Bank Mergers and Acquisitions

Bank Mergers and Acquisitions

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October 28, 2021
Bank Mergers and Acquisitions
On July 9, 2021, President Biden issued an executive order
the banks are legally structured. When banks with different
on competition, which, among other things, encourages the
charter types are involved, approval by more than one
Attorney General and the federal banking regulators “to
regulator can be required. Most of the largest U.S. banks
review current practices and adopt a plan, not later than 180
are structured as bank holding companies (BHCs), and their
days after the date of this order, for the revitalization of
M&As are approved by the Fed. (States may also have
merger oversight.” Congress has been interested in mergers
requirements, beyond the scope of this In Focus, but a state
among large banks in recent years (see Table 1),
regulator can block M&As only on limited grounds.)
particularly how they might affect competition. This In
Focus provides an overview of the bank merger process and
Regulators review M&A proposals for, among other things,
policy issues.
their effects on competition. For example, bank regulators
and the Department of Justice (DOJ) review proposals for
Table 1. Recent IDI M&As Among Top 25 BHCs
effects on market power in both national and local markets.
By BHC consolidated assets, as of June 30, 2021
DOJ has the authority to block an M&A on antitrust
grounds. It is not uncommon for banks to divest branches
Assets
M&A
before an M&A is approved to allay concerns about market
Institutions
($billion)
Date
power. For example, on 16 occasions between 2006 and
2017, the Fed required M&A applicants to sell off
U.S. Bank
$692
9/2021*
branches. M&As are also subject to statutory
(plans to acquire MUFG Union
(pre-M&A sum)
concentration limits to curb market power—the merged
Bank)
entity may not hold more than 10% of total deposits
PNC Financial Services
$555
6/2021
nationally or 30% of deposits in any state. In addition, for
(acquired BBVA USA)
BHCs, the merged entity cannot hold over 10% of all
financial company liabilities nationally.
Truist Bank
$522
12/2019
(merger of BB&T with
Regulators must also consider the “convenience and needs
SunTrust Banks)
of the community.” They do so by seeking public
Capital One Financial
$423
2/2012
comment through public outreach hearings, for example.
(acquired ING Bank)
Notably, the entities merging must resolve any issues
related to consumer compliance or compliance with the
Citizens Financial Group
$212
9/2021*
Community Reinvestment Act (CRA; 12 U.S.C. §2901 et
(plans to acquire Investors
(pre-M&A sum)
seq.)—a law that requires regulators to evaluate how well
Bancorp)
IDIs make credit available to the communities from which
Huntington Bancshares
$175
12/2020
they accept deposits. The M&A approval process is one of
regulators’
(merged with TCF Financial)
main tools to encourage CRA compliance. (For
more information on CRA, see CRS Report R43661, The
Source: S&P Capital IQ Pro; Citizens Financial Group; MUFG Union
Effectiveness of the Community Reinvestment Act, by Darryl
Bank.
E. Getter.)
Notes: This list includes the largest banks resulting from mergers
and acquisitions (M&As) from the past 10 years where the M&A
Statute lays out other factors regulators must consider,
involved large insured depository institutions (IDIs).
including financial resources (Would the merged
*Denotes an announced but uncompleted merger or acquisition.
institution have adequate capital and other resources?);
Asset totals are il ustrative and may differ from post-merger total, if
managerial resources (Do the banks’ officers, directors,
approved.
and principal shareholders have competence, experience,
and integrity?); money laundering (Are the banks effective
Bank Merger Process
at combatting money laundering?); and financial stability
Mergers and acquisitions (M&As) involving banks—or,
(Does the merger pose systemic risk to the United States
more technically, insured depository institutions (IDIs), as
banking or financial system?). There are also restrictions on
there are a number of different types of banks—must
how certain acquisitions can be financed.
comply with a number of statutory requirements. These
vary based on the type of bank but are broadly similar.
Regulators have discretion to reject M&A applications,
Bank M&As need approval by one or several of the
require changes to proposals, and grant conditional
banking regulators—the Federal Reserve (Fed), Federal
approval. They can also waive certain requirements in
Deposit Insurance Corporation (FDIC), or the Office of the
certain circumstances, such as for a bank in default or in
Comptroller of the Currency (OCC)—depending on how
danger of default. For example, during the 2008 financial
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crisis, Wells Fargo’s acquisition of Wachovia was approved
size” banks, but it is unclear if banking at the national level
on an expedited basis under a systemic risk exception.
has become more or less competitive (although it may have
become less competitive in some local markets where those
Issues for Congress
banks operate). A merger between two mid-size banks
might make those banks better able to directly compete
Are Mergers Affecting Competition?
with the very largest banks. In other words, there may be
Some policymakers are concerned about the effect that
competition concerns with the largest banks, but they have
bank mergers are having on competition, which can be
not been caused by mergers in the post-crisis period.
viewed as two distinct concerns: (1) that mergers will lead
to a dearth of community banks, and (2) that mergers will
Is the Merger Approval Process Appropriate?
lead to a handful of banks that are “too big to fail” (i.e.,
The merger process has been criticized by some as too lax
whose failure would cause financial instability) and have
and by others as too slow and vulnerable to interference.
too much market share for markets to be competitive.
Critics who believe the process to be too lax point to the
fact that none of the three regulators has denied a merger
There is a long-term trend of consolidation in the banking
application in recent years and characterize the approval
industry, which has mainly occurred through M&A. This
process as a mere “rubber stamp.” Regulators disagree and
trend was driven by the gradual removal of state and federal
describe the application process as an iterative one, where
restrictions on operating multiple branches and banks,
applicants are given the opportunity to provide more
notably across state lines. In other words, legal restrictions
information or address shortcomings in their applications
had kept banks artificially small. Once these restrictions
before judgment is passed. For example, in 2012 the Fed
were removed in the 1980s and 1990s, economies of scale
created a voluntary “pre-filing” process to give targeted
made it profitable for banks to expand, and many small
feedback on applications before they are formally filed.
banks combined, with annual mergers peaking in 1997.
Applicants may choose to withdraw applications rather than
From 2001 to 2020, the number of FDIC-insured
have them formally rejected. A small percentage of
institutions (which includes commercial banks and savings
applications are withdrawn rather than approved (see Table
associations) fell from 9,613 to 5,002. Over that period,
2), and it is unclear how many applications are not started
mergers outnumbered failures by almost 10 to one and
after initial or pre-filing consultations with the regulators.
outnumbered new banks by almost five to one. In 2020,
there were 168 mergers, six new banks created, and four
Table 2. Merger Application Trends, 2018-2020
failures. However, with almost 5,000 institutions, most of
which are small community banks, there is still a reasonable
Annual Average
Fed
FDIC
OCC
amount of competition in the market for smaller banks.
Approved
175
114
47
Most mergers involve small banks. According to FDIC
Withdrawn (Fed/FDIC) or
13
9
n/a
research, 91% of mergers involved community banks, and
Returned (FDIC)
70% of mergers involved community banks merging with
Avg. Days to Process Appl.
62
70
n/a
each other from 2007 to 2016. However, a handful of high-
profile mergers involve large banks. Large bank mergers
% Appl. Processed within Target n/a
81%
94%
typically involve bank holding companies (BHCs). The
Source: CRS calculations based on Fed, FDIC, OCC reports.
largest BHC M&As can also involve non-depository
Notes: There were no denials for any of the three agencies. FDIC
institutions, which are not covered in this In Focus,
reports % of substantial y complete applications processed within
although they may affect competition in non-bank financial
target. OCC data are fiscal year.
market segments. As seen in Table 1, there are also a
number of large mergers over the past 10 years involving
IDIs, and among the top 10 BHCs, three—U.S. Bancorp,
Because the merger application process is iterative, it can
be lengthy, and some complain that it is too slow. The
Truist, and PNC—have grown significantly through M&As.
These BHCs are considerably smaller than the largest six
regulators have internal guidelines on how long the
BHCs, which have not been involved in significant M&As
approval process should take. The FDIC has a goal of
approving a merger 60 days after a substantially complete
involving IDIs since the 2007-2009 financial crisis. (Some
of the top six grew significantly through mergers during the
application is received, and from 2018 to 2020 it completed
financial crisis, highlighting their potential growth through
81% of applications within that time frame (see Table 2).
mergers if another large bank became distressed.)
Proposals that attract adverse public comments take
significantly longer to be approved. For example, the Fed
Some of the very largest banks cannot grow through
reported that applications receiving adverse public
comments took 232 days on average to process, compared
mergers because they exceed the concentration limits
described above. For example, it appears that JPMorgan
to 64 days for those not receiving adverse comments in
Chase and Bank of America are constrained by the 10%
2020. Critics claim that community input, in some cases,
allows special interests to use the threat of slowing the
national deposit cap. Instead, the largest firms have grown
since the financial crisis through internal growth, which is
approval process to extract community benefit plans from
the merging banks that are not officially required.
not directly constrained by concentration limits or other
bank regulation. However, Wells Fargo’s overall growth is
currently constrained by an enforcement action. This
Marc Labonte, Specialist in Macroeconomic Policy
dynamic has mainly resulted in fewer, but larger, “mid-
Andrew P. Scott, Analyst in Financial Economics
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Bank Mergers and Acquisitions

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