The Office of the Comptroller of the Currency dropped more hints about what aspects of bank merger review policy are under scrutiny as regulators embark on their sweeping review of those guidelines.
In a speech on behalf of acting Comptroller Michael Hsu, Senior Deputy Comptroller and Chief Counsel Benjamin McDonough said the agency is focused on competition, financial stability and community needs during its rethink of current bank merger review policy. The comments were delivered at the OCC's Bank Merger Symposium on Feb. 10, where industry representatives came together to discuss the future of bank merger reviews.
"We need to build a better mousetrap so that healthy mergers get approved while unhealthy mergers get rejected," McDonough said.
Competition
In his remarks, McDonough reiterated regulators' prior calls for updates to how the Herfindahl–Hirschman Index, or HHI, is used to examine market saturation in bank merger reviews. HHI guidelines, which were last updated in 1995, are "less relevant" given the recent rise in online and mobile banking and nonbank competition, he said. Regulators have long called for an update to the 1995 Bank Merger Competitive Review guidelines. In 2020, the Justice Department asked for public comment on amending those guidelines.
In a panel discussion on competition, H. Rodgin Cohen, senior chair at Sullivan & Cromwell LLP, argued that "competition can be adversely affected if markets are unduly insulated for mergers."
"Good mergers should not be discouraged by uncertain regulatory outcomes, and uncertainty of outcome should not be used as a policy tool to deter mergers," Cohen said.
Some believe that increased regulatory scrutiny of M&A is hindering competition by creating more challenges for regional banks to add the scale needed to effectively rival the largest banks.
Financial stability
Another area of merger guidelines ripe for review is financial stability, specifically with a focus on regional banks, McDonough said. As those guidelines currently stand, "there is a resolvability gap for large regional banks in that our resolution tools may not be up to the task," McDonough said.
During a panel on financial stability, participants discussed whether a new framework is needed in addition to the one used for global systemically important banks, or G-SIBs.
"On the measure of financial stability that we have currently, the large regionals could become materially larger without coming anywhere close to being a G-SIB," said former Federal Reserve Vice Chair for Supervision Randal Quarles.
For large regionals, while they do not hold globally systemic importance and do not have cross-border exposure, "domestically, their merger might have financial stability impact," said Graham Steele, assistant secretary for financial institutions at the U.S. Treasury Department.
Steele suggested that creating a new framework for regional banks could be beneficial in ensuring financial stability. As an example, he said if two Category III banks — those with between $250 billion and $700 billion in total assets — merge, they could still be Category III despite having grown "significantly larger." While having more systemic risk, they would still have the same common equity Tier 1 capital, Steele added.
In addition to adding a regional bank framework, the panelists also discussed whether to revise the G-SIB framework, which currently does not address cybersecurity risk, Quarles said. Quarles, who is chairman and co-founder of The Cynosure Group, said regulators should revise the G-SIB framework rather than create something new.
Tim Clark, a senior banking adviser at Better Markets, said he is surprised no nonbank financial institution has a systemically important designation in the U.S.
"So clearly we have an issue with our measure of systemic importance and how we make a determination — a new determination — that a bank or that an institution has now become systemically important," Clark said.
Convenience and needs
McDonough also addressed community convenience and needs. The official said branch closures and changes in product offerings can lead to reduced services, and Community Reinvestment Act ratings are a "critical part" of the analysis for convenience and needs.
Since a July 2021 executive order from President Joe Biden calling for increased M&A scrutiny, banking regulators have zeroed in on areas such as the Community Reinvestment Act and fair lending when reviewing mergers, deal advisers told S&P Global Market Intelligence in December 2022. Convenience and needs have grown in importance over the past few years, as community groups' outcry prolongs deal closing timelines and forces banks to strike community benefit agreements.
During a panel discussion, at least one participant argued that the definitions of convenience, needs and community are unclear as they currently stand.
"We have not actually defined what 'convenience and needs' looks like for a particular community," said Renita Marcellin, legislative and advocacy director at Americans for Financial Reform. For example, it could relate to more branches or more ATMs.
However, another panelist noted that branches are not a good measure of meeting community needs. Greg Baer, president and CEO of the Bank Policy Institute, referenced research that found branch closures were about the same for banks that did and did not engage in mergers.
"Branches are not the driver," Baer said. "The driver is access to technology, access to a phone and financial literacy. And so if you care about the future, and you care about financial inclusion, stop talking about branches, and start talking about things like those."
