approval of U.S. Bancorp's planned acquisition of MUFG Union Bank NA came with a slew of unusual conditions that industry observers expect to become more common going forward.

U.S. Bancorp's long-awaited deal approval from the Federal Reserve and Office of the Comptroller of the Currency came through Oct. 14, but it was announced in conjunction with an advance notice of proposed rulemaking, or ANPR, for more stringent oversight of superregional banks and a number of stipulations. The unique nature of the announcement with the ANPR and the conditions signal a tougher road ahead for superregional bank deal approvals, policy analysts and deal attorneys said.

"With the proposal and the conditions on the deal approval, bank regulators sent a clear signal that the bar for approving future superregional bank M&A proposals has ratcheted higher," Isaac Boltansky, director of policy research at BTIG LLC, said in an email. "Each deal is unique so it's sometimes hard to apply lessons from one approval to the rest of the docket, but in this instance I think it's clear that the hurdle has been raised for all bank deals of a certain size."

Large acquisitions awaiting regulatory approval include Toronto-Dominion Bank's pending acquisition of First Horizon Corp. and Bank of Montreal's pending deal with Bank of the West.

Prepping for larger bank requirements

One such condition from the Fed is that U.S. Bancorp, which has about $600 billion in assets, must submit quarterly plans highlighting how it plans to meet additional regulatory requirements that banks face after they surpass $700 billion in assets. U.S. Bancorp is currently a Category III bank, and would become a Category II bank once surpassing $700 billion in assets.

As part of the approval process, U.S. Bancorp committed to adhering to the additional regulatory requirements by Dec. 31, 2024, or sooner if it is obligated to do so. Gov. Michelle Bowman, one of the members of the Federal Reserve Board, objected to the provision, saying in a statement that the approval order suggests the Fed would require the company to comply with standards of a larger bank by the end of 2024 even if it does not surpass $700 billion in assets.

Bank attorneys and other analysts said requirements such as this one blur the boundaries for asset size requirements.

"It seems like here the red line is not the boundary itself," Derek Tang, economist at Monetary Policy Analytics, said in an interview. "It's somewhere below the boundary. But we don't know how much below the boundary it is, and of course the Fed's not going to tell you because otherwise people would start to look at merger combinations that skirt that, and that's something you don't want."

Joseph Silvia of Dickinson Wright PLLC, who advises financial institutions on M&A and other matters, and is a former counsel to the Federal Reserve Bank of Chicago, said he agreed with Bowman's questioning.

"Perhaps there's a frustration that institutions have a set of rules to play by, and if we're not going to enforce the rules as they're written, then we need to go through the regulatory rule-writing process to address those rules so that everybody has the same set of rules that they're playing by," he said in an interview.

Currently, regulators are working on a sweeping bank merger policy revamp. Until then, the Fed might impose similar requirements on future deal approvals.

"The Federal Reserve is nothing if not deliberate so we should assume that these types of additional conditions could become part of the cost for doing a deal going forward," Boltansky wrote.

Proposal for resolving large banks if they fail

The Federal Reserve announced the deal approval in conjunction with an advance notice of proposed rulemaking. The Fed and FDIC jointly requested comments on "whether an extra layer of loss-absorbing capacity could improve optionality in resolving a large banking organization or its insured depository institution, and the costs and benefits of such a requirement." Comments are due by Dec. 23.

"I don't believe that this transaction or application was the impetus for the rulemaking, but it certainly could have been a factor given that, as the rulemaking suggests, things have evolved since the resolution planning under Dodd Frank really started in earnest about a decade ago," Silvia said. "Some banks have gotten larger. Some banks have gotten even more diversified. Some have gotten more interconnected."

While the transaction itself likely did not spur the proposed rulemaking, the announcement of the approval in conjunction with the ANPR was likely politically driven.

"The politics here is inescapable," Ian Katz, managing director at Capital Alpha Partners, wrote in an Oct. 14 note. "Regulators aren't allowed to say no to deals just because of political pressure. That may explain why approval of this deal — something progressives won't like — was paired with a regulatory action that they will like ... The message to banks is: We'll give you this one, but things are going to get tougher."

The proposal shows the regulators' sensitivity to large bank prudential issues, such as banks being considered 'too big to fail,' said John Gorman, a partner at Luse Gorman PC whose focus areas include M&A.

Business lines that could be sold

One of the conditions in the OCC's approval requires the resulting bank to list business lines and portfolios that could be quickly sold if there is stress and submit the list along with a plan to the OCC for a determination within six months of the merger's consummation.

It is uncommon for this to be part of an approval, both Gorman and Silvia said.

Chip MacDonald, managing director of McDonald Partners LLC, did not think it was unusual, though that kind of condition has normally only been for global systemically important banks, which is the next category above the Category II threshold.

The OCC likely imposed the requirement because the agency does not want to increase financial stability risk, and it could become more common in superregional bank deal approvals going forward, Tang said.

Commitments from the buyer's CEO

Another one of the conditions in the OCC's approval order involved commitments from U.S. Bancorp CEO Andrew Cecere in a letter sent to the agency from the executive, though the approval order did not include details.

Executives at other banks involved in deals might also make commitments to regulators, and these commitments could be related to risk management, though there are many possibilities, Gorman said.

"We may see more of these going forward, where they want to approve a transaction but [also] to address concerns," he said. "I think it's a sensitivity to public criticisms. Again, not that they're playing politics, but they're not deaf to what people are saying."

MacDonald and Silvia both said they have seen similar commitment situations before, though this type of action is still relatively uncommon.

"It could also be something that the institution offers up if they recognize that the regulators seem to be concerned with a particular piece of a transaction," Silvia said.