Global: FDIC’s New Merger Guidelines Elevate Focus on Banking Sector Stability

The landscape for bank mergers is changing as new regulatory guidelines from the Federal Deposit Insurance Corporation (FDIC) are set to raise the bar for evaluating these transactions. Previously, regulators relied on guidelines from decades ago, but the FDIC has now introduced updated rules to better assess the risks associated with proposed bank mergers.

On September 17, the FDIC unveiled its 2023 merger guidelines, which will reshape how bank mergers are scrutinized, particularly in terms of financial stability. These updated rules replace the 2008 guidelines, which themselves were based on even older 1995 criteria. The FDIC, one of three agencies responsible for enforcing the Bank Merger Act, aims to modernize the review process in response to evolving financial conditions.

A key focus of the new guidelines is the consolidation of smaller, community banks, especially in rural areas. The FDIC acknowledged that such mergers could create concentrated markets, but it emphasized the need to balance competitive concerns with the public interest. The FDIC’s final statement notes that mergers involving community banks will be carefully evaluated to ensure the resulting institution can still meet the needs of the local community. Additionally, the FDIC Board reserves the right to scrutinize any application where the merging banks operate in the same geographic area.

Increased Scrutiny for Larger Institutions

The new guidelines introduce heightened scrutiny for mergers involving banks with total assets of $100 billion or more. These deals will now undergo a more comprehensive financial stability analysis. The FDIC will gather extensive data from the banks involved, including details about their business lines, products and services, on- and off-balance sheet activities, branch networks, and relationships with affiliates or third parties.

Furthermore, the FDIC’s review will extend beyond just deposit concentrations to examine other areas, such as the volume of small business or residential loan originations and activities that require specialized expertise. The goal is to ensure that proposed mergers reduce financial risk compared to the banks operating independently.

The FDIC also stressed that any merger resulting in an institution with $50 billion or more in total assets should be subject to public hearings, while mergers creating institutions with assets of $100 billion or more will require a heightened financial stability review.

Implications for Future Mergers

FDIC Chairman Martin Gruenberg emphasized that these new guidelines aim to ensure that bank mergers strengthen the overall stability of the financial system. He reiterated that the FDIC would maintain strict oversight to ensure that any merger reduces financial risk and serves the public interest.

By updating its merger review process, the FDIC is signaling a more cautious and comprehensive approach to bank consolidations, particularly as the financial sector continues to evolve. These new rules are likely to slow down the approval process for large bank mergers, as applicants will need to provide more detailed data and undergo more rigorous analysis before gaining approval.