Proposed Statement of Policy on Bank Merger Transactions

In my first year at the FDIC, I have been struck by the amount of time some merger and other applications have been under the FDIC's consideration. Some merger applications have been with the FDIC well over a year.

I have previously speculated that some of this delay might be due in part to an evolution in our merger policy to incorporate lessons learned from the 2007-2008 financial crisis and last year's bank failures.¹ I also have suggested that, if that's the case, we owe it to the public to articulate a revised policy framework and timely consider applications under that policy.

In that sense, I welcome today's proposal to update our statement of policy on bank mergers. Hopefully it will facilitate transparency and also the timely processing of merger applications.

On the other hand, it is unfortunate that this update makes explicit what we all sort of already knew – the FDIC takes a quite skeptical view of bank mergers. I am unable to support today's proposal because it reflects and would implement a bias against bank mergers that is bad policy and contrary to law.

A few examples of this bias:

• The proposal drops the existing policy that the FDIC normally will not deny a proposed merger on antitrust grounds if the transaction passes an initial concentration test based on the Herfindahl-Hirschman Index (HHI).² There probably is merit to alternatives to HHI. It probably also makes sense to consider measures other than local deposit share (e.g., measures of market power in lending and other product markets). But that should not preclude us from providing some clarity by adopting clear, metric-based presumptions or safe harbors for mergers that do not pose competitive effects concerns.
• The proposal has not included a tailored approach to assessing competitive effects in rural markets. In these communities, HHI and other measures might be misleading, particularly to the extent residents receive banking services from credit unions, the Farm Credit System, or other nonbanks or even from outside the community. Absent an approach tailored to rural markets, our proposal risks discouraging mergers between smaller banks in same community in favor of acquisitions by larger banks from outside the community.³
• The proposal adopts a new expectation “that a merger between IDIs will enable the resulting IDI to better meet the convenience and the needs of the community to be served than would occur absent the merger.”⁴ I have not been persuaded that there is a basis in law for an expectation that the post-merger bank do “better” on the convenience and needs factor. It is also unclear to me that we legally may consider “any job losses or lost job opportunities from branching changes.”⁵
• The proposal's new financial stability considerations relate exclusively to ways in which a merger could increase risk to financial stability. The proposal does not consider ways in which a merger could decrease risk to financial stability by, for example, fostering competition with the largest banks or improving the financial condition of a weaker bank.
• The proposal could be read to preclude a merger in which a stronger bank rescues a troubled bank. The proposal states that “[g]enerally, the FDIC will not find favorably on the financial resources factor if the merger would result in a weaker IDI from an overall financial perspective”⁶ But most rescue transactions will result in a combined bank that is weaker than the stronger bank, particularly after giving effect to the mark-to-market losses associated with purchase accounting.

I look forward to comments on this proposal, and hope that I will be able to support an eventual final statement of policy that takes a more balanced approach.