JULY 2021
Will Joe Biden Pump the Brakes on Bank M&A?

Since 1994, the number of U.S. banks has declined by nearly 70%. There have been some pretty severe economic storms over that period of time, resulting in bank failures. A lot of this decline ⎯ from 14,400 in the first quarter of 1994 to 4,375 in the third quarter of 2020, according to the Federal Reserve Bank of St. Louis ⎯ has been through mergers and acquisitions. 

We normally think of loans and deposits as being the principal activities of banking, and yet banks buying banks has been a brisk business as well.  

This massive consolidation occurred during the tenure of four U.S. presidents -- two Republicans and two Democrats, with little push back. The current president, Joe Biden, may be taking a tougher stand on consolidation. On July 9, Biden signed the Executive Order on Promoting Competition in the American Economy. The order encompasses a large number of industries including banking, and it specifically targeted bank acquisitions. 

The order noted that federal bank regulators have not denied a merger application in over 15 years, and charged that “excessive consolidation” raises costs for consumers and harms low-income communities. It also said that branch closures can reduce small business lending and raise interest rates on loans.

The order gives U.S. Attorney General Merrick Garland, in consultation with the heads of the three federal banking regulatory agencies, 180 days to revamp bank merger oversight to provide more extensive scrutiny of deals.

When the U.S. Department of Justice reviews a merger in any industry for anticompetitive impact, it relies on a commonly used measurement of concentration called the Herfindahl-Hirschman Index. The HHI is calculated by squaring the deposit share of each competitor in a market and then adding up the squared shares. For every industry other than banking, a market in excess of 2,500 is considered to be highly concentrated and therefore likely to be challenged. For bank mergers, according to one M&A lawyer I consulted, the DOJ considers a market to be highly concentrated at the lower level of 1,800. 

Historically, according to the lawyer, the Department of Justice would not challenge a bank acquisition unless the HHI increase was at least 200 points, and the post-merger HHI was at least 1,800, although the department has approved transactions with even higher HHI levels. My source says the department could decide to lower both numbers in the ratio, making the standard more restrictive, although he argues that this would be analytically difficult to justify in view of the disparate HHI standard that is already applied to banking compared to all other industries. 

Another possibility, according to the M&A lawyer, is the regulators could take a tougher stance on branch closures in in-market acquisitions, which usually have larger anti-trust implications than market extensions. Acquirers could either be forced to sell off branches they otherwise planned to close, or required to keep them open for some extended period after the deal closed.

Could Biden’s executive order chill bank M&A in the future? A client memo from Wachtell, Lipton Rosen & Katz notes that the bank regulatory agencies operate independently and “the Administration can only encourage and not compel them to take specific actions.” However, the memo also points out that while the Department of Justice “does not have the authority to approve or deny a bank merger, in our experience, the banking agencies will not approve a transaction unless and until the DOJ is signed off.”

How soon could this merger oversight review impact the bank M&A market? “I’d be shocked if there were any adverse impact on mergers that have already been announced,” the M&A lawyer says. “And I suspect for at least the vast majority of mergers announced in the next few months, there will not be a problem. But if we’re having this call in July 2022, I’m not confident that the prognosis would be the same.”
Jack Milligan is editor-at-large of Bank Director, an information resource for directors and officers of financial companies. You can connect with Jack on Twitter at @BankDirectorEd.

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