#merger

10 03, 2025

Karen Petrou: Will Bessent Do It Better?

Eliza Allen2025-03-10T10:18:10-04:00March 10th, 2025|The Vault|

There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.

Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy …

3 03, 2025

Karen Petrou: The Casualties of Slash-and-Burn Regulatory Rewrites

Eliza Allen2025-03-03T10:54:41-05:00March 3rd, 2025|The Vault|

There’s no doubt that many U.S. institutions have grown such long teeth over the years that they bit themselves in the foot. As a result, radical reform challenging conventional wisdom is long overdue. But, there are two ways to do this: the break-first/fix-later approach taken by the Trump Administration in biomedical research and other vital arenas; the other is to think first, then act decisively within the boundaries of current law or the better ones you demand. Radical reform to U.S. biomedical research is already leaving near-term treatments and cures on the cutting-room floor. If slash-and-burn transformation is also applied to financial-services supervision and regulation, systemic-risk guardrails could be unintentionally, but dangerously, dismantled.

The risks to biomedical research are not so much in what the Trump Administration has done, but that it’s more often than not done retroactively regardless of contractual commitments for continuing funding authorized under longstanding appropriations and by frenetic, indiscriminate firings of well-performing staff. You simply can’t suddenly stop a clinical trial without endangering patients and putting treatments years behind, if they continue at all. You also can’t stop basic biomedical research all of a sudden without leaving labs with a lot of mice, dogs, and primates to feed and no money for kibble. It also takes years to train good biomedical researchers; suddenly firing thousands of them endangers this pipeline and, with it, treatments and cures.

Biomedical research and financial-system governance have little in common, but leaving financial policy in tatters will also have unintended consequences …

6 11, 2024

FedFin Assessment: Trump II Financial-Policy Outlook

Arezou Rafikian2024-11-06T10:55:18-05:00November 6th, 2024|The Vault|

Given the likelihood of a Trump win, we turn in this report to our outlook for federal financial policy in a very different Administration than the one that has set it for the last four years. We will refine this outlook when final tallies determine Congressional control, but slim margins will dog both parties and thus significantly complicate the legislative outlook. Congress, like the White House, will also be preoccupied with nomination battles, immigration, geopolitical risk, and acute fiscal-policy challenges in areas such as the new president’s budget, planned tax breaks, and tariffs.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

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21 10, 2024

Karen Petrou: Competitiveness in a Cold, Cruel World

Eliza Allen2024-10-21T12:04:19-04:00October 21st, 2024|The Vault|

When I gave a talk last week about bank-merger policy, I was asked an important question: if I’m right about the franchise-value challenges facing most U.S. banks, then why is banking here doing so much better than in other advanced, market-oriented nations? The answer in part is that, in a pond full of ugly ducklings, a scrawny mallard with just a few more feathers looks a lot better. But, it’s more complicated than that. The reasons why make it clear that, if bank-merger policy remains implacably set against economies of scale and scope, then only a very few, very big birds and more than a few nonbirds will own the waters.

As in any comparative analysis, the first step to judging U.S. banks versus those in other nations is to define which banks are being compared. Most other nations have very few, very big banks often considered national-champion charters dedicated as much to supporting their sovereign governments as to placating shareholders. As our recent merger-policy paper details, national champions are insulated from market discipline because they are almost always expressly too big to fail. Credit Suisse was an exception to this rule, but only because it failed so fast and Switzerland was so unready for resolution that it could do nothing more than fold one national champion into another, UBS.

For all the talk of TBTF banks in the U.S. and the benefits the very biggest enjoy during flight-to-safety situations, none are yet a national champion, and a good thing …

30 09, 2024

Karen Petrou: How DOJ’s Case Against Visa Could Make Debit-Card Markets Still More Concentrated

Eliza Allen2024-09-30T11:29:16-04:00September 30th, 2024|The Vault|

In our recent paper on bank-merger policy, we noted that over-stringent merger policy is likely to lead to unintended and perverse consequences. This emphatically is not to say that all bank mergers are good mergers, but rather to emphasize that blocking all mergers based on arbitrary criteria may well backfire and lead to still-greater concentration in a market defined as much by regulatory-arbitrage opportunities as competitiveness. Case in point: Justice may rightly want to bring Visa to heel, but its bank-merger policy could simultaneously block the kinds of bank consortia that would otherwise be able to continue market-critical card processing and also bring it under the regulatory umbrella. If DOJ successfully sues Visa, its bank-merger policy is likely to replace one disgraced omnipotent network-effect competitor with another omnipotent network-effect competitor rather than one or more regulated networks comprised of regulated, competing banks.

One of the often-overlooked – but very important – aspects of new merger policy from the Department of Justice is its dark view of financial networks and platforms. These are of course most pertinent in the payment system where, as one payment executive recently put it, “payment is a matter of volumes. If you don’t have volumes, you don’t have the capacity to be competitive.” Put another way, payment systems are network-effect entities and, unless Justice understands this, the only bank payment-system providers will be one or more of the very biggest banks that don’t need third-party networks to generate scale. Existing bank consortia of different-sized …

25 09, 2024

FedFin on: DOJ Bank-Merger Policy

Eliza Allen2024-09-25T15:37:45-04:00September 25th, 2024|The Vault|

In conjunction with final merger-policy statements from the FDIC and OCC, the Department of Justice (DOJ) released “commentary” expanding on how the 2023 guidelines it issued along with the Federal Trade Commission expressly apply to bank mergers. The DOJ’s commentary and that from the other banking agencies revise merger policy last set in 1995. However, the Fed has yet to do so or even clarify how all of these actions affect its approach beyond a statement earlier this year that the FRB was working with other agencies and a more recent answer from Vice Chair Barr that he is content with Fed policy as it stands…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

24 09, 2024

FedFin on: OCC Bank-Merger Policy

Eliza Allen2024-09-24T16:56:21-04:00September 24th, 2024|The Vault|

In conjunction with final FDIC action on its merger policy, the OCC also finalized its proposal. The final OCC standards include a rule revising merger-review procedures to eliminate streamlined and expedited consideration in favor of OCC commitments to act in a timely fashion, especially for smaller deals it believes will be considered on a schedule no different than that now governing these deals or perhaps even more quickly. However, long delays are still more likely for larger transactions or those with controversial elements…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

23 09, 2024

Karen Petrou: The New Bank-Regulatory Paradigm We Need

Eliza Allen2024-09-23T11:58:35-04:00September 23rd, 2024|The Vault|

On Friday, we posted a client alert to a new Federal Reserve study that, to put it succinctly, overturns received wisdom about what makes banks fail. It is a paradigm-busting analysis based on solid, validated, empirical evidence, not on the models notoriously replete with assumptions that suit a researcher’s fancy or whomever backs the work. This study’s main finding is that, even before the advent of federal deposit insurance, bank failure is due to and reliably predicted by growing bank insolvency – not illiquidity – at otherwise-solvent banks and generally not even by runs at very weak banks. Depositors and, worse, supervisors are demonstrably slow to catch on to emerging risk, with depositors understandably subject to information asymmetries and supervisors inexcusably distracted, confused, or even captive. Policy should not be based on one study, but this one study warrants immediate attention backed as it is by many others and replete with damning data analyzed with a straightforward methodology using records going back to 1986. Now would be a very good time to take heed – banking agencies in 2024 are building yet another regulatory edifice to compensate for yet another round of critical supervisory lapses. This may well prove as doomed as its predecessors unless regulators stop blaming banks after failure for bad behavior well within supervisory sight and reach long before indisposition turned terminal.

Importantly, I am not saying that this study proves there is no need for capital or liquidity regulation just as our new merger-policy study does …

9 09, 2024

Karen Petrou: Workers’ Rights and Merger Wrongs

Eliza Allen2024-09-09T13:28:07-04:00September 9th, 2024|The Vault|

In all the fuss and fury over banking-agency merger policy, many have missed a consequential late-August announcement from other U.S. antitrust authorities laying out how workers’ rights will drive merger approvals. This follows 2023 guidelines from the Department of Justice and Federal Trade Commission retracting the old price criterion by which consumer welfare has long been judged in favor of policies taken factors such as network effects and “soft” market power fully into account. The guidelines addressed workers’ rights, but the new agreement adds sharp, sharp teeth. Thus, it’s clear that Administration policy is focused on economic justice along with its tough stand on monopolization. Bankers take warning: operational-integration rationales now cut two ways when it comes to merger approval.

To be sure, bankers are used to one economic-justice criterion when it comes to merger approval: those requiring consideration of customer “convenience and needs” based in large part on how this is demanded of them under the Community Reinvestment Act. Banks planning an acquisition thus typically accompany an offer with a massive CRA pledge promising more loans to low-and-moderate individuals and communities, affordable-housing investments, and the like.

This won’t cut it under the pending merger-policy rewrites from the OCC and FDIC, but these proposals generally do not replace CRA-style approval criteria. Instead, they beef them up, with the FDIC’s policy most notably (and dubiously) requiring acquirers to prove that communities not only will be better served, but also better served than if each bank remained independent.

However, the FDIC also …

27 03, 2024

FedFin on: Bank Merger Policy

Arezou Rafikian2024-03-27T16:44:22-04:00March 27th, 2024|The Vault|

Following its 2022 request for input, the FDIC has released a formal proposal that would redefine the agency’s bank-merger policy into one that will make it difficult for all but the smallest and simplest transactions within its jurisdiction to have the clear prospects for approval usually necessary in non-emergency transactions, subjecting other M&A applications to protracted review with a high likelihood of denial. Strategic alliances involving nonbanks and/or nonbank affiliates and BHCs with nonbank activities may also come under critical FDIC scrutiny, complicating transactions otherwise under the FRB or OCC’s review….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…