Randy Benjenk’s commentary was featured in a Law360 article about the Federal Deposit Insurance Corporation’s (FDIC) new plan to overhaul its bank merger process and the flashpoints that may emerge.
Randy explained how the proposal would reduce the impact of what is often referred to as the regulatory “penalty box,” where supervisory downgrades can effectively prevent banks from engaging in M&A activity:
“There are two ways you can change that dynamic,” Randy said. One way, he explained, is to make it harder for banks to get downgraded in the first place, an approach that the FDIC and other banking regulators are already pursuing with separate plans to revamp their ratings system.
"The other way is to change what gets you into the penalty box,” Randy continued. “And a proposal like this one,” he added, referring to the FDIC’s merger overhaul, “addresses that.”
The FDIC has also said it is planning to run an additional “fair banking” review that would apply when a merger is set to produce a combined bank with more than $50 billion in assets. This review would become part of the FDIC’s convenience-and-needs evaluation and look at whether either bank in a deal has treated customers “less favorably” due to “political, social, cultural or religious considerations rather than individualized, objective, and risk-based analysis.”
As Randy noted, it marks the administration’s first attempt to codify “fair banking” in a generally applicable rule, not just guidance or one-off actions.
According to Randy, the FDIC’s proposal also doesn’t use precisely the same language to describe fair banking as Trump’s directives and other federal regulators have used, nor is it clear the FDIC even has legal authority to scrutinize fair banking issues in a merger oversight context. Benjenk said he accordingly sees “some” risk of a court challenge if the plan is finalized as written.
"One possibility is that a bank sees this and thinks, 'I might one day file an application that would be subject to the standard … I want to go take a stand about it,'” he said.
Furthermore, the FDIC wants to retain the current market concentration thresholds used to screen prospective mergers for antitrust concerns, but the proposal would create a stronger safe harbor for deals that stay below these thresholds and broaden the inputs that go into their calculation. In particular, the proposal calls for counting credit union deposits and centrally booked deposits in the FDIC’s initial market concentration screen and widening its geographic scope, providing a more complete picture of the competitive landscape that a deal would be measured against.
But whether the changes will be substantial enough for banks is another matter. Under the proposal’s revised methodology, for example, Randy said the FDIC’s screens would continue to omit institutions that compete for some of the same customers, such as online-only banks.
From that perspective, he said, “what the FDIC has proposed here doesn’t go all the way.
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