Recent efforts from the Office of the Comptroller of the Currency to improve its M&A review process for national banks could discourage dealmaking.

The agency, which regulates national banks, took steps last week meant to improve the transparency of its bank merger review process through a notice of proposed rulemaking. Within that rulemaking, the Office of the Comptroller of the Currency (OCC) provided guidelines on what constitutes a merger likely to receive timely approval versus what attributes could hold up approval.

However, industry experts said those guidelines have caused more confusion than clarity and introduced seemingly new criteria, leaving banks and their advisers wondering whether they are already being evaluated with these. The OCC's efforts could hinder dealmaking, with the effects being felt more acutely among larger banks, serial acquirers and merger-of-equal (MOE) type deals.

"We have handled other transactions in which a healthy bank is acquiring a troubled bank — a very logical acquisition and one where speed is important," Neil Grayson, partner leading the financial institutions corporate and regulatory practice group at Nelson Mullins Riley & Scarborough LLP, and Benjamin Barnhill, another partner at the firm, wrote in a joint email. "But a healthy bank is not always going to have a perfect score under the OCC's new criteria, and this could mean that transactions that would be good for the industry — and good for the Deposit Insurance Fund — would not be approved."

Large banks, active acquirers, MOEs take the brunt

According to the guidelines, applications in which the acquiring bank has satisfactory supervisory ratings, no open enforcement actions and no fair lending, Community Reinvestment Act (CRA) or Bank Secrecy Act concerns usually warrant a timely approval.

"Although it purports to have the objective of providing clarity as to the factors the OCC considers, the rule demonstrates how subjective the factors are and still does not provide institutions with certainty," Scott Coleman, a partner at Ballard Spahr LLP who represents banks and bank holding companies, wrote in an email. "I don't think it will increase transactions and think at the larger end of the scale it is certain to decrease applications."

In the guidelines, one of the attributes that the OCC listed for applications consistent with approval is if the resulting institution would have total assets of less than $50 billion. It is unclear if the agency is already reviewing mergers with this criterion in mind or if it is new and what the rationale for that size threshold is, experts said.

"That's another thing that I think that people will wonder about: Is this something that is already in practice?" James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group, said in an interview. "We know that transactions that are of that size ... take longer from a regulatory standpoint. Maybe this is why."

The industry has been predicting a wave of regional bank M&A to deal with impending regulatory rule changes for banks with more than $100 billion in assets, but now bank executives might "pause and rethink and maybe not even go forward," Stevens said.

Another seemingly new criterion is whether a bank has struck multiple acquisitions recently. According to the guidelines, "the OCC is less likely to approve an application when the acquirer ... has engaged in multiple acquisitions with overlapping integration periods," among other factors.

That point creates more confusion than clarity, as the industry is left wondering how many deals in what time frame are considered a red flag.

"The proposed rule does not define 'overlapping integration periods,'" Coleman said. For example, it is unclear if an acquirer would be scrutinized if it proposed to engage in more than two transactions during a given year and how much time would have to pass between conversions, Coleman said.

Another attribute of applications consistent with approval is when the total assets of the target are less than or equal to 50% of the acquirer's, according to the OCC. This could spell trouble for MOEs, which have grown in popularity recently, particularly among community banks, reaching their highest yearly total in three years last year.

"We handle many mergers of community banks, including a number of mergers of banks that are of roughly the same size, transactions that are often referred to as mergers of equals," the pair of attorneys from Nelson Mullins wrote. "Most of these mergers are not controversial and make perfectly good sense, but these transactions would not meet the OCC's criteria that the target bank be no more than 50% the size of its acquirer."

Decreasing appetite

All in all, the guidelines are more likely to decrease banks' M&A appetite as they are left with more questions than answers about the deal approval process for national banks.

"I think it'll decrease [M&A appetite] because of the speed issue, because there are now more ways that the regulators will hold up a transaction and also because there are some new criteria that are in the proposal as to ... what types of factors the regulators will look at," Matthew Bisanz, a partner in Mayer Brown's financial services regulatory and enforcement practice, said in an interview.

Despite banks' motivation to obtain scale through transactions, some have been deterred by prolonged regulatory approval timelines, leading some banks to terminate agreements and others to extend them. This proposal could further exacerbate that issue.

"If in practice, however, implementation of the OCC's policy statement adds significant delay or uncertainty to the application review and approval process, that may discourage national banks from choosing to pursue potential deals in the future," Mathew Petersen, senior attorney at Fenimore Kay Harrison LLP, who represents financial institutions on M&A and more, wrote in an email.

On the flip side, Stevens believes banks' hunger for scale will overcome the confusion.

"[The proposal's] ultimate impact on M&A will be marginal because, at the end of the day ... the drivers of M&A — people trying to get scale and efficiency and get in new markets — it's just too important," Stevens said.