Regulators may leave bank mergers in limbo
Mergers and acquisitions have been a backbone of financial services, a strategic tool that helps big companies get bigger and small businesses get big, finally.
At a high level, mergers and acquisitions can be seen as a direct answer to this age-old question of build versus buy, in this case, firmly in favor of “buying”. By putting the money (or debt) to close one deal, a bank that enters into another, or pools its resources in a merger, can gain access to technology or a desirable demographic that would otherwise only be acquired. with the passage of time and maybe even trial and error.
Bank merger regulations appear to be the subject of further scrutiny, but there also appears to be internal feuds between regulators, which may darken the picture surrounding the transactions themselves a bit.
As reported by sites such as the Wall Street Journal, there is at least some partisanship involved here. The Journal reported that Democratic members of the Federal Deposit Insurance Corp. (FDIC) “are pushing to review regulations” related to larger banking transactions.
And in a twist that has surfaced in recent days, three Democratic members had sought to initiate a regulatory review that was not expressly supported by FDIC President Jelena McWilliams. This trio included the director of the Consumer Financial Protection Bureau, Rohit Chopra, Acting Currency Comptroller Michael Hsu and Martin Gruenberg. The Journal noted that Chopra, Hsu and Gruenberg voted privately to support the revision.
“The three-member decision is a signal that Democrats are trying to set the FDIC’s agenda and are not waiting for Ms. McWilliams’ term to expire in 2023,” the Journal reported.
Leaving politics aside for a moment, it is worth considering the joint statement released last week by Chopra and Gruenberg. In addition to the (allegedly) one-sided assertion in the document that the FDIC board approved a request for information and comment on the rules and policies related to bank merger operations, we find that “although there has been significant consolidation in the banking sector Over the past 30 years, fueled in large part by mergers and acquisitions, there has been no meaningful review of the implementation of the Bank Merger Act by agencies during this period. “
Against this background, the number of insured deposit-taking institutions with assets exceeding $ 100 billion stood at 33 last year, compared with a single entity of this size in 1990.
These large companies now hold 70% of total industry assets and 66% of deposits.
The FDIC, according to the document, should (because it has not yet done so) “explicitly incorporate the factor of financial stability into its rule or policy statement implementing the Bank Merger Act.” This factor examines the risks to the stability of the financial system as a whole that could result from such mergers. In a look back at the great financial crisis of 2008, said Chopra and Gruenberg, “Experience shows that the consideration of financial stability risk under the Bank Merger Act should not be limited to the world’s largest banks. ‘systemic importance (GSIB)’.
The cascade of acquisitions of failing regional banks and the consolidations that marked the crisis of the last decade “arguably exacerbated concentration” in the banking system and increased the risk of long-term financial stability, according to the note. The letter stated that it should be examined (and asked for comments) whether a transaction creating a financial institution with an asset base above a predetermined level (hypothetically, say $ 100 billion), should be considered to pose a systemic risk. .
“More specifically, the request for comment asks whether clear minimum standards for prudential factors should be established and, if so, which minimum standards for which prudential factors,” wrote Chopra and Gruenberg.
Politics can cloud matters until all FDIC regulators – spanning both political parties – join a unified approach. But the only thing that is in the dark could be the timing … while a close examination of the mergers themselves seems a certainty.