Final FDIC M&A Policy Statement Exacerbates Regulatory Uncertainty in Bank M&A

In an increasingly complex, delay-riddled and uncertain regulatory environment for merger approval, banks become reluctant to commit the considerable resources required to undertake the process, ultimately stifling innovation and competition. The FDIC's recently finalized Statement of Policy on Bank Merger Transactions only exacerbates this uncertainty by significantly changing how mergers are evaluated by the agency, including with respect to the scope of its jurisdiction under the Bank Merger Act and its analysis of the statutory factors governing approvals. A lack of interagency coordination in this critical policy area furthers the uncertainty for industry participants and has a chilling effect on bank merger transactions.

This effect extends beyond immediate transaction considerations; it may also influence the strategic decisions banks make regarding investment, risk management and competitive positioning. These regulatory shifts will have lasting implications for the banking sector's structure and competitive landscape. Striking the right balance between regulating and promoting healthy M&A activity is essential for fostering a robust banking industry in the years ahead.

This post will break down certain aspects of the FDIC's statement and preview potential legal challenges to changes that are, in effect, new regulatory requirements that function as final rules.^[1]

Challenging Problematic Requirements in the FDIC's Final Policy Statement

Certain aspects of the final FDIC policy statement-including its expansion of the FDIC's jurisdictional scope over non-merger transactions^[2] and its entirely new spin on what the "convenience and needs" statutory factor means^[3]-go beyond merely clarifying existing policy and represent a significant shift in the FDIC approach to evaluating and processing applications under the Bank Merger Act. Although the FDIC policy statement is styled as "nonbinding," there is strong evidence that its contents are, in effect, legally binding. Once established as final agency actions, there are strong legal grounds to challenge the substance of these provisions.

The FDIC Is Illegally Growing Its Jurisdiction Under the Bank Merger Act

The FDIC policy statement seeks to expand the agency's authority under the Bank Merger Act to cover transactions beyond traditional mergers and consolidations, expressly stating that acquisitions of "lines of business [where] the target is no longer a viable competitor" qualify as "mergers in substance" subject to prior FDIC approval, "regardless of whether the target plans to liquidate immediately after consummating the transaction."^[4] The FDIC rejected comments noting that such an expansive interpretation of the agency's jurisdiction was inconsistent with the statutory language and structure. Under this change, simple deals become needlessly complicated. The change is especially concerning for any bank considering an asset acquisition transaction with an uninsured entity, as the FDIC gives effect to an overbroad interpretation that will complicate what were previously straightforward transactions.

The FDIC's assertion of jurisdiction over an expanded group of transactions likely constitutes final agency action. The FDIC is interpreting the Bank Merger Act to extend its jurisdiction beyond the plain meaning of the statutory language and specifically enumerated categories of transactions that have historically been covered by the de facto merger doctrine, thus imposing legal consequences on parties seeking to engage in such transactions.

Once established as final agency action, the FDIC policy statement's interpretation of the word "merger" in the Bank Merger Act is not entitled to deference both in light of the Supreme Court's recent decision in Loper Bright Enterprises, and because Congress limited the FDIC's authority to define terms in the Bank Merger Act to the extent "authority [under the Bank Merger Act] is conferred on any of the Federal banking agencies other than the FDIC"; the Bank Merger Act confers the OCC and Federal Reserve with authority to regulate other types of bank mergers. Moreover, the FDIC's interpretation of "merger" is unreasonable; indeed, the FDIC itself acknowledged in the proposed FDIC policy statement that "acquisitions of assets are not specifically enumerated as a category of transactions subject to FDIC approval under the BMA."^[5] This expansion is contrary to the plain language and structure of the Bank Merger Act.

The FDIC Policy Statement Disregards Clear BMA Statutory Factors

The FDIC policy statement introduces a novel requirement that applicants show that the resulting institution from a proposed merger will "better meet the convenience and needs of the community to be served," through, for example, higher lending limits, greater access to existing products and services, new or expanded products or services, reduced costs or increased convenience. This FDIC-specific policy requirement goes beyond the clear statutory requirement, which simply asks the FDIC to "take into account" the convenience and needs of the community. The accompanying demand for "specific and forward-looking information" will be evaluated by the FDIC as "claims and commitments" on an ongoing basis. This creates a new burden on applicants that will almost certainly make the application process more cumbersome and further exacerbate timing delays as applicants seek to provide information that is difficult to obtain or produce.

The shift in language from considering community needs (the statutory requirement) to requiring demonstrable benefits (the FDIC's requirement) represents a significant overreach, not supported by the statutory language of the Bank Merger Act. Here again the FDIC's reinterpretation of this statutory factor likely constitutes final agency action. This novel requirement imposes legal consequences for applicants with the practical effect of requiring applicants to demonstrate how they would meet the new standard; no bank (buyer or seller) would enter into a merger agreement subject to the FDIC's jurisdiction if the bank did not believe it would comply with this requirement of the final FDIC policy statement.

Anti-Merger Bias

Finally, the FDIC policy statement states that transactions resulting in large insured depository institutions with assets exceeding $100 billion will face "added scrutiny," by way of "additional information requests, more frequent discussions and correspondence with application parties, and supplementary meetings and discussions with regulators and community groups," as these transactions are "more likely" to present potential financial stability concerns. This vague standard may discourage banks from pursuing mergers that could create larger institutions, further chilling potentially pro-competitive M&A activity. Heightened scrutiny of "large" transactions that result in IDIs in excess of $100 billion in assets is directly contrary to the size limit on mergers imposed by Congress-10 percent of national deposits or liabilities-which is approximately 20 times the size of a $100 billion-asset bank.

Clarifications in the OCC's Final Policy Statement

In a coordinated release alongside the FDIC's final statement, the OCC finalized its own separate, substantively distinct policy statement, adding to the marked lack of interagency coordination on the substance of M&A policy.^[6] The OCC also finalized rules removing expedited review procedures and streamlined applications. The OCC policy statement finalizes an indicator framework outlining positive and negative indicators for merger approval, but-unlike the FDIC policy statement -endeavors to eliminate some confusion stemming from its proposal. First, the OCC policy statement clarifies that applications that "tend to withstand scrutiny more easily and are more likely to be approved expeditiously" generally feature all of the enumerated positive indicators, but that "these indicators are not required for a transaction to be approved." Second, because the asset size thresholds (i.e., a combined entity with total assets of less than $50 billion and less than or equal to 50% of acquirer's total assets) were viewed as arbitrary thresholds complicating the M&A landscape, the OCC explained in its release that (1) the "$50 billion indicator merely reflects the likelihood of an expeditious approval," but that many larger transactions may also be approved, and (2) in the OCC's experience transactions involving institutions of similar sizes generally require "more review," but this "indicator is not intended to discourage mergers of equals."

The OCC's indicator framework could also face scrutiny, particularly concerning its lack of statutory basis for using an indicator framework and its potential to impose undue restrictions on merger applicants. The framework's focus on asset thresholds could be viewed as contrary to statutory intent. As noted above, however, the OCC took careful steps to clarify how it would use the framework, explained in the preamble to the final OCC policy statement.

[1] Final agency action is action that determines "rights or obligations" or imposes "legal consequences." Some courts have recognized that if "a so-called policy statement is in purpose or likely effect . . . a binding rule of substantive law," it "will be taken for what it is," i.e., a final agency action.

[2] The FDIC policy statement extends the FDIC's jurisdiction under the Bank Merger Act to cover transactions other than mergers and consolidations to include transactions that are purportedly "mergers in substance." Specifically, the FDIC extends its jurisdiction under the Bank Merger Act to include transactions (involving an IDI and a non-insured entity or involving IDIs in which the resulting institution is an FDIC-supervised institution) that are not de facto mergers under state corporate laws, such as acquisitions of assets or even discrete business lines.

[3] While the BMA provides that the FDIC only "take into consideration . . . the convenience and needs of the community to be served," the FDIC policy statement imposes a new requirement that an applicant establish that the merger will "better meet the convenience and the needs of the community to be served" and also require that the applicant "provide specific and forward-looking information to enable the FDIC to evaluate the expected benefits of the merger on the convenience and needs of the community to be served."

[4] The policy statement would subject asset acquisitions to FDIC approval under the Bank Merger Act even if the transaction would not result in the transfer of all or substantially all assets of a target or subsequent liquidation of the target (at least one if not both of which would be present for a transaction to be considered a de facto merger under state law).

[5] 89 Fed. Reg. at 29225. Asset acquisitions are covered in the BMA, but scrutiny of such transactions is limited to the acquisition of "the assets" of one insured bank by another insured bank, and the approval is required from the "responsible agency," which may or may not be the FDIC.

[6] Under the Bank Merger Act, the "responsible agency" for reviewing and approving an application generally is (1) the FDIC, where an insured depository institution merges with, assumes liability to pay any deposits made in, or transfers assets (in consideration of the assumption of liabilities or deposits of the IDI) to, a noninsured institution; (2) the OCC, when an insured depository institution merges with, assumes liability to pay any deposits made in, or acquires the assets of, any other insured depository institution, in each case where the resulting institution will be a national bank or Federal savings association. 12 U.S.C. § 1828 (c). These are the transactions to which the FDIC and OCC policy statements, respectively, should presumably apply.

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