Comparing a revamped regulatory framework for bank mergers to a “better mousetrap,” a top staffer of the national bank regulator Friday indicated a new framework should assure healthy mergers are approved, while rejecting unhealthy unions.
Speaking as a stand-in for Comptroller Michael Hsu, Office of the Comptroller of the Currency (OCC) Senior Deputy Comptroller and Chief Counsel Ben W. McDonough cited a need to evaluate the framework for evaluating bank mergers. He spoke at the OCC-sponsored Bank Merger Symposium in Washington. Participants also included representatives of the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve.
McDonough told the group that without enhancements to current bank merger policy, “there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks.
“By the same token, a moratorium on mergers would lock in the status quo and inhibit growth and improvements that could help communities and increase competition,” he said.
He said the “better mousetrap” of a revamped system “needs to be not only theoretically sound and consistent with our values, but also capable of implementation within the statutory criteria for merger review.”
He pointed to broad use of the Herfindahl–Hirschman Index (HHI) to assess market concentration before and after mergers as something for reconsideration. (HHI is described by Investopedia as a measure of market concentration used to determine market competitiveness, often pre- and post-merger & acquisition, or M&A, transactions. It measures the size of companies relative to the size of the industry they are in and the amount of competitiveness.)
While he called HHI a “transparent, empirically proven, efficient, easily understood” and objective measure of concentration, he also asserted that HHI might have become less relevant since the bank merger guidelines were last updated in 1995.
“For example, the growth in online and mobile banking and rise of nonbank competitors may have made HHI—which is based only on deposits—a less effective predictor of competition across product lines,” McDonough said. “This is so because a bank’s deposit base may have become less probative of its offering of other banking products.”
McDonough then turned to financial stability as a factor in reconsidering merger rules. “From my perspective, the current framework for assessing the financial stability risks of bank mergers bears examining,” he said. He cited a “resolvability gap” for large regional banks for which the OCC’s resolution tools “may not be up to the task.”
The senior deputy comptroller also pointed to analysis of a merger’s effects on the convenience and needs of communities served, from branch closures to changes in product offerings and terms, as also crucial to merger review.
“An assessment of each bank’s Community Reinvestment Act (CRA) performance is of course a critical part of this analysis, and I believe CRA performance and ratings are only a starting point,” he said.