Earlier this week, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is intended to reduce the regulatory burdens imposed on financial institutions under Dodd-Frank. President Trump is expected to sign the legislation by Memorial Day. Although the legislation makes a number of changes to existing law, its most significant change is the increase in the threshold for designation of an entity as a “systemically important financial institution” (SIFI) from $50 billion to $250 billion in assets.
Financial institutions falling within the SIFI classification face particularly burdensome regulation, and this Wachtell memo says that the change in the SIFI threshold may result in a big upswing in financial institutions M&A. Here’s an excerpt:
The $50 billion threshold has been a powerful deterrent to bank M&A. Since the passage of Dodd-Frank in 2010, only one bank holding company has crossed the $50 billion threshold as a result of an acquisition – CIT through its acquisition of OneWest in 2015. As a practical matter, the $50 billion threshold even deterred mergers where the combined company would exceed $40 billion as the company would then have to demonstrate to its regulators its readiness to cross the $50 billion threshold. For banks above the $50 billion threshold, the complexity and uncertainties of the CCAR stress test also discouraged acquisitions.
The memo notes that the legislation comes at a time when other factors encouraging bank M&A are falling into place. These include a gradual easing of the regulatory environment by new leadership at the regulatory agencies, growing confidence that deals will receive regulatory approval, increasing competition for deposits & millenials’ preference for larger banks. All of these factors point to a significant increase in bank M&A.
– John Jenkins