Bank Mergers Under Scrutiny by Biden Administration

The Biden administration has turned its attention to bank mergers, with a top federal banking regulator announcing plans to tighten the approval process. Acting Comptroller of the Currency, Michael Hsu, intends to propose a new rule that will require the agency to proactively approve or deny merger applications. Currently, if no action is taken within 15 days after the close of the comment period, a merger is automatically approved. The new rule aims to eliminate this backdoor approval process.

Experts have predicted that proposed bank capital rules, called Basel III Endgame, may lead to a surge in mergers and acquisitions among regional lenders. This, in turn, could result in a shift of banking activity towards nonbanks. The completion of the Basel III Endgame rules is expected later this year.

Hsu emphasized the importance of bank mergers as significant corporate transactions that should require a deliberate decision from the OCC. In addition to the new rule, the agency plans to publish guidelines outlining the attributes that make a merger more or less likely to be approved. The OCC also intends to reassess their criteria for assessing the competitive landscape in the banking industry.

Hsu’s statements come nearly a year after the collapse of regional banks, such as Silicon Valley Bank and Silvergate Capital. These banks failed due to concerns about their ability to repay depositors, exacerbated by their heavy investments in long-dated Treasury debt. The value of these bonds depreciated as interest rates rose throughout 2022 and the first half of 2023.

The Future of Regional Banks and the Impact of Bank Mergers

While concerns over the stability of regional banks have lessened in recent months, investors remain cautious. The iShares U.S. Regional Banks ETF experienced a significant drop of 42% from March to early May. However, there has been a strong rebound, with a 46% increase overall, including a 36% rise since late October. In light of this, Citigroup analysts have revised their full-year earnings estimates for Western Alliance Bancorporation, a prominent regional bank.

The Office of the Comptroller of the Currency (OCC) aims to bring clarity to the evaluation process of merger applications by proposing specific criteria. In a recent statement, Hsu, the head of the OCC, mentioned the notion of “chalk lines” which would clearly outline the attributes that could make a merger application more or less likely to be approved. For instance, applications from acquirers with unsatisfactory supervisory ratings, open enforcement actions, or other concerns would be highly unlikely to receive approval until these matters are addressed and resolved.

While the OCC’s new rules may not have an immediate impact on stocks, as the 15-day rule is typically not applicable to publicly traded banks, it is still a significant development. According to Jaret Seiberg, an analyst at TD Cowen, the requirement for acquiring banks to be free from supervisory concerns has been an implicit expectation for several years. However, this speech solidifies the OCC’s stance on the matter.

One thing is clear—bank mergers will undergo strict scrutiny as long as the Biden administration remains in power.

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