SUMMARY: The FDIC is proposing to revise its Statement of Policy on
Bank Merger Transactions by updating it to reflect legislative and
other developments that have occurred since the Statement of Policy was
last revised in 1989. The proposed revision also gives additional
guidance by including new provisions and clarifying some existing
provisions. The proposal is a part of the FDIC's systematic review of
its regulations and written policies under the Riegle Community and
Regulatory Improvement Act of 1994 and is intended to be read in
conjunction with the merger provisions of the FDIC's proposed
amendments dealing with applications filed with the FDIC, which also
appears in this issue of the Federal Register.
DATES: Comments must be received by January 7, 1998.
ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429. Comments may be
hand delivered to the guard station located at the rear of the 17th
Street building (located on F Street), on business days between 7:00
a.m. and 5:00 p.m. (FAX number (202) 898-3838; Internet address:
comments@FDIC.gov). Comments may be inspected and photocopied at the
FDIC Public Information Center, Room 100, 801 17th Street NW,
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Kevin W. Hodson, Review Examiner,
Division of Supervision, (202) 898-6919; Martha Coulter, Counsel, Legal
Division, (202) 898-7348, Federal Deposit Insurance Corporation,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION: Section 303(a) of the Riegle Community
Development and Regulatory Improvement Act of 1994 (CDRI Act), 12
U.S.C. 4803(a), requires that each of the federal banking agencies (the
FDIC, the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Office of Thrift
Supervision) conduct a review of its regulations and written policies,
for two general purposes. These purposes are: (1) To streamline and
modify the regulations and policies in order to improve efficiency,
reduce unnecessary costs, and eliminate unwarranted constraints on
credit availability; and (2) to remove inconsistencies and outmoded and
As part of this review, the FDIC has determined that its Statement
of Policy on Bank Merger Transactions (Policy Statement or Statement)
should be revised. The primary purpose of the revision is to update the
Statement to reflect statutory changes and other developments that have
taken place since its last revision in 1989. In addition, certain
clarifications and refinements are being proposed, as well as new
provisions intended to give guidance in areas not previously addressed
by the 1989 Statement. The proposed revisions are discussed more fully
Recent Developments. Among the proposed revisions to the Statement
are those resulting from statutory changes, including the CDRI Act, the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Act), and the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA).1 Section 321(b) of the
CDRI Act reduced the post-approval, pre-consummation waiting period for
certain merger transactions from 30 days to 15 days (see 12 U.S.C.
1828(c)(6)). Section 102 of the Interstate Act, codified at 12 U.S.C.
1831u, provided for interstate bank mergers. FIRREA broadened the
coverage of the Bank Merger Act, 12 U.S.C. 1828(c), to include savings
associations and eliminate the Federal Savings and Loan Insurance
\1\ The citations for these statutes are, respectively, Pub. L.
103-325, 108 Stat. 2160; Pub. L. 103-328, 108 Stat. 2338; and Pub.
L. 101-73, 103 Stat. 183.
\2\ FIRREA sections 201 and 221.
Each of these changes caused related references in the 1989
Statement to become out-dated or incomplete, a situation the proposed
new Statement corrects. For example, because the Bank Merger Act now
applies to thrift institutions as well as banks, the proposed Statement
replaces the term ``bank'' with ``depository institution.'' It also
deletes a reference to the FSLIC. In addition, the proposed Statement
includes references to interstate mergers and to the CDRI Act's 15-day
post-approval waiting period.
In addition to statutory changes, there have been other
developments that warrant revision of the 1989 Statement. For example,
the 1989 Statement refers to the use of ``IPC'' deposits (deposits of
individuals, partnerships, and corporations) in FDIC merger analysis.
However, IPC deposit data is no longer collected by the FDIC.
Accordingly, the proposed revisions indicate that the FDIC now uses
``total deposits'' in evaluating the competitive effects of a proposed
Another development was the 1995 amendment of the FDIC's
regulations implementing the Community Reinvestment Act (CRA) (see 60
FR 22156 (May 4, 1995)). Changes the FDIC made to its CRA regulations
include elimination of the requirement for CRA statements and revision
of the CRA performance standards to be applied by the FDIC. These
changes are reflected in the proposed new Statement.
Other developments affecting the Statement include the proposed
amendment by the FDIC of its Bank Merger Act regulations in 12 CFR part
303, which appear elsewhere in this issue of the Federal Register.
Among these proposed amendments (which would comprise new subpart D to
part 303) is a new expedited processing procedure for applications
meeting certain eligibility criteria. Another amendment to the merger
regulations would be replacement of the term ``phantom'' merger with
the term ``interim'' merger. These changes have been incorporated into
the proposed new Statement. In addition, the Statement's citations to
the FDIC's merger regulations would be revised consistent with the new
section designations in the proposed new part 303.
Additions, Deletions and Clarifications. In addition to the updates
discussed above, the Statement would be expanded to address several
elements not previously covered. These include optional conversion
transactions (commonly referred to as Oakar transactions) under 12
U.S.C. 1815(d)(3), branch closings in connection with merger
transactions, and interstate and interim mergers. Also included is a
new section addressing legal fees and other expenses, which has been
transferred from the FDIC's recently-rescinded Statement of Policy on
Applications, Legal Fees, and Other Expenses (see 62 FR 15479 (April 1,
The proposed Statement includes a number of clarifications and
refinements, as well. For example, a new sentence in the initial
paragraph would incorporate the FDIC's existing view that 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. Other such clarifications include pluralization
of the term ``relevant geographic market'' (to read ``relevant
geographic market(s)'') to make clear that a merger can involve more
than one distinct market area.
The proposed Statement further includes a number of minor, non-
substantive wording changes intended only to refine or clarify. None of
these minor changes reflects any change in the FDIC's merger-analysis
practices or policies.
The FDIC has found in its experience that few if any issues
regarding the FDIC's obligations under the National Environmental
Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq.) or the National
Historic Preservation Act (NHPA) (16 U.S.C. 470 et seq.) are presented
in the context of bank merger transactions. Since the FDIC is in the
process of reviewing its policies on NEPA and NHPA, the FDIC believes
it is not advisable to include a reference to NEPA and NHPA in the
Statement of Policy at this time.
The proposed Statement is set forth below. It is intended to be
read in conjunction with the proposed new merger provisions of part 303
(Applications) of the FDIC's regulations, notice of which is published
elsewhere in this issue of the Federal Register.
For the above reasons, the FDIC proposes the following Statement of
Proposed FDIC Statement of Policy on Bank Merger Transactions
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
(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 ``mergers'' or
``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 that would result in a monopoly, or which 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
whose effect in any section of the country may be substantially to
lessen competition, or which in any other manner would be in restraint
of trade. An exception may be made in the case of a merger 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. For example, the FDIC may approve a
merger to prevent the probable failure of one of the institutions
In every proposed merger transaction, the FDIC must also consider
the financial and managerial resources and future prospects of the
existing and proposed institutions, and the convenience and needs of
the community to be served.
II. Application Procedures
1. Application filing. Application forms and instructions may be
obtained from any FDIC Division of Supervision regional office.
Completed applications and any other pertinent materials should be
filed with the appropriate regional director as specified in
Sec. 303.2(g) of the FDIC rules and regulations (12 CFR 303.2(g)). The
application and related materials will be reviewed by regional office
staff 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 regional
director pursuant to the delegations of authority set forth in
Sec. 303.66 of the FDIC rules and regulations (12 CFR 303.66) or the
application will be forwarded to the FDIC's Washington office for
processing and decision.
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 section 303.2 (12 CFR 303.2),
Sec. 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 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 Sec. 303.65 of the FDIC rules and regulations (12 CFR 303.65). The
applicant must furnish evidence of publication of the notice to the
regional director following compliance with the publication
requirement. (See Sec. 303.7(b) of the FDIC rules and regulations (12
4. Reports on competitive factors. As required by law, the FDIC
will request reports on the competitive factors involved in a proposed
merger from the Attorney General, the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and the
Director of the Office of Thrift Supervision. These reports must
ordinarily be furnished within 30 days, and the applicant will, if it
so requested, be given an opportunity to submit comments to the FDIC on
the contents of the competitive factors reports.
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 or an
emergency exists requiring expeditious action, a merger 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 merge may
find additional guidance in the reported bases for FDIC approval or
denial in prior merger cases compiled in the FDIC's annual ``Merger
Decisions'' report. Reports may be obtained from the FDIC Office of
Corporate Communications, Room 100, 801 17th Street NW., Washington, DC
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 deciding proposed merger transactions.
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 product markets 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
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. 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 compete directly with
depository institutions for real estate loans.
3. Analysis of Competitive Effects
In its analysis 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. 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
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, or other measures.
Initially, the FDIC will focus on the respective shares of total
deposits 3 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
would not significantly increase concentration in an unconcentrated
market, a favorable finding will be made on the competitive factor.
\3\ In 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
Where the market shares of merger participants 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) 4 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).
\4\ The 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:
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 more than 1,800, reflects an increase of less
than 200 points from the pre-merger HHI. Where a proposed merger 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:
<bullet> The number, size, financial strength, quality of
management, and aggressiveness of the various participants in the
<bullet> The likelihood of new participants entering the market
based on its attractiveness in terms of population, income levels,
economic growth, and other features;
<bullet> Any legal impediments to entry or expansion; and
<bullet> Definite entry plans by specifically identified entities.
In addition, the FDIC will consider the likelihood that other
prospective 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
would likely create a stronger, more efficient institution able to
compete more vigorously in the relevant geographic market.
4. Consideration of the Public Interest
The FDIC will deny any proposed merger whose overall effect would
be likely 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 are clearly outweighed in the public interest by 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 relevant
geographic market. Moreover, the applicant must show that the expected
benefits cannot reasonably be achieved through other, less
Where a proposed merger is the only reasonable alternative to the
probable failure of an insured depository institution, the FDIC may
approve an otherwise anticompetitive merger. The FDIC will usually not
consider a less anticompetitive alternative that is substantially more
costly to the FDIC to be a reasonable alternative unless the potential
costs to the public of approving the anticompetitive merger are clearly
greater than those likely to be saved by the FDIC.
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 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 their
Convenience and Needs Factor
The FDIC will consider the extent to which the proposed merger is
likely to improve the service to the general public through such
capabilities as higher lending limits, new or expanded services,
reduced prices, increased convenience in utilizing the services and
facilities of the resulting institution, or other means. In assessing
the convenience and needs of the community served, 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.
IV. Related Considerations
1. Interstate bank mergers. Where a proposed transaction is an
interstate merger 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. Optional conversion transactions. Section 5(d)(3) of the Federal
Deposit Insurance Act, 12 U.S.C. 1815(d)(3), provides for ``optional
conversions'' (commonly known as Oakar transactions) which, in general,
are mergers that involve a member of the Bank Insurance Fund and a
member of the Savings Association Insurance Fund. These transactions
are subject to specific rules regarding deposit insurance coverage and
premiums. Applicants may find additional guidance in Sec. 327.31 of the
FDIC rules and regulations (12 CFR 327.31).
4. 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.
5. 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.
By order of the Board of Directors.
Dated at Washington, D.C., this 23rd day of September, 1997.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
[FR Doc. 97-26233 Filed 10-8-97; 8:45 am]
BILLING CODE 6714-01-P