May 24, 2018

Bank M&A: Happy Days are Here Again?

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