In an effort to increase transparency in the Bank Merger Act (BMA) approval process, the Office of the Comptroller of the Currency (OCC) has recently issued a proposed policy statement (the “Policy Statement”) which is intended to provide insight into the principles the OCC would apply when reviewing BMA applications. Coupled with the proposed Policy Statement are two proposed regulatory amendments to eliminate expedited review procedures in the context of business combination transactions. The full text of the proposed Policy Statement and regulatory amendments can be found here.
While the Policy Statement in particular, is only proposed, the OCC has, arguably, provided the banking community with public insight into various internal processes and factors the OCC may already be using (whether objectively or subjectively) in reviewing BMA applications. Although limited to national banks, the insights are equally valuable for state member and non-member banks to consider as they also evaluate the prospects for regulatory approvals of business combinations.
Policy Statement
The Policy Statement outlines the OCC’s general principles in reviewing BMA applications and how it assesses a variety of factors in determining whether or not to approve a business combination transaction. These factors include: (i) financial stability; (ii) financial and managerial resources, and (iii) the convenience and needs of communities.
General OCC Principles for Business Combinations
The Policy Statement identifies certain hallmarks which the OCC has determined are “indicators” of approvable applications. These include:
- attributes regarding the acquirer’s financial condition and size;
- the acquirer’s management, compliance and Community Reinvestment Act (CRA) ratings;
- a good record of fair lending for the acquirer coupled with an effective Bank Secrecy Act/anti-money laundering program;
- factors relating to the target’s size and ratings;
- no significant adverse effect on competition; and
- the customary absence of significant CRA or consumer compliance concerns.
Similarly, the Policy Statement sets forth certain indicators that will raise supervisory concerns and that will lead, more likely than not, to denial of approval of a business combination application unless such indicators are properly addressed. These include if an acquirer:
- has a CRA rating below “Satisfactory”;
- has compliance or management ratings of 3 or worse;
- is systemically important;
- has open or pending Bank Secrecy Act/Anti-money Laundering enforcement or fair lending actions; or
- has failed to properly address corrective actions required by bank regulators or has multiple enforcement actions against the acquirer over the last three years.
Financial Stability
In assessing financial stability in BMA applications, the Policy Statement provides that the OCC will apply a balancing test which weights the financial stability risk of approving the transaction against the same financial stability risk of denying the transaction. This concern is heightened when reviewing applications to acquire troubled financial institution. In that context, the OCC would review, among other factors:
- whether the size of the combined institutions would result in material increases in risk to financial stability;
- the effect on competitive product offerings following completion of the combination;
- whether the acquirer, following the business combination, would engage in any business activities or participate in markets that could cause significant risks to other banks in the event the acquirer experienced financial distress; and
- difficulty in winding up the resulting institution’s business if it were to fail.
Financial and Managerial Resources and Future Prospects
As part of its overall assessment of a BMA application, the OCC would consider the financial and managerial resources and future prospects (both separately and together) of the institutions that are parties to the business combination both separately and together.
The OCC will be less likely to support a BMA application when the acquirer:
- has a less than satisfactory supervisory record;
- has experienced rapid growth;
- has engaged in recent multiple acquisitions with overlapping periods of integration;
- has failed to comply with conditions imposed in prior OCC licensing decisions; or
- is functionally the target in the transaction.
Convenience and Needs
With respect to the convenience and needs of the community served by the proposed business combination, the OCC would review:
- any plans to close, expand, consolidate, or limit branches or branching services, including in low- or moderate-income areas;
- any plans to reduce the availability or increase the cost of banking services or products or plans to provide expanded or less costly banking services or products to the community;
- credit availability throughout the community;
- job losses or reduced job opportunities from branch staffing changes;
- community outreach strategies along with community investment or development initiatives; and
- efforts to support small businesses and affordable housing initiatives.
The OCC would also consider comments from public hearings or meetings and the applicant’s CRA record in evaluating a business combination application. In addition, the Policy Statement outlines the criteria the OCC will utilize in determining whether a public meeting is appropriate to review a BMA application.
Regulatory Amendments
Coupled with the Policy Statement, the OCC is proposing to amend certain regulations, including removing business combinations from an “expedited review” process and eliminating the prospect that applications could be approved by the OCC by default just from the passage of time.
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The release of the Policy Statement, together with remarks by Acting Comptroller of the Currency, Michael Hsu, are part and parcel of overall efforts by the federal banking agencies to reevaluate how to assess business combination transactions in the financial institution industry. We anticipate similar proposals from the other bank regulatory agencies in the near term.