The US Office of the Comptroller of the Currency (OCC) on January 29 proposed meaningful revisions to its rules and processes for reviewing proposed transactions involving national banks under the Bank Merger Act. The proposed amendments would notably remove the expedited application review process and associated OCC streamlined business combination application, replacing them with a policy statement that outlines the principles the OCC plans to use when evaluating merger applications, including a number of proposed indicia that support approval and, potentially, denial.
The proposal followed a speech by Acting Comptroller of the Currency Michael Hsu and comes almost one year after the OCC’s 2023 Symposium on Bank Mergers and in the wake of broader governmental scrutiny on the bank merger review process. The proposal is likely to be of interest to national banks and others within the banking industry, particularly its potential to clarify and, in some cases, establish presumptions for approval or denial, as well as its impact on timing for Bank Merger Act applications with the OCC.
This blog post summarizes the proposal (which may be viewed here) and provides some observations on the potential effects of the proposal (including what may, and perhaps may not, change if the proposal is adopted). Comments are due no later than 60 days following publication of the proposal in the Federal Register.
Proposed Amendments and Policy Statement
The OCC’s proposed amendments to its Part 5 business combination regulations would (1) remove the current provisions permitting expedited review, codified at 12 C.F.R. § 5.33(i), and (2) remove the OCC’s streamlined business combination application, codified at 12 C.F.R. § 5.33(j). Currently, under those two provisions, certain applications that qualify as “business reorganizations” under OCC regulations are deemed automatically approved as of the 15th day after the close of the public comment period, unless the OCC notifies the applicant that its application is not eligible for expedited review or that the expedited review process has been extended. In addition, current OCC regulations set forth four specific situations in which an applicant could use a “streamlined business combination application” as opposed to the full Interagency Bank Merger Act application.
The OCC is proposing to remove both of these provisions entirely because, in its view, (1) “any business combination subject to a filing under § 5.33 is a significant corporate transaction requiring OCC decisioning, which should not be deemed approved solely due to the passage of time,” and (2) “[g]iven the nature of review of business combinations . . . it appears that the fuller record provided through the Interagency Bank Merger Act Application provides the appropriate basis for the OCC to review a business combination application.”
In their place, and to assist the OCC in reviewing applications for combinations, the OCC has proposed a policy statement that is designed to “outline general principles the [OCC] uses in its review of applications under the Bank Merger Act and the OCC’s consideration of the financial stability, financial and managerial resources and future prospects, and convenience and needs factors.” As is usual, the proposal would still allow the OCC to approve business combination applications in limited circumstances, such as those related to acquisitions of failed banks, on an expedited basis.
Criteria Indicative of Approval
As observed by Acting Comptroller Hsu in his speech, “[m]erger applications exist along a spectrum,” and while some clearly argue for approval or denial, the “majority lie somewhere in between and require varying degrees of scrutiny and multiple rounds of inquiry.” Along this continuum, the proposed policy statement would set forth 13 criteria or indicia that “applications consistent with approval generally feature,” among which include the following:
- Certain attributes about the acquirer’s financial conditions and size
- The acquirer’s management, compliance, and Community Reinvestment Act (CRA) ratings
- The effectiveness of the Bank Secrecy Act/anti-money laundering (BSA/AML) program, as well as the absence of fair lending concerns of the acquiring institution
- Attributes regarding the target’s size and ratings, including that the target’s combined total assets are less than or equal to 50% of the acquirer’s total assets
- The resulting institution having less than $50 billion in total assets
- The lack of any significant effect on competition
- The absence of any significant CRA or consumer compliance concerns
Criteria That Could Lead to Denial
Conversely, the proposed policy statement also identifies indicia that may raise supervisory concerns and likely would be inconsistent with approval, such as if the acquirer
- has an unsatisfactory CRA rating;
- has a compliance or management rating of “3” or worse;
- is a global systemically important bank (G-SIB) or a subsidiary thereof;
- has an open or pending BSA/AML enforcement or fair lending actions, including referrals or notifications to other agencies; and/or
- has failed to address corrective actions under an existing formal enforcement order or has been the subject of multiple enforcement orders during the prior three-year period.
The OCC notes that presence of any of these factors means an application is unlikely to receive approval “unless and until such concerns are resolved.”
Financial Stability Considerations
The policy statement also articulated the factors the OCC will consider when evaluating financial stability concerns under the Bank Merger Act. These factors are not new and, in fact, largely mirror those factors that have been applied by the OCC and other federal banking agencies in reviewing bank merger and acquisition (M&A) transactions since the Dodd-Frank Act added financial stability as a mandatory factor for consideration under the Bank Merger Act and other statutes in 2010. They include:
- Size
- Substitutability
- Interconnectedness
- Complexity
- Cross-border activity
- Difficulty of resolvability
- Any other factors that present a risk to the US banking or financial system
The OCC proposal would also explicitly apply a balancing test when evaluating financial stability, specifically to weigh the risks of approving a proposal against the risks of denying a proposal. The policy statement continues to largely reflect the OCC’s views regarding evaluation of the financial and managerial resources—and future prospects—of the combining and resulting institutions.
The policy statement also confirms that the OCC is less likely to approve a combination when the acquirer has
- supervisory issues or a “less than satisfactory supervisory record” (including by not complying with prior conditions imposed by the OCC);
- experienced rapid growth (e.g., a high level of organic growth over a short period of time); or
- engaged in multiple transactions with overlapping integration periods (i.e., the applicant is a serial acquirer).
The proposal also confirms that the OCC will continue to focus on corporate governance and personnel and systems integration plans, and specifically integration of IT and business continuity systems, as part of reviewing any merger applications.
The proposal also describes how the OCC would evaluate the “convenience and needs” impact of a transaction, including the probable effects of any proposed business combination on the communities to be served. The proposal specifies that this evaluation would be conducted on a prospective (i.e., forward-looking) basis in addition to evaluating an applicant’s CRA rating.
As part of this convenience and needs analysis, the OCC would specifically consider a longer or more detailed list of factors than previously articulated, including
- any plans to close, expand, consolidate, or limit branches or branching services, including in low- to moderate-income areas;
- any plans to cut the availability or increase the cost of banking services or products, or plans to provide expanded or less costly banking services and products to the community;
- credit availability throughout the community;
- job losses or decreased job opportunities from branch staffing changes;
- community investment or development initiatives; and
- efforts to support affordable housing initiatives.
The proposal also would clarify that, while the Bank Merger Act does not require the OCC to hold meetings or hearings, the OCC may determine that it is in the public interest to hold a hearing to facilitate public involvement in the decision-making process. The OCC proposes a number of factors it would consider as part of deciding whether to hold a public meeting.
Observations
The OCC’s proposal regarding its review of Bank Merger Act filings is, in some ways, simply a more transparent codification of existing agency practice and views, which many of us have already experienced while discussing bank applications with the OCC or other federal banking agencies. For instance, while expedited review and streamlined applications may be technically available for a specific transaction, a banking agency will not infrequently send additional information requests or otherwise extend the processing for an otherwise expedited application, thereby removing much of the advantage of “expedited” filing.
Similarly, it is almost common sense that an applicant with a poor supervisory record or poor management rating will face an uphill battle for approval to expand, and those familiar with the bank M&A process will undoubtedly have noticed increased scrutiny of integration plans by the federal banking agencies. When viewed through this lens, the proposed elimination of expedited filing and specification of factors that the OCC will consider when reviewing a bank merger, including those that are likely consistent with approval (or denial), does not appear significant.
On the other hand, however, the proposal represents another step in the continuing evolution toward increased scrutiny in how bank merger applications are reviewed, even without any formal changes in how competition or concentration limits are analyzed (which is a topic for another day, especially because Acting Comptroller Hsu stated in his speech that “we need to develop modes of analysis for banking competition that go beyond retail deposits as a proxy for market power”). Specifically, by removing the availability of expedited processing, the OCC seems to be signaling that even internal transactions that are essentially internal business reorganizations may be subject to increased scrutiny, extended processing timelines, and uncertainty that is more typically applied to true M&A transactions.
By including as indicia of supervisory concern (and some may say a presumption of denial) situations where the acquirer either (1) is a G-SIB or affiliate thereof, or (2) has an open or pending BSA/AML action, both of which cast a fairly broad net, the OCC could be precluding approval for a larger list of potential transactions than one may think appropriate.
The proposal also is potentially significant because, if adopted, it could set a de facto size threshold for mergers of up to $50 billion in total assets (one may easily ask why $50 billion instead of $100 billion to match the Federal Reserve’s presumption related to financial stability), while leaving those banks with more than $50 billion in total assets—but that are also not G-SIBs—uncertain as to their prospects. Furthermore, the proposal somewhat ominously introduces the possibility that the OCC (and perhaps the federal banking agencies more broadly) may now consider factors, such as job losses or reduced job opportunities, that they previously stated they would not consider as part of evaluating a merger application.
Ultimately, the proposal does introduce a level of increased transparency into the OCC’s bank M&A process, but it remains to be seen which elements of the proposal will be adopted by the OCC and which ones may be moderated.