Brown: Fed dragging feet on merger review process

Bloomberg News

WASHINGTON — In a letter to the Federal Reserve, a group of Democratic banking committee senators asked regulators to review their bank merger approach, particularly in the aftermath of the three large regional bank failures earlier this year. 

The letter comes as a number of regulators have signaled tougher rules around the mergers of large regional banks, most recently with Assistant Attorney General Jonathan Kanter saying in a speech earlier this year that the Department of Justice will expand the number of considerations in its bank merger review process. 

But while individual Fed regulators, including Michael Barr, the central bank's top bank regulator, have said that the Fed is considering how to more closely scrutinize bank mergers, the group of Democratic lawmakers, led by Senate Banking Committee Chairman Sherrod Brown, D-Ohio, criticized the Fed for not taking enough concrete action. 

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"The application of the financial stability factor has not been rigorous enough," the lawmakers, who also include Sens. Elizabeth Warren, D-Mass., Jack Reed, D-R.I., and John Fetterman, D-Pa, wrote. "In the past, Federal Reserve orders approving mergers have contained cursory analysis and reasoning to support the determination that such mergers would not result in greater financial stability risk." 

The lawmakers said they are concerned that the Fed hasn't issued any rules or guidance indicating the types of bank mergers that might raise financial stability concerns. That's especially true as regulators consider how to prevent situations where the failures of any large regional banks could result in a systemic risk exception, as it did with the failure of Silicon Valley Bank and First Republic Bank earlier this year. 

"While rapid growth and poor risk management contributed to SVB's ultimate failure, the lack of any financial stability analysis in the prior merger approval demonstrates that the Federal Reserve needs a more thoughtful way to consider and explain a merger's risk to financial stability," the senators said in their letter. 

According to the letter, the Fed hasn't begun to reevaluate its approach to bank mergers, or asked for public feedback on its merger process, instead continuing "to approve mergers under the old rubric." 

After a partisan squabble over the agency's board, the Federal Deposit Insurance Corp. issued a request for information on its merger policy, and acting Comptroller Michael Hsu has said that he's directed senior OCC staff members to work with the Department of Justice and other federal banking agencies to reconsider how it weighs bank mergers.