Federal Reserve Gov. Michelle Bowman explained her views about the role bank mergers and acquisitions (M&A) play in preserving a healthy financial market during a speech at the Kansas Bankers Association summit. She also reiterated her concerns about reforms proposed by the federal banking agencies intended to improve liquidity in response to the bank failures of 2023.
Bowman was direct in her remarks as she described how far apart she believes bankers and regulators are in their views about the regulatory regime governing the financial sector.
“When we talk about M&A process reform, it can feel like bankers and regulators are living in different worlds,” Bowman said. “Bankers seek to conclude the process in a timely way, enabling them to move forward from the uncertainty of the application process to the important work of integrating the banks’ operations as quickly as possible.”
Bowman’s remarks came on the heels of recent proposals put forth by the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Controller of the Currency (OCC) on corporate governance and M&A approval processes, which have met with pushback from the banking industry. It also coincided with the Federal Financial Institutions Examination Council’s request for information about potentially unnecessary, outdated, or unduly burdensome regulatory requirements.
“One of the key risks to an effective process is a lack of timely regulatory action,” Bowman contended. “The consequences of delays can significantly harm both the acquiring institution and the target, causing greater operational risk (including the risk of a failed merger), increased expenses, reputational risk, and staff attrition in the face of prolonged uncertainty. In contrast, some regulators feel pressure to revisit well-established regulatory approval standards relating to statutory factors, such as the effect of a transaction on competition, or to even expand the use of M&A review to accomplish other objectives, like forcing banks to adopt regulatory standards that would not otherwise apply by regulation as a condition of approval.”
She asserted that regulators should resist the urge to revisit certain established M&A approval standards, such as the effect of a transaction on competition or to expand the use of M&A review to accomplish other objectives.
Regarding arguments that regulators are too eager to “rubber stamp” proposed mergers, she pointed to Federal Reserve data supporting her view that “even for the self-selected population who files an application, the process does not always lead to approval.”
“To the contrary, based on the most recent data reported for 2023, a significant portion of M&A applications were withdrawn before approval, and the average processing time in the second half of 2023 was 87 days,” she said. “The number of approved M&A transactions was also significantly lower in 2023 than it was in 2020, 2021 or 2022.
With respect to regulating bank liquidity, Bowman expressed doubt regarding regulators’ recent proposal to require banks to preposition collateral at the Fed’s discount window.
“The effectiveness of a prepositioning requirement as a solution to perceived stigma concerns remains to be seen, but one can reasonably question if compulsory prepositioning or compulsory use of the discount window would materially change market perceptions and resolve bank concerns about stigma,” she said. “There is no reason for a bank to take a loan at a penalty rate or to preposition collateral during periods of calm if the discount window operates effectively and communicates with banks on a regular basis. If the issue is that the window does not operate in an effective manner, requirements to use it more frequently will not address these underlying operational issues. To the contrary, investments must be made to address its operational shortcomings.”
Bowman advised bankers to be concerned about “significant swings of the regulatory pendulum,” especially those that increase uncertainty in the financial system and could complicate day-to-day operations and long-term planning. She asserted that change should be “deliberate” and “thoughtful” and demonstrate the Federal Reserve’s commitment to operating in an independent manner, focusing on its statutory obligations.