Drama atop banking regulator puts pressure on bank mergers

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WASHINGTON, DC – AOT 03: Jelena McWilliams, President of the Federal Deposit Insurance Corporation (FDIC), testifies during a hearing before the Senate Committee on Banking, Housing and Urban Affairs at the Dirksen Senate office building on August 3, 2021 on Capitol Hill in Washington, DC. The committee held a hearing on “Oversight of Regulators: Does Our Financial System Work for Everyone?” (Photo by Alex Wong / Getty Images)

2021 was a banner year for bank mergers. But bank consolidation could be the subject of further scrutiny after the Federal Deposit Insurance Corporation (FDIC) political drama pushed the last Trump-era banking regulator back to Washington.

The unrest at the FDIC, best known for its guarantee on insured bank deposits up to $ 250,000, stems from a battle over how to handle larger bank mergers.

On New Years Eve, FDIC President Jelena McWilliams abruptly announced that she would be stepping down from her post, effective February 4. The move leaves only Democrat-appointed officials on the FDIC board. There are two other major banking regulators: the Comptroller of the Currency and the Vice President of Supervision of the Federal Reserve. The Biden administration tapped Michael Hsu for the old role, and is about to name a choice for the latter role.

“We expect short-term pressure on financials as a result of accelerating regulatory change, especially for banks with pending deals that would form a combined entity with assets over $ 100 billion,” wrote Ed Mills, analyst at Raymond James.

In addition to freezing possible merger talks, the turning point in regulatory winds draws attention to a number of previously announced deals of significant magnitude. In September, US Bancorp said he would buy MUFG Union Bank NA and in December, BMO Financial Group Said he would buy Bank of the West.

Data from S&P Global Market Intelligence shows that 2021 has been a big year for bank mergers and acquisitions, possibly ahead of leadership changes within regulators. In November (thus excluding the deal with BMO), more than $ 60 billion in deals were signed last year, surpassing 2007 as the most important year for US bank mergers and acquisitions.

Isaac Boltansky, analyst at BTIG, acknowledged the FDIC’s “soap opera” but noted that he wouldn’t expect regulators to start crushing all deals.

“We continue to believe that there will be M&A hurdles for banks, which will extend approval times, but we believe transactions with pro forma assets close to or less than $ 100 billion should have a clearer path to approval, all other things being equal. “

What’s going on at the FDIC?

The leadership upheaval is the latest development to come from an internal battle over the exact subject of bank mergers.

The spat began in early December, when the FDIC requested public comment on the regulatory approach to bank mergers, with particular emphasis on financial stability issues associated with transactions that would involve banks or create a bank of more than $ 100 billion.

But the proposal was not approved by the president. Instead, it was published by two of the Democratic members of the FDIC board: Martin Gruenberg and Rohit Chopra (also the head of the Consumer Financial Protection Bureau).

The action sparked an uproar on Capitol Hill, where Republicans accused rogue regulators engineering a “coup” to the FDIC. McWilliams, a person named by Trump, would veto the measure before fully withdrawing just two weeks later. She provided no reason for the sudden departure of her resignation to President Joe Biden.

Across the aisle, Rep. Maxine Waters (D-Calif.) Cheered on Democrats and further requested banking regulators to freeze all merger requests exceeding $ 100 billion in total assets.

Regulators have not put in place such a moratorium.

Brian Cheung is a reporter covering the Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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