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Bank merger guidance, cannabis banking safe harbor expected in 2022

Bank regulators will be proactive in the first half of 2022 as the Biden administration seeks to accomplish goals ahead of the November midterm elections.

In 2022, Congress is expected to take action on financial services for cannabis businesses, while consumer protection and climate risk will likely remain on regulators' radars. Two other topics that policymakers will continue to debate are capital requirements and merger reviews.

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Merger review is a closely watched area for upcoming regulatory action. The U.S. Justice Department issued a request for public comment Dec. 17, regarding whether the Antitrust Division should revise bank merger review guidelines from 1995 and, if so, how. It will accept comments through Feb. 15, 2022. It responds to President Joe Biden's executive order in July.

"Right now it's basically an admission. ... It needs to be worked on," Renita Marcellin, senior banking policy analyst at Americans for Financial Reform, a coalition of labor unions and other advocacy groups, said in an interview. Marcellin organization recommends that regulators wait to approve deals until there is a plan to strengthen those guidelines.

Meanwhile bank regulators are also seemingly heeding the president's order, with the Fed taking longer than usual to approve merger applications and Democratic Federal Deposit Insurance Corp. board members submitting a request for comment on M&A guidelines.

A threshold of $100 billion in assets could be relevant for regulatory scrutiny and approvals, proposed by officials including Democratic members of the Federal Deposit Insurance Corp. board.

Banks face a question of whether the cost to get a deal approved keeps them from applying in the first place, said Thomas Hoenig, a former president of the Federal Reserve Bank of Kansas City and distinguished senior fellow at George Mason University's Mercatus Center, a market-oriented research center.

"The greatest consolidation is in the largest five or 10 [banks], and the regionals are just trying to consolidate to survive these times," Hoenig added. The industry may become pretty concentrated as "people are migrating to the high-tech" options, such as neobank payment providers and other large fintech companies.

Regulators consider competition within markets, but that definition might need to evolve.

"As we're pushing more and more of the services ... online, does the tight geographic definition continue to make sense?" asked Brian Knight, director of innovation and governance and a senior research fellow at Mercatus. "Is there the risk that you focus too much on [online banking], and in fact there is a lot of people where the proximity to a physical location really does matter for them?"

Deal activity is just one of several areas that analysts are watching for bank regulation in 2022.

Financial services for cannabis businesses

Despite Congress omitting a bill allowing banks to conduct business with cannabis companies from the National Defense Authorization Act, stakeholders believe that there is a strong likelihood it could pass on its own in 2022.

The Secure and Fair Enforcement Banking Act is being held up by Democratic leadership in the Senate seeking more comprehensive cannabis legislation, according to Stephen Keen, vice president of congressional relations at the Independent Community Bankers of America.

But those efforts are expected to fall short, and if they do, the SAFE Banking Act, which passed the House in 2019, will receive broader support in the upper chamber, said Isaac Boltansky, director of policy research at BTIG LLC.

Climate risk

Addressing risks to banks posed by climate change has been a top priority for regulators under the Biden administration and that is only expected to increase in 2022.

The Fed is likely to issue similar guidance to the OCC or its own regarding how banks should address these risks, according to Yevgeny Shrago, a policy counsel for Public Citizen's Climate Program.

"Both regulators should then follow Europe's lead and conduct scenario analysis to test bank vulnerability to both physical and transition risks at various time horizons," Shrago wrote in an email. "At the same time as they take these important steps to assess the threats and improve individual bank safety and soundness, they should start preparing to build deeper resilience into the financial system."

These actions could include assessing potential weighted capital requirements, climate risk capital surcharges for big banks or limits on the riskiest fossil fuels in investment portfolios, Shrago added.

Consumer protection

The Consumer Financial Protection Bureau under Director Rohit Chopra, whose term started in October, is likely to be more active than under the previous Republican administration, according to Boltansky of BTIG in a note to clients Nov. 30. Activity will include rulemaking, supervision and enforcement.

Buy-now, pay-later companies are another topic of potential rules or target enforcement, according to Edward Mills, a managing director and Washington policy analyst at Raymond James & Associates Inc., in a Dec. 17 note. Mills expects to see action in the second half of 2022.

The agency recently launched an inquiry into buy-now, pay-later credit due to concerns about accumulating debt, regulatory arbitrage and data harvesting in the consumer credit market.

Stress tests

Analysts do not expect the Fed's stress tests of banks to change in 2022.

Predicting changes to the annual stress tests is difficult given that Biden has still not nominated an individual to fill the open vice chair of supervision seat at the Fed — the person who will oversee the tests, Hoenig of Mercatus said. Nevertheless, Hoenig does not expect to see any changes in the next 12 to 20 months given the time required for a nominee to be confirmed and then to make changes. The Democratic nominees are unlikely to ease the tests, Hoenig added.

Policymakers are debating the merits of current capital requirements with some at the Fed advocating for lower levels, arguing it would encourage banks to make more loans, Hoenig added.

Banks have maintained higher than required capital levels during the COVID-19 pandemic, and changes to regulatory requirements like these tend to be reactive rather than proactive, said Francesco Trebbi, a business and public policy professor at the University of California, Berkeley's Haas School of Business.

"I do not think that they will appoint a combative vice chair for supervision given the current political climate, so the chance of a more activist stance on that front seems fairly low," Trebbi wrote in an email.

A Federal Reserve spokesperson declined to comment on whether it might change its stress tests.