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5000 - Statements of Policy
{{10-31-08 p.5145}}
FDIC Statement of Policy on Bank Merger Transactions
I. Introduction
Section 18(c) of the Federal Deposit Insurance Act
(12 U.S.C. 1828(c)),
popularly known as the "Bank Merger Act," requires the prior
written approval of the FDIC before any insured depository institution
may:
(1) Merge or consolidate with, purchase or otherwise acquire the
assets of, or assume any deposit liabilities of, another insured
depository institution if the resulting institution is to be a state
nonmember bank, or
(2) Merge or consolidate with, assume liability to pay any
deposits or similar liabilities of, or transfer assets and deposits to,
a noninsured bank or institution.
Institutions undertaking one of the above described "merger
transactions" must file an application with the FDIC. Transactions
that do not involve a transfer of deposit liabilities typically do not
require prior FDIC approval under the Bank Merger Act, unless the
transaction involves the acquisition of all or substantially all of an
institution's assets.
The Bank Merger Act prohibits the FDIC from approving any proposed
merger transaction that would result in a monopoly, or would further a
combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States. Similarly, the
Bank Merger Act prohibits the FDIC from approving a proposed merger
transaction whose effect in any section of the country may be
substantially to lessen competition, or to tend to create a monopoly,
or which in any other manner would be in restraint of trade. An
exception may be made in the case of a merger transaction whose effect
would be to substantially lessen competition, tend to create a
monopoly, or otherwise restrain trade, if the FDIC finds that the
anticompetitive effects of the proposed transaction are clearly
outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community to be
served. For example, the FDIC may approve a merger transaction to
prevent the probable failure of one of the institutions involved.
In every proposed merger transaction, the FDIC must also consider
the financial and managerial resources and future prospects of the
existing and proposed institutions, the convenience and needs of the
community to be served, and the effectiveness of each insured
depository institution involved in the proposed merger transaction in
combating money-laundering activities, including in overseas branches.
II. Application Procedures
1. Application filing. Application forms and
instructions may be obtained from the appropriate
FDIC office. Completed applications and
any other pertinent materials should be filed with the appropriate FDIC
office. The application and related materials will be reviewed by the
FDIC for compliance with applicable laws and FDIC rules and
regulations. When all necessary information has been received, the
application will be processed and a decision rendered by the FDIC.
2. Expedited processing. Section 303.64 of the FDIC
rules and regulations (12 CFR
303.64) provides for expedited processing, which the FDIC will
grant to eligible applicants. In addition to the eligible institution
criteria provided for in § 303.2 (12 CFR 303.2), § 303.64 provides
expedited processing criteria specifically applicable to proposed
merger transactions.
3. Publication of notice. The FDIC will not take final
action on a merger application until notice of the proposed merger
transaction is published in a newspaper or newspapers of general
circulation in accordance with the requirements of
section 18(c)(3) of the
Federal Deposit Insurance Act. See § 303.65 of the FDIC rules and
regulations (12 CFR
303.65). The applicant must furnish evidence of publication of
the notice to the appropriate FDIC office following compliance with the
publication requirement. See § 303.7(b) of the FDIC rules and
regulations (12 CFR
303.7(b)).
4. Reports on competitive factors. As required by law,
the FDIC will request a report on the competitive factors involved in a
proposed merger transaction from the Attorney
{{10-31-08 p.5146}}General. This report must ordinarily
be furnished within 30 days, and the applicant upon request will be
given an opportunity to submit comments to the FDIC on the contents of
the competitive factors report.
5. Notification of the Attorney General. After the
FDIC approves any merger transaction, the FDIC will immediately notify
the Attorney General. Generally, unless it involves a probable failure,
an emergency exists requiring expeditious action, or it is solely
between an insured depository institution and one or more of its
affiliates, a merger transaction may not be consummated until 30
calendar days after the date of the FDIC's approval. However, the FDIC
may prescribe a 15-day period, provided the Attorney General concurs
with the shorter period.
6. Merger decisions available. Applicants for consent
to engage in a merger transaction may find additional guidance in the
reported bases for FDIC approval or denial in prior merger transaction
cases compiled in the FDIC's annual "Merger Decisions" report.
Reports may be obtained from the FDIC Public Information Center, 3501
North Fairfax Drive, Room E-1002, Arlington, VA 22226. Reports may also
be viewed at http://www.fdic.gov.
III. Evaluation of Merger Applications
The FDIC's intent and purpose is to foster and maintain a safe,
efficient, and competitive banking system that meets the needs of the
communities served. With these broad goals in mind, the FDIC will apply
the specific standards outlined in this Statement of Policy when
evaluating and acting on proposed merger transactions.
Competitive Factors
In deciding the competitive effects of a proposed merger
transaction, the FDIC will consider the extent of existing competition
between and among the merging institutions, other depository
institutions, and other providers of similar or equivalent services in
the relevant product market(s) within the relevant geographic
market(s).
1. Relevant geographic market. The relevant geographic
market(s) includes the areas in which the offices to be acquired are
located and the areas from which those offices derive the predominant
portion of their loans, deposits, or other business. The relevant
geographic market also includes the areas where existing and potential
customers impacted by the proposed merger transaction may practically
turn for alternative sources of banking services. In delineating the
relevant geographic market, the FDIC will also consider the location of
the acquiring institution's offices in relation to the offices to be
acquired.
2. Relevant product market. The relevant product
market(s) includes the banking services currently offered by the
merging institutions and to be offered by the resulting institution. In
addition, the product market may also include the functional equivalent
of such services offered by other types of competitors, including other
depository institutions, securities firms, or finance companies. For
example, share draft accounts offered by credit unions may be the
functional equivalent of demand deposit accounts. Similarly, captive
finance companies of automobile manufacturers may compete directly with
depository institutions for automobile loans, and mortgage bankers may
complete directly with depository institutions for real estate loans.
3. Analysis of competitive effects. In its anlaysis of
the competitive effects of a proposed merger transaction, the FDIC will
focus particularly on the type and extent of competition that exists
and that will be eliminated, reduced, or enhanced by the proposed
merger transaction. The FDIC will also consider the competitive impact
of providers located outside a relevant geographic market where it is
shown that such providers individually or collectively influence
materially the nature, pricing, or quality of services offered by the
providers currently operating within the geographic market.
The FDIC's analysis will focus primarily on those services that
constitute the largest part of the businesses of the merging
institutions. In its analysis, the FDIC will use whatever analytical
proxies are available that reasonably reflect the dynamics of the
market, including deposit and loan totals, the number and volume of
transactions, contributions to net income,
{{10-31-08 p.5147}}or other measures. Initially, the
FDIC will focus on the respective shares of total
deposits 1
held by the merging institutions and the various other participants
with offices in the relevant geographic market(s), unless the other
participants' loan, deposit, or other business varies markedly from
that of the merging institutions. Where it is clear, based on market
share considerations alone, that the proposed merger transaction would
not significantly increase concentration in an unconcentrated market, a
favorable finding will be made on the competitive factor.
Where the market shares of the merging institutions are not clearly
insignificant, the FDIC will also consider the degree of concentration
within the relevant geographic market(s) using the Herfindahl-Hirschman
Index (HHI) 2
as a primary measure of market concentration. For purposes of this
test, a reasonable approximation for the relevant geographic market(s)
consisting of one or more predefined areas may be used. Examples of
such predefined areas include counties, the Bureau of the Census
Metropolitan-Statistical Areas (MSAs), or Rand-McNally Ranally Metro
Areas (RMAs).
The FDIC normally will not deny a proposed merger transaction on
antitrust grounds (absent objection from the Department of Justice)
where the post-merger HHI in the relevant geographic market(s) is 1,800
points or less or, if it is more than 1,800, it reflects an increase of
less than 200 points from the pre-merger HHI. Where a proposed merger
transaction fails this initial concentration test, the FDIC will
consider more closely the various competitive dynamics at work in the
market, taking into account a variety of factors that may be especially
relevant and important in a particular proposal, including:
• The number, size, financial strength, quality of
management, and aggressiveness of the various participants in the
market;
• The likelihood of new participants entering the market
based on its attractiveness in terms of population, income levels,
economic growth, and other features;
• Any legal impediments to entry or expansion; and
• Definite entry plans by specifically identified entities.
In addition, the FDIC will consider the likelihood that new entrants
might enter the market by less direct means; for example, electronic
banking with local advertisement of the availability of such services.
This consideration will be particularly important where there is
evidence that the mere possibility of such entry tends to encourage
competitive pricing and to maintain the quality of services offered by
the existing competitors in the market.
The FDIC will also consider the extent to which the proposed merger
transaction likely would create a stronger, more efficient institution
able to compete more vigorously in the relevant geographic markets.
4. Consideration of the public interest. The FDIC will
deny any proposed merger transaction whose overall effect likely would
be to reduce existing competition substantially by limiting the service
and price options available to the public in the relevant geographic
market(s), unless the anticompetitive effects of the proposed merger
transaction are clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and needs
of the community to be served. For this purpose, the applicant must
show by clear and convincing evidence that any claimed public benefits
would be both substantial and incremental and generally available to
seekers of banking services in the
{{10-31-08 p.5148}}relevant geographic market(s) and
that the expected benefits cannot reasonably be achieved through other,
less anticompetitive means.
Where a proposed merger transaction is the least costly alternative
to the probable failure of an insured depository institution, the FDIC
may approve the merger transaction even if it is anticompetitive.
Prudential Factors
The FDIC does not wish to create larger weak institutions or to
debilitate existing institutions whose overall condition, including
capital, management, and earnings, is generally satisfactory.
Consequently, apart from competitive considerations, the FDIC normally
will not approve a proposed merger transaction where the resulting
institution would fail to meet existing capital standards, continue
with weak or unsatisfactory management, or whose earnings prospects,
both in terms of quantity and quality, are weak, suspect, or doubtful.
In assessing capital adequacy and earnings prospects, particular
attention will be paid to the adequacy of the allowance for loan and
lease losses. In evaluating management, the FDIC will rely to a great
extent on the supervisory histories of the institutions involved and of
the executive officers and directors that are proposed for the
resultant institution. In addition, the FDIC may review the adequacy of
management's disclosure to shareholders of the material aspects of the
merger transaction to ensure that management has properly fulfilled its
fiduciary duties.
Convenience and Needs Factor
In assessing the convenience and needs of the community to be
served, the FDIC will consider such elements as the extent to which the
proposed merger transaction is likely to benefit the general public
through higher lending limits, new or expanded services, reduced
prices, increased convenience in utilizing the services and facilities
of the resulting institution, or other means. The FDIC, as required by
the Community Reinvestment Act, will also note and consider each
institution's Community Reinvestment Act performance evaluation
record. An unsatisfactory record may form the basis for denial or
conditional approval of an application.
Anti-Money Laundering Record
In every case, the FDIC will take into consideration the
effectiveness of each insured depository institution involved in the
proposed merger transaction in combating money-laundering activities,
including in overseas branches. In this regard, the FDIC will consider
the adequacy of each institution's programs, policies, and procedures
relating to anti-money laundering activities; the relevant supervisory
history of each participating institution, including their compliance
with anti-money laundering laws and regulations; and the effectiveness
of any corrective program outstanding. The FDIC's assessment may also
incorporate information made available to the FDIC by the Department of
the Treasury, other Federal or State authorities, and/or foreign
governments. Adverse findings may warrant correction of identified
problems before consent is granted, or the imposition of conditions.
Significantly adverse findings in this area may form the basis for
denial of the application.
Special Information requirement if applicant is affiliated with or
will be affiliated with an insurance company.
If the institution that is the subject of the application is, or
will be, affiliated with a company engaged in insurance activities that
is subject to supervision by a state insurance regulator, the applicant
must submit the following information as part of its application: (1)
The name of insurance company; (2) a description of the insurance
activities that the company is engaged in and has plans to conduct; and
(3) a list of each state and the lines of business in that state which
the company holds, or will hold, an insurance license. Applicant must
also indicate the state where the company holds a resident license or
charter, as applicable.
{{10-31-08 p.5149}}
IV. Related Considerations
1. Interstate bank merger transactions. Where a
proposed transaction is an interstate merger transaction between
insured banks, the FDIC will consider the additional factors provided
for in section 44 of the Federal Deposit Insurance Act,
12 U.S.C. 1831u.
2. Interim merger transactions. An interim institution
is a state- or federally-chartered institution that does not operate
independently, but exists, normally for a very short period of time,
solely as a vehicle to accomplish a merger transaction. In cases where
the establishment of a new or interim institution is contemplated in
connection with a proposed merger transaction, the applicant should
contact the FDIC to discuss any relevant deposit insurance
requirements. In general, a merger transaction (other than a purchase
and assumption) involving an insured depository institution
and a federal interim depository institution will not
require an application for deposit insurance, even if the federal
interim depository institution will be the surviving institution.
3. Branch closings. Where banking offices are to be
closed in connection with the proposed merger transaction, the FDIC
will review the merging institutions' conformance to any applicable
requirements of section 42 of the FDI Act concerning notice of branch
closings as reflected in the
Interagency Policy Statement
Concerning Branch Closing Notices and Policies. See 2 FDIC Law,
Regulations, Related Acts 5391.
4. Legal fees and other expenses. The commitment to
pay or payment of unreasonable or excessive fees and other expenses
incident to an application reflects adversely upon the management of
the applicant institution. The FDIC will closely review expenses for
professional or other services rendered by present or prospective board
members, major shareholders, or other insiders for any indication of
self-dealing to the detriment of the institution. As a matter of
practice, the FDIC expects full disclosure to all directors and
shareholders of any arrangement with an insider. In no case will the
FDIC approve an application where the payment of a fee, in whole or in
part, is contingent upon any act or forbearance by the FDIC or by any
other federal or state agency or official.
5. Trade names. Where an acquired bank or branch is to
be operated under a different trade name than the acquiring bank, the
FDIC will review the adequacy of the steps taken to minimize the
potential for customer confusion about deposit insurance coverage.
Applicants may refer to the Interagency Statement on Branch Names for
additional guidance. See FDIC, Financial Institution Letter, 46--98
(May 1, 1998).
By Order of the Board of Directors, July 7, 1998.
[Source:
63
Fed. Reg. 44762, August 20, 1998, effective October 1, 1998;
amended at 67 Fed. Reg. 48178, July 23, 2002; 67 Fed. Reg. 79278,
December 27, 2002; 73 Fed. Reg. 8871, February 15, 2008]
[The page following this is 5155.]
1In many cases, total deposits will adequately serve as a proxy
for overall share of the banking business in the relevant geographic
market(s); however, the FDIC may also consider other analytical
proxies. Go Back to Text
2The HHI is a statistical measure of market concentration and
is also used as the principal measure of market concentration in the
Department of Justice's Merger Guidelines. The HHI for a given market
is calculated by squaring each individual competitor's share of total
deposits within the market and then summing the squared market share
products. For example, the HHI for a market with a single competitor
would be: 1002 = 10,000: for a market with five competitors with
equal market shares, the HHI would be: 202 + 202 + 202 +
202 + 202 = 2,000. Go Back to Text
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