To Approve a Bank Merger or Not: That Is the Question!

On January 29, 2024, the OCC issued a proposed policy statement[1] describing the general principles it uses to evaluate applications for approval of transactions under the Bank Merger Act (“BMA”), principally bank mergers, consolidations, and deposit assumptions (“Business Combinations”). The policy statement is intended to provide transparency on how the OCC evaluates the statutory factors of financial and managerial resources, future prospects of the combined institution, convenience and needs of the community to be served, and financial stability of the U.S. banking system.[2] The proposed policy statement also provides details about the process and procedures relating to public comments received and the OCC’s considerations related to public meetings. 

In addition to the proposed policy statement, the OCC proposes to eliminate the availability of expedited review procedures and the streamlined business combination application currently available for certain applicants.

We discuss both aspects of the proposal below.

Proposed Policy Statement

The policy statement would apply only to Business Combinations involving national banks and federal savings associations where OCC approval is required. It is notable that neither the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) nor the Federal Deposit Insurance Corporation (“FDIC”) joined in the proposal. The Federal Reserve Board has approval authority under the BMA for Business Combinations where the resulting depository institution is a state member bank, and the FDIC has such authority where the resulting depository institution is a state nonmember bank or a state savings bank. All three bank regulatory agencies rely on the same statutory factors for evaluating applications under the BMA.[3] However, given the general nature of the statutory standards, there is significant room for differences in their application. [4] Accordingly, there may be material differences in the emphasis given to the various statutory factors. That being said, the OCC proposed policy statement is a helpful window for all depository institutions into current thinking by an influential voice about BMA approval considerations. 

In a speech delivered the same day that the proposals were released, Acting Comptroller of the Currency Michael Hsu observed that bank merger applications exist along a spectrum—(i) applications that have some significant deficiencies; (ii) applications that are “relatively straightforward because the acquiring bank is model of safety and soundness and has earned the trust of the community and supervisors”; and (iii) applications that lie somewhere in between.[5] According to the Acting Comptroller, most applications fall under category (iii), and the policy statement is meant to propose “chalk lines demarcating these three groups.”

General Approval/Disapproval Considerations. According to the proposed policy statement, applications that are consistent with approval generally contain all of the following features:

1. The acquirer and resulting institution are well capitalized;
2. The resulting institution will have total assets less than $50 billion;
3. The acquirer has a Community Reinvestment Act (“CRA”) Rating of Outstanding or Satisfactory;
4. The acquirer has a composite and management rating of 1 or 2 under the Uniform Financial Institutions Ratings System (“UFIRS”) or risk management, operational controls, compliance, and asset quality (“ROCA”) rating system;[6]
5. The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System (“CC Rating System”), if applicable;
6. The acquirer has no open formal or informal enforcement actions;
7. The acquirer has no open or pending fair lending actions, including referrals or notifications to other agencies;
8. The acquirer is effective in combating money laundering activities;
9. The target’s combined total assets are less than or equal to 50 percent of acquirer’s total assets;
10. The target is an “eligible depository institution”;[7]
11. The proposed transaction clearly would not have a significant adverse effect on competition;
12. The OCC has not identified a significant legal or policy issue; and
13. No adverse comment has raised a significant CRA or consumer compliance issue.

Of particular note are the two size-related considerations—features 2) and 9)—which may raise concerns for BMA approval prospects for banks with assets exceeding $50 billion and for so-called “mergers of equals.” However, we understand this list to be an exercise in taxonomy; that is to say, when all of these features are present, approval is generally forthcoming. The absence of any one or more of these features should not be construed to disqualify automatically a transaction for approval. 

Under the proposed policy statement, the OCC is unlikely to find that the statutory factors under the BMA are consistent with approval if indicators that raise supervisory or regulatory concerns are present and the applicant has not adequately addressed or remediated the concerns. Examples that raise supervisory or regulatory concerns include: (1) the acquirer has a CRA Rating of less than Satisfactory; (2) the acquirer’s consumer compliance rating is 3 or worse; (3) the acquirer has UFIRS or ROCA composite or management ratings of 3 or worse, or the most recent report of examination otherwise indicates that the acquirer is not financially sound or well managed; (4) the acquirer is a globally systemically important banking organization (“GSIB”), or subsidiary thereof; (5) the acquirer has open or pending BSA/AML enforcement or fair lending actions, including referrals or notifications to other agencies; (6) the acquirer has failed to adopt, implement, and adhere to all the corrective actions required by a formal enforcement action in a timely manner; or (7) there are multiple enforcement actions against the acquirer executed or outstanding during a three-year period. None of these indicators giving rise to concern is particularly surprising except, at first blush, the disfavor given to a prospective GSIB acquirer—a “concern” that may be difficult to address except in special circumstances, such when a GSIB proposes to acquire a distressed or failed institution.[8] On other hand, the inclusion on this list of GSIBs reflects widely held concerns about the concentration of banking assets in the hands of such institutions and the attendant concerns about financial stability.

Financial and Managerial Resources and Future Prospects Factor. The proposed policy statement provides that the OCC considers each of the financial and managerial resources and future prospects factors of the combining and resulting institutions independently and holistically. Under the proposed policy, the OCC will tailor its consideration of these factors based on the size, complexity, and risk profile of the combining and resulting institutions. The OCC is less likely to approve an application when the acquirer: (1) has a less than satisfactory supervisory record; (2) has experienced rapid growth; (3) has engaged in multiple acquisitions with overlapping integration periods; (4) has failed to comply with conditions imposed in prior OCC licensing decisions; or (5) is functionally the target in the transaction.

Convenience and Needs Factor. The OCC considers the probable effects of the proposed transaction on the community to be served. As part of its review of this factor, the OCC’s review is prospective. While the OCC considers the CRA record of the applicant as part of its review, the OCC’s evaluation is forward‑looking, and it will consider the likely impact on the communities of the resulting institution. The policy statement provides that the OCC will, in evaluating this factor, consider job losses or lost job opportunities. Job losses or lost job opportunities have previously been considered outside the scope of this factor.[9]

Financial Stability Factor. The proposed policy statement clarifies that the OCC applies a balancing test when considering this factor and weighs the financial stability risk of approving the transaction against the financial stability risk of denying the proposed transaction, particularly if the proposed transaction involves a troubled institution. However, for all but Business Combinations involving the largest institutions, the financial stability factor is unlikely to come into play.

Proposed Changes to the OCC’s Business Combination Approval Process Regulation

Under existing OCC regulations, certain filings are deemed approved as of the 15th day after the close of the comment period unless the OCC notifies the applicant that the filing is not eligible for expedited review or the review process is extended.[10] As a result of the proposed change, all Business Combination applications subject to OCC review would be subject to the same processing procedures. 

The OCC also proposes to eliminate its streamlined Business Combination application. As a result, all Business Combination applicants would be required to complete the full Interagency BMA Application.

Key Takeaways

Policy Statement

In Acting Comptroller Hsu’s speech, he provided as context for these proposals that, for purposes of thinking about the size and structure of the banking system, the appropriate construct may be a macro view of the banking system (i.e., thinking holistically about the banking system), and that an evaluation of imbalances between the economy and banking system may provide a useful framework for such a macro view. According to the Acting Comptroller, under this macro view, the “optimal scenario is . . . where the economy and banking system are balanced.”

By drawing “chalk lines,” the proposed policy statement is intended to provide transparency into the OCC’s review of Business Combination applications. The question may be asked, however, in light of the Acting Comptroller’s full remarks, whether it portends changes in emphasis in the weight given to various factors in the evaluation process, particularly to the size of the institutions involved.

Proposed Changes to Application Process

If adopted, the proposed changes to the Business Combination application process are likely to lead to greater time for the processing of applications currently subject to expedited processing. Also, applicants that can now avail themselves of streamlined applications will need to dedicate more time and resources to completing the full interagency BMA application. This may prove particularly burdensome for applications for approval of simple branch acquisitions involving deposit assumptions.

The message implicit in the proposed changes to the application process is that no Business Combination is too small or well structured, and no acquirer too worthy, not to merit full consideration. Adverse comments from the banking industry on these proposed regulatory changes can be expected. Comments are due 60 days from the publication of the proposed rule in the Federal Register.

[1] If adopted, the policy statement would be set forth as Appendix A to Subpart C of Part 5 of the OCC’s regulations.

[2] The Comptroller’s Licensing Manual: Business Combinations summarizes Business Combination approval criteria based on the statutory standards but does not provide the same insight or depth as the proposed policy statement. The proposed policy statement does not address how the OCC evaluates the statutory factor of competition, as it relies in this regard on guidelines published by the Antitrust Division of the Department of Justice. Bank Merger Competitive Review—Introduction and Overview (1995), Department of Justice, Antitrust Division. Likewise, with respect to the statutory factor requiring evaluation of an institution’s effectiveness in combating money laundering, the OCC looks to the FFIEC’s Bank Secrecy Act/Anti-Money Laundering Examination Manual.

[3] The Federal Reserve Board and FDIC have expressed their policies for evaluating bank mergers in prior orders and targeted policy statements about one or several statutory factors. See, e.g., Federal Reserve Board, SR Letter 14-2/CA 14-1, Enhancing Transparency in the Federal Reserve's Applications Process (Feb. 24, 2014). However, neither agency has, to date, adopted a comprehensive policy statement akin to the OCC’s proposal. Cf. FDIC, Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions, 87 Fed. Reg. 18,740 (March. 31, 2022) (the FDIC’s request for information did not result in the issuance of any specific proposal).

[4] Bank merger oversight and industry concentration as a general matter are current focal points of governmental concern. See Executive Order on Promoting Competition in the American Economy and FACT SHEET: Executive Order on Promoting Competition in the American Economy.

[5] Hsu, Michael, “What Should the U.S. Banking System Look Like? Diverse, Dynamic, and Balanced” (Jan. 29, 2024). 

[6] UFIRS is also known as the CAMELS system. The ROCA System is the interagency uniform supervisory rating system for U.S. branches and agencies of foreign banking organizations.

[7] An “eligible depository institution” is one that (1) is well capitalized; (2) has a composite CAMELS rating of 1 or 2; (3) has a CRA rating of “Outstanding” or “Satisfactory”; (4) has a consumer compliance rating of 1 or 2 under the CC Rating System; and (5) is not subject to a cease-and-desist order, consent order, formal written agreement, or Prompt Corrective Action directive or, if subject to any such order, agreement, or directive, is informed in writing by the OCC that it may be treated as an eligible bank or eligible savings association. 12 C.F.R. § 5.3.

[8] See, e.g., OCC Order Approving JPMorgan Chase Bank, National Association’s acquisition of the substantial majority of First Republic Bank’s assets (May 1, 2023). 

[9] See, e.g., OCC Conditional Approval #177 (Oct. 2016).

[10] “Business reorganizations” may qualify for expedited review procedures. 12 C.F.R. § 5.33(d)(3).