Breaking Down the Bank Merger Review Process

Recent political commentary has revived the myth of the “rubber stamp” bank M&A approval process. This myth contrasts with the reality of a rigorous, deliberative process behind the scenes. Here’s how the process actually works.

Extra layer: Bank mergers and acquisitions are unlike virtually any other mergers in the U.S. marketplace – they’re subject not only to the same federal antitrust laws as other sectors, but also to an industry-specific legal and regulatory review framework.

Who: Bank mergers are reviewed by the Department of Justice for antitrust standards and by the federal banking agencies and, in many cases, by state authorities as well. The DOJ can challenge block a bank merger on its own, regardless of whether the banking agencies have approved it.  The public has an opportunity to review the record and provide comments.

What: The DOJ evaluates bank mergers’ competitive impact, while the banking regulators evaluate them based on these five key criteria:

  1. The convenience and needs of the communities to be served and the subject banks’ record of compliance with the Community Reinvestment Act;
  2. The effectiveness of the applicant in combating money laundering;
  3. The financial resources and prospects of the applicant;
  4. The managerial resources and prospects of the applicant; and
  5. Risks to the U.S. banking or financial system (financial stability).

Challenging even to start: The M&A approval process includes minimum eligibility standards to even file an application in the first place. Regulators may encourage banks to withdraw their application if it is flawed. They may also require banks to divest certain acquired assets as a condition to approval. All banks seeking to merge in the U.S. must provide a regulatory application or prior notice.

  • Preview: Banks often preview an intended deal with their regulators before announcing the transaction. This preview allows the regulator to identify any issues that should be addressed in the application. Sometimes, banks decide not to move forward with a transaction based on this meeting, on examiner feedback or because they do not meet approval criteria like certain CRA or CAMELS ratings.
  • Withdrawals: Other times, banks may withdraw an M&A application after it has been filed. This can happen after regulators inform a bank that there is a significant issue that would likely preclude approval.

Once filed, a bank merger application undergoes extensive review by the DOJ and bank regulators.

Process: Depending upon the structure of the transaction, approvals may be required at both the holding company and bank level.  Applications under the Bank Holding Company Act are subject to regulatory approval by the Federal Reserve. 

Applications at the bank level under the Bank Merger Act are subject to regulatory approval by the primary federal regulator of the resultant bank.

Regarding process, the Bank Holding Company Act establishes a 91-day period by which the Federal Reserve must act on a completed application for an acquisition by a bank holding company.  In addition, federal banking law requires the Federal Reserve, the OCC and the FDIC to act on applications within a one-year period.  Bank merger applicants must submit a completed Interagency Bank Merger Act Application, which requires the applicants to disclose detailed information on the banks and the transaction.

Diving into the standards

  • Competition: DOJ guidelines for bank M&A have restrictive concentration thresholds used for screening deals. The key metric is the Herfindahl-Hirschman Index or HHI, a common measure of concentration. Banks often calculate the HHI for certain markets in a proposed merger before they apply.
    • Bank concentration is determined based on deposits. The DOJ or regulators may require banks to divest certain branches to limit concentration in certain markets. They may consider factors, such as local competition from credit unions, that are relevant when evaluating competition in a market.
    • Statutory deposit caps prohibit banks from gaining more than 30% of federally insured deposits in any state, as well as a national deposit cap of 10% for transactions across state lines. This effectively bars the very largest banks from M&A.
    • Deep dive: An analysis of Federal Reserve M&A conducted in 2021 orders offers some takeaways on competition.
      • Banks avoid transactions that would likely raise competitive issues.
      • Most transactions raised no competitive issues.
      • In a quarter of the cases, regulators required banks to divest branches as a condition of approval.
      • In three cases, divestitures were not a condition of approval but the banks received extra scrutiny for competitive effects. These cases included “key mitigating factors” that offset concentration effects, such as significant credit union competition.
  • Convenience and needs: The core factor with this standard is the merging banks’ CRA performance, although the convenience and needs factor also examines consumer regulation and fair lending compliance.
    • All banks in the analysis of Fed orders were rated either satisfactory or outstanding in their most recent CRA examination.
    • The CRA standards to gain approval are rigorous, and so are the commitments banks often make to expand community lending after the transaction closes.
  • AML: BSA/AML enforcement actions have a significant impact on banks’ ability to merge. Banking agencies go even further than the statute requires—major AML program violations or deficiencies that result in even an informal action may preclude a merger being approved.
  • Financial resources: Bank merger applicants are expected to have adequate financial resources — in other words, to be well capitalized. Acquisitions that create or exacerbate financial issues can cause rapid deterioration in the combined bank’s financial condition and lead to messy resolutions. All of the banks in the analysis of Fed orders met the financial resources criteria.
  • Managerial resources: The banking agencies view an unresolved compliance issue or enforcement order as a red flag that would preclude merger approval. Generally, the banking agencies suggest that banks with a CAMELS rating of 3 for management or composite 3 for safety and soundness should not pursue acquisitions in order to avoid diverting management resources from remediation. In other words, they should focus on fixing their compliance problems before considering M&A.
    • Sometimes, regulators will formally prohibit bank expansion via an enforcement order, but more often, banks with compliance issues will simply put M&A plans on hold; they may be discouraged from applying to merge or withdraw an application.
    • Other times, banks with a pending M&A application will have the approval withheld until the issues are resolved. This remediation process can take over a year, even when the bank addresses the issue proactively.
  • Financial stability factor: The Federal Reserve considers five factors in evaluating a merged bank’s effect on financial stability – size, substitutability of providers for critical products and services, interconnectedness, contribution to complexity of the financial system and extent of cross-border activities. These factors largely align with those used to determine if a bank is a GSIB.
    • Financial stability implications have been an important factor in recent merger approval orders.
    • The enhanced stringency of capital and liquidity requirements for larger banks may result in improved financial stability for merged institutions.

The Bottom Line: The bank M&A process in the U.S. is multi-layered, complex and rigorous. Far from being a rubber-stamp exercise, it subjects banks to a litany of intensive requirements on all levels of business and regulatory compliance, resulting in a system where only the most serious applicants choose to undergo the process.