BB&T and SunTrust have proposed a merger that could form the eighth-largest bank holding company (BHC) by assets in the United States (see CRS Insight IN11062, BB&T and SunTrust: The Latest Proposed Merger in a Long-Term Trend of Banking Industry Consolidation). This has focused congressional attention on bank mergers. This Insight examines the bank merger regulatory approval process.

Merger Approval Process

BB&T and Suntrust are both BHCs with state-chartered subsidiary banks. The Suntrust bank is not a member of the Federal Reserve System. As such, the merger must be approved by the Federal Reserve (the Fed; primary federal regulator of BHCs and state member banks) under the Bank Holding Company Act and the Federal Deposit Insurance Corporation (FDIC; primary regulator of state nonmember banks) under the Bank Merger Act.

Pursuant to these acts, mergers must meet several statutory conditions to be approved. While the statutory language of the acts differs in some ways, the agencies generally consider similar factors, including the banks' financial and managerial resources, past anti-money laundering compliance, and financial stability implications. Particularly pertinent in large bank mergers, both must consider competitive factors (i.e., the potential for monopoly power or anticompetitive effects) and the community's needs and convenience. For example, the merged entity may not initially hold more than 10% of total deposits nationally, 10% of all financial company liabilities nationally, or 30% of deposits in any state (certain states may have additional limits). The Department of Justice reviews mergers for compliance with federal antitrust laws. Furthermore, merging entities must have a good record of consumer protection compliance and Community Reinvestment Act (CRA; 12 U.S.C. §§2901-2908) performance.

The process includes opportunities for public input. Applicants generally must publish notice of their merger proposals, typically in newspapers, informing the public of the opportunity to submit written comments. In addition, the agencies may hold hearings on proposals, allowing interested parties to testify.

BB&T and SunTrust Considerations

Large bank mergers have been infrequent in the current economic expansion. A CRS analysis of S&P Global Intelligence data indicates that since 2010, in 88% of bank acquisitions, the acquired bank had assets of less than $1 billion, whereas 1% of acquisitions were for banks with greater than $10 billion in assets. The BB&T-SunTrust proposal is an outlier in comparison. Suntrust has $215.5 billion of assets, making it over twice as large as the next biggest post-crisis acquisition (see Table 1.)

Absent divestitures, the merged entity would currently have $441.2 billion in assets, well above the $250 billion threshold that automatically subjects it to enhanced prudential regulation (EPR) mandated by the Dodd-Frank Act. However, a bank of this size does not necessarily pose national anticompetitive or financial-stability issues. BB&T and SunTrust have already complied individually with most EPR requirements that would apply to the merged entity, because the threshold has only recently been increased from $50 billion. The merger application notes that the merged bank would remain significantly smaller than the very largest BHCs and hold 2.5% of U.S. banking assets and 2.7% of deposits. However, competitive effects are also considered at the state and local level. Because both banks are concentrated in the Southeast, they are proposing to divest branches in markets where their market share would be too great (the specific branches proposed are confidential).

Merger approvals are one of the main CRA enforcement mechanisms. The merger application reports a current CRA rating of "outstanding" for BB&T and "satisfactory" for SunTrust.

In regard to anti-money laundering compliance, a consent order was issued in 2017 requiring BB&T to correct deficiencies in its compliance risk management program. The merger application details the steps BB&T has taken since, and in April the consent order was terminated.

Merger Approval Trends

How frequently are merger applications approved? Data are available from the Fed covering 2006 to 2017 and from the FDIC covering 2013 to 2017. (As noted above, most of these mergers involved small banks.) In practice, no application was formally rejected over these periods. Instead, applicants withdrew them before rejection, and the FDIC may also return applications. Alternately, banks might not file an application if preliminary discussions with the agencies raise concerns.

At the Fed, the approval rate has increased since the crisis, as shown in the ratio of approved to withdrawn applications in Table 2. After reaching a postcrisis low of 2.8 in 2010, the ratio rose in most years. In 2017 and 2018, it surpassed precrisis levels, reaching 19.0 in 2018. For the FDIC, the data show no clear trend, although 2018 does have the highest ratio of the years available.

No clear trend is present in the average number of days for merger approval. Recently, approvals in cases that elicit adverse public comments have occurred more quickly, however. Although these proposals still take longer to approve than others, as shown in Table 4, the time has shortened in recent years, reaching 113 days in 2018.

Some critics believe that the banking regulators are too deferential to banks in their interpretation of the statutory considerations when approving mergers. Other critics believe the process allows outside actors to use adverse public comments to extract inappropriate concessions from the merging banks.

These trends might shed some light on whether merger approval standards have changed, although conclusions would be limited by the small number of withdrawn/returned applications and the lack of formal rejections and data on inquiries that did not result in applications. The increasing approved-to-withdrawn ratio at the Fed could be evidence that standards have become more permissive. (FDIC data are not available over the same period.) Similarly, the average days to approval has fallen significantly in cases where there were adverse public comments, although the overall days to approval shows no trend.

However, other possible explanations exists for such trends. For example, the quality of applications could have improved, because of improving economic conditions or if merger requirements in the postcrisis regulatory environment became clearer.