The U.S. Office of the Comptroller of Currency (OCC) released a notice of proposed rulemaking (NPR) seeking to “increase the transparency of the standards that apply to the agency’s review of business combinations involving national banks and Federal savings associations.” The NPR includes several amendments to the procedures for reviewing proposed bank mergers under the Bank Merger Act (BMA).

Acting Comptroller of the Currency Michael J. Hsu remarked that the new rules would end a previous policy of approving merger applications for banking institutions automatically on the 15th day after the close of the comment period unless the OCC removes the filings from expedited processing. The NPR also would eliminate the use of condensed BMA applications for certain transactions.       

The NPR includes thirteen factors that, when all present, are consistent with application approval:

  1. The acquirer and the subsequent 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 composite and management ratings of 1 or 2 under the Uniform Financial Institution Ratings System (UFIRS) or risk management, operational controls, compliance, and asset quality (ROCA) rating system.
  5. The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance 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 combatting money laundering.
  9. The target’s combined total assets are less than or equal to 50% of acquirer’s total assets.
  10. The target is an eligible depository institution (as defined by OCC regulation).
  11. The proposed transaction would not have a significant adverse effect on competition.
  12. The OCC has not identified a significant legal or policy issue in the merger.
  13. No adverse comment letter from the public has raised a significant CRA or consumer compliance concern.

The proposed rulemaking also includes six factors that raise regulatory concerns. The presence of any one factor below is inconsistent with approval:

  1. The acquirer has a CRA rating of less than Satisfactory.
  2. The acquirer has a consumer compliance rating of 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 indicates that the acquirer is not financially sound or well managed.
  4. The acquirer is a global systemically important banking organization (GSIB) or subsidiary thereof.
  5. The acquirer has open or pending Bank Secrecy Act/Anti-Money Laundering enforcement or fair lending action.
  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 multiple enforcement actions have been executed against the acquirer during a three-year period.

As a strategic matter, because the OCC proposes expediting failed bank transactions, acquisitions of financial institutions on the cusp of failing may be more challenging from a regulatory standpoint than acquisitions of targets that are merely struggling – potentially sending a mixed message to the market about incentives to maintain a healthy banking system..

Sections IV and V of the proposed rulemaking provide that the OCC will review community impact, possible integration issues, and whether potential service interruptions or job loss would outweigh the benefits of a bank merger.

Under section VI of the NPR, Bank Merger Act applications are typically followed by a 30-day public comment period, which may be extended when an applicant fails to file all information timely or when the OCC otherwise determines it necessary.  In determining whether to host a public meeting regarding a BMA application, the OCC considers the effect the proposed merger will having on the banking industry, what relevant information could only be obtained at a public meeting, and public interest.

The Department of Justice also reviews the competitive impact of bank and bank holding company mergers under antitrust laws to prevent transactions that would significantly decrease competition.  Banking agencies and the DOJ have jointly developed screens to identify proposed mergers that clearly do not impede consumer choice and competition. Notably, mergers involving certain banks, savings and loan institutions, and federal credit unions are exempt from the pre-merger notification requirements under the Hart-Scott-Rodino Act to the extent they are subject to separate agency approval.

The proposed rulemaking, if finalized, is expected to lead to fewer bank merger applications being approved due to the elimination of automatic approvals and recommended inclusion of new factors such as community impact. In a prepared statement, Mr. Hsu said that there has been a “decline from roughly 15,000 banks in the U.S. in 1985 to 4,500 banks today.” The NPR aims to stop that number from continuing to significantly decrease, or at minimum slow its rate.

Bank merger applications submitted to the OCC should also expect a longer processing time and more thorough application process. Additionally, parties to a potential transaction should resolve in advance to the extent possible the presence of any of the six factors the OCC has deemed inconsistent with approval.