30 Mar, 2023
US bank M&A must clear even higher regulatory hurdles following failures
By Zoe Sagalow
Banks' interest in M&A will likely surge once the dust settles from the recent market turmoil, but regulators will almost certainly respond to the tumult with even tougher deal reviews.
Regional banks have faced several M&A hurdles over the past year and a half, such as prolonged closing timelines, as regulators took a closer look at bank deals. Now, recent events like the failures of Silicon Valley Bank and Signature Bank and questions surrounding industry liquidity will push regulators to take an even tougher approach to M&A, which could stifle a potential wave of bank deals.
As part of those expected enhanced M&A reviews, regulators will zero in on deposit bases, liquidity and interest rate risk of both buyers and sellers.
Overall, merger reviews may become "much more stringent," Edward Hida, senior financial services risk management and regulatory advisor with Secura/Isaac group, said on a March 22 webinar hosted by Clark Street Capital.
Even more robust regulatory review
|
One of regulators' main focuses in merger review is loan portfolios and whether the deal will create "undue" concentrations, according to John Geiringer, a partner in the Financial Institutions Group at Barack Ferrazzano Kirschbaum & Nagelberg LLP. But now, other factors will increasingly grasp regulators' attention.
"Recent events may cause them to take a closer look at whether mergers could create excessive liquidity or interest rate risks," Geiringer wrote in an email.
Scott Coleman, partner at Ballard Spahr LLP, agreed that regulators will take a harder look at interest rate sensitivity, liquidity modeling, and resulting capital of the combined institution when reviewing transactions. While they will continue to pay close attention to deals between the nation's largest banks, that enhanced scrutiny will impact deals of all sizes, he said.
"Certainly any of the banks [with assets] $50 billion and above are going to get more attention on the liquidity on the balance sheet, but I think it's going to be true of all transactions," Coleman said in an interview. "There's no question that they're going to be focused on that, and certainly would have always been focused on it, but are probably going to place far more attention to it, even for smaller institutions."
The more intense transaction reviews will continue to drive delays in getting deals done at a time when banks are already feeling the pain of prolonged closing timelines, said Jonathan Hightower, partner at Fenimore Kay Harrison LLP who represents banks on growth plans, regulation and other topics.
Pushing selling banks toward credit unions
If regulators crack down even harder on merger reviews, it could come with an unintended consequence — more credit union acquisitions of banks, which have been on the rise in recent years but still make up a small part of overall bank M&A.
If bank regulators start taking a harder look at deposit concentration more broadly and impose new rules regarding concentration of uninsured deposits or deposits from certain industries, banks may prefer to merge with credit unions over other banks if the National Credit Union Administration does not impose similar restrictions, said Jason Kuwayama, shareholder in Godfrey & Kahn S.C.'s banking and financial institutions practice group whose focus areas include M&A, on the Clark Street webinar.
"Banks who are looking to acquire other banks for strategic reasons are going to start looking at that deposit concentration, do that analysis and there may be restrictions that the [Federal Deposit Insurance Corp.] puts on uninsured deposits and other things that makes that deal a lot less worthwhile deal or more expensive," he said.
Should regulators encourage regional banks to pair up?
Lack of diversification contributed to the collapses of Silicon Valley Bank, which had a large uninsured deposit base largely made up of venture capital clients, and Signature Bank, which also had a large uninsured deposit base.
Deal advisers noted that bank deals can help institutions diversify their business and funding bases. However, they also acknowledged that regulators have been more skeptical of transactions involving larger institutions. Silicon Valley Bank and Signature Bank both had more than $100 billion in assets at Dec. 31, 2022, which industry experts have tabbed as the unofficial threshold for regulatory scrutiny.
"With the benefit of hindsight, each of these institutions certainly could have survived if merged into a more diverse institution with better financial positioning," Hightower wrote in an email. However, "the regulatory environment for deals involving parties of that size has not been terribly welcoming."
Coleman agreed about Silicon Valley Bank and questioned if regulators would have allowed a transaction involving the bank to go through.
"To the extent that they could have found a transaction with a target that had a lot of on balance sheet liquidity, that could have been attractive to them," Coleman said. However, "these larger bank deals are taking an extended time to approve. … The other question I had about all of this is really whether or not they could have obtained approval given their own balance sheet position."
SVB Financial Group, the parent company of Silicon Valley Bank, struck its only bank deal in 2021 for Boston Private Financial Holdings Inc.
In recent House and Senate committee hearings regarding the recent bank failures, Republicans questioned top FDIC and Federal Reserve officials, asking if their "reluctance to promote mergers" contributed to the shortage of buyer interest in Silicon Valley Bank and Signature Bank, Ian Katz, managing director at Capital Alpha Partners LLC, wrote in a note on March 29.
Now, the recent events could serve as a cautionary tale of not allowing regional banks to engage in M&A.
"Regardless of the specifics of SVB and Signature, we think it’s going to be increasingly difficult for the Fed, FDIC and OCC to maintain their recent 'let’s-take-our-time' approach to M&A proposals," Katz wrote. "Whatever one thinks of M&A, a merger is preferable to a bank failure."