OCC’s Hsu: Time to update bank merger analysis frameworks

During an industry event today, Michael Hsu, acting comptroller of the currency, once again addressed the topic of bank mergers—an issue he says has garnered “significant attention” recently. “Concerns about the negative effects of bank mergers on competition, communities and financial stability have prompted some to call for a moratorium on merger activity,” Hsu said. “In response, others have defended the benefits of mergers. They note that the U.S. financial services market is highly competitive, and mergers allow institutions to achieve needed economies of scale and to diversify risk through geographic or product expansion.”

Hsu said the frameworks for analyzing bank mergers need updating but that imposing a moratorium on mergers would “lock in the status quo,” preventing mergers that could increase competition, serve communities better, and enhance industry resiliency. The OCC uses the Department of Justice’s bank merger review guidelines, which were last revised in 1995—though an update to the guidelines is currently pending.

Given all the market, technological and demographic changes of the last 27 years in the United States, Hsu said it’s time to “rethink the frameworks” used to analyze bank merger applications. “I do not think the statutory prongs of competitiveness, safety and soundness, meeting community needs, and financial stability need to be revisited,” he said. “Rather, the modes of analysis used by regulators to apply these factors need to be improved.”

One of the modes Hsu cited was the analytical framework for assessing financial stability risks of bank mergers under the Bank Merger Act, which he said needs “significant work,” citing a “resolvability gap” for large regional banks. “Unless and until that gap is addressed, the approvals of large bank mergers risk creating a new set of too-big-to-fail firms,” he said. His comments echo those he made at an industry event in early April.