Federal regulators are looking to update bank merger rules amid the fintech challenge
Federal bank regulators continue to signal that they are moving to update bank merger guidelines that have been in place since 1995 in light of how the competitive market has changed over the years.
Bank concentration rules remain a “big part of the conversation” around updating the Fed’s merger guidelines, which has been a prominent theme in recent speeches from some big names in the US banking system, Raymond James analyst Ed Mills said.
“It’s pretty high on the to-do list for the Federal Reserve,” Mills said.
In at least three key speeches in September, bank regulators have talked about bank mergers. The latest was a speech on Wednesday by Michelle Bowman, a member of the Fed’s governing board.
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When bank merger deals land on government desks, regulators consider the number of branches the combined business will have in the banks’ respective communities. If concentration is too high, they can require banks to divest some branches to protect competition and stave off the potential for higher fees and fewer choices for consumers in a given area.
Some examples include the sale of seven bank branches in Northeast Mississippi as part of the $6 billion combination of BancorpSouth and Cadence Bank CADE,
in 2021. Huntington Bancshares Inc.’s HBAN,
$22 billion merger with TCF Financial Corp. included a requirement to sell 14 branches in Michigan.
The $66 billion combination of SunTrust and BB&T in 2019 to create Truist Financial Corp. TFC,
triggered the sale of 30 SunTrust branches in three states to buyer First Horizon Corp. FHN,
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In his speech on Wednesday, Bowman said the competitive market has changed due to increased competition from less regulated fintech companies.
Since the Fed’s current M&A framework doesn’t take into account all competitors, Bowman said, “we’re only constraining banks from making strategic merger choices, while allowing those outside the framework to proliferate.”
Bowman, who served as vice president of Farmers & Drovers Bank of Kansas from 2010 to 2017, is widely seen as the voice of community banks on the Fed’s board, Mills said, adding that her speech allowed her to put her stamp on the effort. to update guidelines for bank mergers.
Two other major banking regulators have also weighed in on the topic recently.
Michael Barr, the Federal Reserve’s deputy chairman for supervision, said in a Sept. 7 speech that he is working to review how the central bank conducts merger analysis and where it could be improved.
“A merged institution may be able to offer more competitive products and services, but it may also have the potential to reduce competition and access to financial services in a geographic area by raising prices, limiting the supply of services and reducing the supply of small business – or community development loans that rely on local knowledge,” he said.
Acting Comptroller of the Currency Michael J. Hsu also addressed the issue, saying in a Sept. 7 speech that guidelines under the Bank Merger Act “are ripe for updating.”
The Office of the Comptroller of the Currency is working with the Department of Justice to review the bank merger framework, as well as to understand concerns about both the impact of bank mergers on communities and the potential for institutions to become too large to manage, Hsu said.
Industry groups have already considered these issues.
While regulators may voice concerns that bank mergers will result in fewer branches in some areas, the opposite is true, according to the Bank Policy Institute.
Although the total number of banks has declined due to mergers, the number of bank branches almost doubled between 1981 and 2021, according to the institute. During that 40-year period, the group said, the average bank’s branch network increased to 17.1 branches from 2.7 branches.
All told, the Bank Policy Institute reported, there were 4,377 banks in the United States in 2020, down from 14,434 in 1981. During the same period, the number of branches increased to 74,936 from 38,738.
Updating merger rules will be a complex task involving the Fed, the Federal Deposit Insurance Corp. (FDIC) and the Department of Justice, among other agencies, as well as laws including the Bank Holding Company Act, the Bank Merger Act, the Dodd-Frank Act, and the Home Owners Loan Act.
The Justice Department has sought public input on whether it should update its standards for evaluating proposed bank mergers under US banking and antitrust laws. The Fed must also weigh in as part of the overall process.
Along with bank mergers, the Ministry of Justice is looking at updating rules on mergers and acquisitions more broadly. In a July 2021 order, President Joe Biden urged the FDIC and other federal agencies to review current practices and adopt a plan “for the revitalization of merger oversight.”
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