Federal bank regulators continue to signal they’re on a path to update bank-merger guidelines that have been in place since 1995 in light of how the competitive marketplace has changed over the years.
Rules about bank concentration remain a “big part of the conversation” around updating the Fed’s merger guidelines, which has been a prominent topic in recent speeches by some big names in the U.S. banking system, said Raymond James analyst Ed Mills.
“It’s pretty high on the to-do list for the Federal Reserve,” Mills said.
In at least three key speeches in September, banking regulators have spoken about bank mergers. The most recent was an address on Wednesday by Michelle Bowman, a member of the Fed’s board of governors.
When bank-merger deals land on the government’s desk, regulators review the number of branches the combined business would have in the banks’ respective communities. If the concentration is too high, they may require banks to divest some branches to protect competition and avert the potential for higher fees and fewer choices for consumers in a given area.
Some examples include the sale of seven bank branches in northeastern Mississippi as part of the $6 billion combination of BancorpSouth and Cadence Bank
in 2021. Huntington Bancshares Inc.’s
$22 billion merger with TCF Financial Corp. included a requirement to sell 14 branches in Michigan.
The $66 billion combination of SunTrust and BB&T in 2019 to create Truist Financial Corp.
sparked the sale of 30 SunTrust branches in three states to buyer First Horizon Corp.
In her speech on Wednesday, Bowman said the competitive marketplace has changed because of the increase in competition from less-regulated financial-technology companies.
Since the Fed’s current framework for mergers and acquisitions does not account for all competitors, Bowman said, “we’re only restricting banks from making strategic merger choices, while allowing those outside the framework to proliferate.”
Bowman, who served as a vice president of Farmers & Drovers Bank in Kansas from 2010 to 2017, is widely seen as the voice of community banks on the Fed’s board, Mills said, adding that her speech allowed her to put her mark on the effort to update bank-merger guidelines.
Two other major banking regulators have also weighed in on the topic recently.
Michael Barr, the Federal Reserve’s vice chair for supervision, said in a Sept. 7 speech that he’s working to assess how the central bank performs merger analysis and where it could improve.
“A merged institution may be able to provide more competitive products and services, but it could also have the potential to reduce competition and access to financial services in a geographic area by raising prices, narrowing the range of services offered, and reducing the supply of small business or community development loans that rely on local knowledge,” he said.
Acting Comptroller of the Currency Michael J. Hsu also addressed the topic, saying in a Sept. 7 speech that guidelines under the Bank Merger Act “are ripe for updating.”
The Office of the Comptroller of the Currency is working with the Department of Justice to review its bank-merger framework as well as to understand concerns about both the impact of bank mergers on communities and the potential for institutions to become too big to manage, Hsu said.
Industry groups have already been weighing in on these issues.
While regulators may voice concerns that bank mergers will result in fewer branches in some areas, the opposite is true, according to the Bank Policy Institute.
Although the total number of banks has gone down due to mergers, the number of bank branches nearly doubled between 1981 and 2021, according to the institute. Over that 40-year period, the group said, the average bank’s branch network increased to 17.1 branches from 2.7 branches.
All told, the Bank Policy Institute reported, there were 4,377 banks in the U.S. in 2020, down from 14,434 in 1981. During the same period, the number of branches increased to 74,936 from 38,738.
Updating merger rules will be a complex task involving the Fed, the Federal Deposit Insurance Corp. (FDIC) and the Justice Department, among other agencies, as well as laws including the Bank Holding Company Act, the Bank Merger Act, the Dodd-Frank Act, and the Home Owners’ Loan Act.
The Justice Department has been seeking public input on whether it should update its standards for assessing proposed bank mergers under U.S. banking and antitrust laws. The Fed must also weigh in as part of the overall process.
Along with bank mergers, the Justice Department is looking at updating rules about mergers and acquisitions more broadly. In a July 2021 executive order, President Joe Biden urged the FDIC and other federal agencies to review current practices and adopt a plan “for the revitalization of merger oversight.”