Bank regulators hint at more openness to M&A following industry turmoil

A wave of regional bank M&A could be unleashed should regulators follow through on hints that they may ease more stringent bank merger reviews in the wake of industry turmoil.

Following nearly two years of increased scrutiny of bank M&A that has led to prolonged deal closings, regulators have leaned on some of the largest banks to acquire assets of failed institutions in order to offset costs to the Deposit Insurance Fund. Ironically, the buyers of the assets of two failed banks were both involved in other M&A deals that incurred some of the longest delays in recent history due to regulatory hurdles.

Flagstar Bank NA, which purchased substantially all of the deposits and certain assets of Signature Bridge Bank NA, was involved in the longest pending US bank deal since 2018, while First-Citizens Bank & Trust Company Inc. which bought substantially all of the deposits and certain assets of Silicon Valley Bridge Bank NA, was involved in the seventh-longest pending deal in that time frame.

Meanwhile, the largest bank in the US, JPMorgan Chase Bank NA, scooped up essentially all of the deposits and assets of First Republic Bank. Traditionally, JPMorgan and the nation's other largest banks are precluded from bank M&A because of a rule prohibiting any single bank from holding more than 10% of all deposits in the country. That rule is waived in failed bank deals.

"What's happened so far is that the regulators have just really been putting out fires as they've come, and we don't really have an indication of how they're thinking about M&A sort of going forward longer term, on a non-emergency basis," said Ian Katz, managing director at Capital Alpha Partners LLC, in an interview.

However, in recent public comments, regulators hinted that they may be more open to bank M&A following the recent turmoil — a change that would pave the way for a potential wave of regional bank M&A once current dealmaking headwinds abate.

Will regulators be more open?

In written testimony for a May 16 hearing in front of the House Financial Services Committee, acting Comptroller of the Currency Michael Hsu said the recent turmoil "has increased the urgency" to update bank merger guidelines, an ongoing process across multiple federal agencies.

"The OCC is committed to being open-minded when considering merger proposals and to acting in a timely manner on applications, consistent with the requirements of the Bank Merger Act," Hsu said.

Just a few days prior to those comments, Treasury Secretary Janet Yellen told Reuters that "this might be an environment in which we're going to see more mergers, and you know, that's something I think the regulators will be open to, if it occurs."

Despite those comments, some industry experts believe regulators will continue to heavily scrutinize bank M&A.

Fast approvals like that for SunTrust and BB&T's merger of equals, which took just 10 months and resulted in Truist Financial Corp., seem "to be a long ways away at this junction," said Christopher Marinac, director of research at Janney Montgomery Scott LLC.

Moreover, the recent failed bank deals do not signal regulators' openness to future M&A because those were emergency situations, said James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group, in an interview.

"Obviously these were situations that were very compelling in the sense that they were transactions designed to sort of enable the government to find a low-cost solution for those organizations," Stevens said.

Hesitancy to weigh on appetite

The recent industry turmoil is expected to increase regional banks' appetite for M&A in order to compete with First Republic, First-Citizens and JPMorgan Chase, which "have gotten much stronger" as a result of their deals, Stevens said.

Further, given the current unstable environment, it could be good for more vulnerable banks to join up with more solid institutions, Katz said.

Such a deal wave would buck a trend among regional banks, which have been hesitant to strike deals as regulatory approval timelines have dramatically slowed in recent years. Only one deal resulting in a combined company with assets between $50 billion and $250 billion has been announced since the beginning of 2022.

Further, among the 20 largest US bank deals announced since 2018, none are from 2022 or 2023.

"People were too scared to engage in bank M&A because they thought it was a road to nowhere with the regulators," said Keith Noreika, acting comptroller of the currency in 2017 and now executive vice president and chairman of the banking supervision and regulation group at consultancy Patomak Global Partners. "The bank regulators and people on Capitol Hill have to get off from being totally anti-bank merger.

"They may have to say there are actually good mergers to be had and that people should engage in them or at least exploring engaging in them, so that we can avoid all these losses to the deposit insurance," Noreika said.

If regulators do not change their posture, regional banks will remain hesitant to pair up.

"I don't think, for the most part, the regional banks are going to want to put themselves through that for something that's got an uphill climb," said John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics.

Failed bank deals

Given regional banks' hesitancy to strike traditional M&A deals due to regulatory delays, failed bank transactions are increasingly attractive, industry experts said.

Multiple regional banks jumped at the opportunity to acquire certain parts of Silicon Valley Bank and Signature Bank after their failures. Banks such as BankUnited Inc., Home BancShares Inc., The Bank of Nova Scotia, Citizens Financial Group Inc., PNC Financial Services Group Inc. and Valley National Bancorp. were among the bidders for Silicon Valley Bridge Bank, according to the Federal Deposit Insurance Corp.

Meanwhile, Home Bancshares, First-Citizens and Northeast Bank were among the bidders for parts of Signature Bridge Bank, and Citizens Financial, PNC and Fifth Third Bancorp were among the bidders for First Republic Bank, sources told S&P Global Market Intelligence.

"It is tempting for some other regional buyers to wait to see if there's a failed bank," Marinac said. "Maybe it's academic because they are not going to do a transaction anyway because the Fed approval process is so hard."