What Happened
On July 9, 2021, President Biden signed an “Executive Order on Promoting Competition in the American Economy.” Included within the order is a sweeping recommendation that the Attorney General, in consultation with the heads of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, review current practices and adopt a plan within 180 days for the “revitalization” of bank merger oversight to provide more extensive scrutiny of mergers.
In his companion comments to the executive order, the President noted that the United States has lost, over the last four decades, 70% of the banks that once populated the country and that federal agencies have not formally denied a bank merger application in more than 15 years. In addition, he cited increased costs for consumers, restrictions on credit access and harm to lower-income communities as direct byproducts of bank consolidation.
Why It Matters
The immediate impact of the executive order is to introduce an element of uncertainty in the planning, pricing and execution of bank acquisitions by other banks, primarily involving larger institutions with branches in overlapping metropolitan statistical areas (MSAs) or counties. For the last several years, the likelihood of receiving regulatory approval for a merger turned primarily on the acquiring and resulting banks’ being well-capitalized and having CAMEL ratings of 2 or better, management ratings of 2 or better, a Herfindahl-Hirschman Index (HHI) that is no greater than 1,800 and that does not increase by more than 200, and BSA-AML and CRA ratings that are deemed satisfactory. Until the DOJ and bank regulators announce their collective plan, which is due in January 2022, and possible revised or new standards for scrutinizing bank mergers more intensively, it is unlikely that the status quo will be disrupted. The same bank merger guidelines for antitrust purposes, which have been in effect since 1995, should continue until they are changed by either amendments to the Bank Merger Act or regulations applicable to regulatory approvals of bank mergers.
But at the very least, this uncertainty could adversely affect the valuation and pricing of acquisitions and result in some bank boards’ reevaluation of their strategic plans. The underlying thrust of the executive order appears to be aimed at the largest corporate interests in 17 sectors, including banking. If the regulatory response is limited to the largest banks without “trickle down” regulatory application, the executive order may not have any meaningful impact on regional or community banks.
A possible countervailing short-term impact for sellers of small institutions is that valuations offered by investor groups with plans to enhance revenues with new products and delivery models could become more competitive with bids from existing banks that rely on significant cost savings measures from branch closures and staff eliminations. Faced with any material reduction in merger premiums, or the possible absence of a merger of equals or acquisition by a larger bank, banks with the necessary vision, capital and personnel may decide to remain independent by growing organically with new products and services, relocating operations to growing markets, cherry-picking compatible acquisitions in desirable markets, or establishing strategic partnerships to offer white label banking products and services to companies with large customer bases.
While the initial headlines focus on more intensive scrutiny of bank mergers, a reassessment of bank merger guidelines had begun earlier. The DOJ commenced a review of bank merger guidelines in September 2020. The department recognizes that the existing bank merger guidelines in effect since 1995 are out of date.
“Innovative emerging technologies are disrupting traditional banking models and introducing new competitive elements to the financial sector. As part of the division’s increased attention to modernizing our competitive analysis of financial services markets, we are examining whether the 1995 Banking Guidelines need updating to reflect our evolving economy.”1
A critical component of this review is the relevance of the current HHI index—the DOJ’s first review threshold for antitrust purposes. HHI is based on the merging banks’ market shares in MSAs as defined by the Federal Reserve Board and measured by the number of branches and deposits in those MSAs. With Internet banking, remote deposits, reloadable credit cards offered by large retailers, retail mobile ACH payments, and Zelle and Venmo payments, the limited geographic and deposit elements of the current HHI index are or are becoming less relevant. While not mentioned in the executive order, the response to it may also take into account the rapidly growing competition to legacy banks from the various fintechs offering loans, deposits, payment services, financial planning and investment services via the Internet. The target markets for many of these fintechs are the underserved customers that the executive order seeks to benefit. To the extent the “whole government” review contemplated in the executive order incorporates these factors in its analysis, in addition to geographically centered physical branch and deposit data, the effects on bank mergers may prove to be positive.
Perhaps more important to facilitating abundant and cheaper banking services for all Americans may be the ability of customers to own their own banking data and have it follow them wherever—whatever financial service provider is interfacing with the customer. More banks are offering application programming interface (API) access to their customers’ information to third parties as requested by their customers as well as deposit and payment services. This facilitates the transformation of banks from originators of financial products and services to their own customers to banking service providers to third-party financial product originators and their customers. In this regard, it is worth noting that the Consumer Financial Protection Bureau has already issued a set of 100 questions for comment and that the executive order instructs the CFPB to adopt regulations aimed at facilitating the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products. This could lead to increased competition in banking and other financial services that will benefit those banks with the vision, capital and qualified personnel to reimagine banking for the benefit of their shareholders and customers.
The Bottom Line
For the vast majority of banks, the executive order may not have much, if any, immediate impact on merger and acquisition activity. The final impact will have to be assessed once the DOJ and the bank regulators propose revised merger guidelines and adopt other regulations that hopefully and most likely will involve consideration of the many factors characterizing the financial services marketplace beyond local market branches and deposits.
1 www.justice.gov/atr/antitrust-division-banking-guidelines-review-public-comments-topics-issues-guide (October 28, 2020)