Biden Administration Presses to Scrutinize Bank Mergers, Potentially Delaying Deals

Three FDIC board members—Consumer Financial Protection Bureau Director Rohit Chopra, Acting Comptroller of the Currency Michael Hsu and Martin Gruenberg —voted privately last week to release a document seeking public input on bank mergers.

“Conducting this review is sensible to ensure that the agency’s merger policies promote fair competition in banking markets,” Mr. Chopra said in a statement Tuesday.

Jelena McWilliams, the FDIC’s Trump-appointed chairman, blocked the request from being published by the agency last week. At Tuesday’s public meeting, she also rejected a push to have the Democrats’ vote reflected as a valid board action. FDIC staff say that the measure wasn’t drafted through normal, staff-led channels and that only the chairman controls the agenda before the board. The agency’s staff largely reports to Ms. McWilliams.

In addition to balking at the Democrats’ procedure, Ms. McWilliams has previously offered her own version of the request. People familiar with the draft have described its language as more neutral about the risks posed by large banks.

The move by the three members is a signal that Democrats are trying to set the agenda for the FDIC and not waiting until Ms. McWilliams’s term expires in 2023.

Though the Democrats’ request for information appeared on the CFPB’s website, along with a joint statement from Messrs. Chopra and Gruenberg, the FDIC later said there was no valid vote to approve the release.

Supporters say the request is designed in part to jump-start a policy process that has been delayed for months because the Biden administration hasn’t placed allies in key financial-regulatory posts. Those positions include a vice chairman for bank supervision at the Fed, who would likely lead any push to revamp merger reviews.

“The question is how do we promote competition amongst large banks while preventing too-big-to-fail firms from forming,” Mr. Hsu said in a Dec. 8 interview, speaking broadly about merger policy.

FDIC Democrats are raising concerns about bank mergers because they say consolidation in the industry in recent decades has “significantly reduced the number of smaller banking organizations and increased the number of large and systemically-important banking organizations,” they wrote in their request.

Industry officials say any restriction on big-bank mergers would be inconsistent with federal law, which already imposes caps on the size of merged banks, including limiting them to 10% of U.S. deposits. A moratorium would also deny lenders the opportunity to compete with larger rivals such as nonbank financial-technology firms that face less intensive regulation, critics say.

“Achieving scale often requires combining through mergers or acquisitions, particularly for midsized and regional banks,” said Greg Baer, the president and chief executive of the Bank Policy Institute.

Critics said the action by Democrats at the FDIC could further politicize the bank-merger process.

“It seeks to establish serious and perhaps insurmountable obstacles to consolidation in an industry where market forces and good public policy are demanding it,” Mr. Baer said.

Banking lawyers and analysts say a review could challenge future bank mergers.

At present, the merger-review process includes consideration of factors such as a deal’s effect on financial stability. Democrats want to overhaul the way regulators assess these factors, though they haven’t spelled out how, precisely, they plan to change those considerations.

Some Democrats, including House Financial Services Committee Chairwoman Maxine Waters (D., Calif.), are calling for a temporary moratorium on all mergers above $100 billion while officials conduct their review, which could take a year.

At least seven mergers involving banks with at least $100 billion in assets have been announced since October 2020. Recently, U.S. Bancorp said it would buy MUFG Union Bank’s core retail-banking operations for $8 billion. Meanwhile, bank deals are on pace for their biggest year since at least 2008, when some large banks were forced to sell at the height of the financial crisis.

Though the industry remains profitable, persistently low interest rates make it difficult for banks to make earnings from their bread-and-butter lending businesses. The issue is acute for regional banks, which rely more on lending than banks with large Wall Street operations. What is more, many community and regional banks have been forced to increase their technology spending significantly to keep up with larger competitors whose big budgets allow for flashier apps and digital platforms.

A moratorium would add to pressure from Washington after a July executive order from Mr. Biden asked regulators and the Justice Department for more robust scrutiny of bank mergers.

Democrats could use any review to impose new requirements on banks seeking to merge, for instance giving the CFPB a formal say on whether to approve mergers—a topic raised in their request. At present, the CFPB doesn’t have one. Regulators could also overhaul the way they assess a combined bank’s effects on the convenience and needs of a community, beyond the present requirement that firms have a satisfactory rating on their lending to low-income neighborhoods around their physical bank branches.

“The bottom line is it’s going to be a lot harder to do these deals,” said Dan Stipano, a former deputy chief counsel at the Office of the Comptroller of the Currency. “They’re not going to stop completely, but banks will have to make a lot of commitments.”

Write to Andrew Ackerman at [email protected] and Orla McCaffrey at [email protected]