Bank Merger Process Should Be Modernized and Simplified

GGD-82-53: Published: Aug 16, 1982. Publicly Released: Aug 16, 1982.

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Because of recent increases in the number of bank mergers and the potential for further increases, GAO reviewed the federal laws and regulatory supervision for approving bank mergers.

In acting on merger applications, federal and state agencies consider: (1) the financial condition of the applicant banks; (2) the character and experience of the management of the surviving bank; (3) whether the convenience and needs of the community will be served; and (4) the effects of the merger on competition. Although federal bank regulators' assessments of the competitive effects of proposed mergers receive the most consideration and involve the most controversy, the agencies' evaluations are not uniform, and specific criteria have not been developed for making the evaluations. The ways by which the regulators defined the relevant market to be used in evaluating competitive effects of proposed mergers differed and lacked uniform criteria in applying the line of commerce and potential competition concepts. This has resulted in conflicting decisions by federal regulators and encourages agency shopping, whereby parties to a merger seek out the federal bank regulator possessing the most lenient standards for assessing mergers. GAO also found that, despite its frequent use, the phantom bank merger process is expensive, time consuming, and burdensome to banks, bank holding companies (BHC), and federal regulators. This complicated process is used because banking laws do not provide for shell corporations, which serve similar purposes for nonbank corporations. Finally, GAO concluded that changes are needed in both agency practices and merger law to reduce the processing time for merger applications.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Merger procedures are being reevaluated in light of deteriorating industry conditions and the new competitive environment.

    Matter: Congress should amend the Bank Merger Act to provide that the banking agencies, to the extent practicable and within available data limitations, consider competing nonbank financial institutions in evaluating the competitive effects of a bank merger.

  2. Status: Closed - Not Implemented

    Comments: The agencies have submitted proposed legislation that is now being considered by Congress.

    Matter: Congress should amend the Bank Holding Company Act to permit BHC to acquire, by an exchange of stock, total control of an operating national bank subject to approval of the Federal Reserve System and upon the affirmative vote of the shareholders owning at least two-thirds of that bank's outstanding capital voting stock. The amendment should provide that: (1) the appropriate BHC application be accompanied by a plan of acquisition; (2) the shareholders of the target bank voting against the acquisition could receive stock in the holding company; (3) the exchange of stock qualify as a tax-free exchange; (4) the acquired bank continue as a Federal Deposit Insurance Act-insured bank; (5) the plan of acquisition be in compliance with all applicable federal securities laws; and (6) for similar acquisitions of state-chartered banks, the BHC application be accompanied by a plan of acquisition, rather than a merger application.

  3. Status: Closed - Not Implemented

    Comments: Congress is expected to take action during its next session when the agencies' proposed legislation is submitted.

    Matter: Congress should amend the Bank Merger Act to exempt phantom mergers and corporate reorganizations from competitive effects assessments. This would remove the requirement that the responsible agency obtain reports on a proposed merger's competitive aspects from the Attorney General and the other two bank regulatory agencies. These types of mergers should also be exempted from the 30-day period for Attorney General review prior to consummation.

  4. Status: Closed - Not Implemented

    Comments: Congress is expected to take action during its next session when the agencies' proposed legislation is submitted.

    Matter: Congress should delete the publication and comment requirement for phantom mergers and corporate reorganizations and reduce the publication period for regular mergers to a period more consistent with that of other types of corporate change applications.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The competitive question may change during the current debate on the structure of the financial industry.

    Recommendation: The three federal bank regulatory agencies should, with the advice of the Department of Justice, work together to formulate a useful and consistent method of analysis for considering what effect a proposed merger would have on future competition in the market area of the bank being acquired.

    Agency Affected: Department of Justice

  2. Status: Closed - Not Implemented

    Comments: The Office of the Comptroller of the Currency (OCC) contends that total uniformity is not possible or desirable. Justice provided the uniformity needed.

    Recommendation: The three federal bank regulatory agencies should, with the advice of the Department of Justice, work together to formulate a useful and consistent method of analysis for considering what effect a proposed merger would have on future competition in the market area of the bank being acquired.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  3. Status: Closed - Implemented

    Comments: The Federal Deposit Insurance Corporation (FDIC) proposed a unilateral change for state-chartered nonfederal member banks. Adverse comments from the Justice Department and others forced withdrawal.

    Recommendation: The three federal bank regulatory agencies should, with the advice of the Department of Justice, work together to formulate a useful and consistent method of analysis for considering what effect a proposed merger would have on future competition in the market area of the bank being acquired.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Not Implemented

    Comments: The merger question is related to larger legislative issues on industry competition now being debated.

    Recommendation: The three federal bank regulatory agencies should, with the advice of the Department of Justice, work together to formulate a useful and consistent method of analysis for considering what effect a proposed merger would have on future competition in the market area of the bank being acquired.

    Agency Affected: Federal Reserve System

  5. Status: Closed - Not Implemented

    Comments: Although OCC agreed with this recommendation, no action was initiated, and it is not known when any action will commence. It contends that difficult cases are few and, in those cases, consensus on market and competitive aspects is not possible or desirable.

    Recommendation: The three federal bank regulatory agencies should jointly establish a more consistent method of analysis for defining the relevant market when evaluating the competitive aspects of a proposed merger.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  6. Status: Closed - Implemented

    Comments: Although FDIC agreed with this recommendation, its proposed changes were not supported by Justice and other agencies.

    Recommendation: The three federal bank regulatory agencies should jointly establish a more consistent method of analysis for defining the relevant market when evaluating the competitive aspects of a proposed merger.

    Agency Affected: Federal Deposit Insurance Corporation

  7. Status: Closed - Implemented

    Comments: Although no formal agreement was made, the Federal Reserve believes that the agencies are cooperating and consistently following Justice guidelines.

    Recommendation: The three federal bank regulatory agencies should jointly establish a more consistent method of analysis for defining the relevant market when evaluating the competitive aspects of a proposed merger.

    Agency Affected: Federal Reserve System

  8. Status: Closed - Not Implemented

    Comments: OCC considers advisory opinions on competitive factors unnecessary and suggests that they be eliminated.

    Recommendation: The federal regulators should take steps to ensure that competitive factor reports are furnished to the requesting agency within the required 30 days and that the requesting agency properly considers the comments received and reconciles major conflicting conclusions.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  9. Status: Closed - Not Implemented

    Comments: No changes have been made by the regulators.

    Recommendation: The federal regulators should take steps to ensure that competitive factor reports are furnished to the requesting agency within the required 30 days and that the requesting agency properly considers the comments received and reconciles major conflicting conclusions.

    Agency Affected: Federal Deposit Insurance Corporation

  10. Status: Closed - Implemented

    Comments: The Federal Reserve System developed a procedural manual that requires meeting the 30-day period.

    Recommendation: The federal regulators should take steps to ensure that competitive factor reports are furnished to the requesting agency within the required 30 days and that the requesting agency properly considers the comments received and reconciles major conflicting conclusions.

    Agency Affected: Federal Reserve System

  11. Status: Closed - Implemented

    Comments: Please call 202/512-6100 for information.

    Recommendation: OCC and FDIC should delegate responsibility to their regional offices for approving less complicated mergers.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  12. Status: Closed - Implemented

    Comments: Please call 202/512-6100 for information.

    Recommendation: OCC and FDIC should delegate responsibility to their regional offices for approving less complicated mergers.

    Agency Affected: Federal Deposit Insurance Corporation

  13. Status: Closed - Implemented

    Comments: Please call 202/512-6100 for information.

    Recommendation: FDIC should permit regional offices to officially accept all merger applications and immediately begin their processing.

    Agency Affected: Federal Deposit Insurance Corporation

  14. Status: Closed - Not Implemented

    Comments: Because of the limited extent to which the Federal Reserve System works with state applications, it suggested that the cost-effectiveness of this recommendation might not make implementation workable. GAO did not study this aspect of the recommendation in sufficient detail to dispute this. However, the Federal Reserve System agreed to cooperate with states to the greatest extent possible.

    Recommendation: The Federal Reserve System and FDIC should jointly work with state bank regulators to: (1) coordinate the federal/state review of merger applications; and (2) develop common merger application forms.

    Agency Affected: Federal Deposit Insurance Corporation

  15. Status: Closed - Not Implemented

    Comments: Because of the limited extent to which the Federal Reserve System works with state applications, it suggested that the cost-effectiveness of this recommendation might not make implementation workable. GAO did not study this aspect of the recommendation in sufficient detail to dispute this. However, the Federal Reserve System agreed to cooperate with states to the greatest extent possible.

    Recommendation: The Federal Reserve System and FDIC should jointly work with state bank regulators to: (1) coordinate the federal/state review of merger applications; and (2) develop common merger application forms.

    Agency Affected: Federal Reserve System

 

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