SUMMARY: The FDIC is revising its Statement of Policy on Bank Merger
Transactions (Statement of Policy) by updating it to reflect
legislative and other developments that have occurred since the
Statement of Policy was last revised in 1989. The revision also gives
added guidance by including new provisions and clarifying some existing
provisions. The revision is a part of the FDIC's systematic review of
its regulations and written policies under the Riegle Community
Development and Regulatory Improvement Act of 1994. The revised
Statement of Policy is intended to be read in conjunction with the
merger provisions of the FDIC's revised regulations governing
applications filed with the FDIC, which also appear in this issue of
the Federal Register.
EFFECTIVE DATE: October 1, 1998.
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, D.C. 20429.
SUPPLEMENTARY INFORMATION: On October 9, 1997, the FDIC issued for a
public comment a proposal to revise the existing Statement of Policy
(62 FR 52877). The proposal was issued in connection with section
303(a) of the Riegle Community Development and Regulatory Improvement
Act of 1994 (CDRI Act), 12 U.S.C. 4803(a), which required that each of
the federal banking agencies conduct a review of its regulations and
written policies, for two general purposes. These purposes were: (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 duplicative requirements.
As part of this review, the FDIC determined that the Statement of
Policy should be revised. The primary purpose of the revision was to
update the Statement of Policy to reflect statutory changes and other
developments since its last revision in 1989. In addition, certain
clarifications and refinements were proposed, as well as new provisions
intended to give guidance in
areas not addressed by the existing Statement of Policy.
The recent developments reflected in the proposed revisions
included those resulting from statutory changes, such as changes made
by the CDRI Act; the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994; and the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989.1 Changes in each of
those statutes caused related references in the existing Statement of
Policy to become out-dated or incomplete.
\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.
Also reflected in the proposed revision were such other
developments as the discontinuation of FDIC collection of data on
``IPC'' deposits (deposits of individuals, partnerships, and
corporations), previously used as a measure in FDIC merger analysis.
The proposal also reflected amendments to certain FDIC regulations,
such as the 1995 amendment of the FDIC's regulations implementing the
Community Reinvestment Act (see 60 FR 22156 (May 4, 1995)) and, more
recently, the proposed amendments to the FDIC's regulations governing
merger applications (see 62 FR 52810 (October 9, 1997)).
In addition to the updates discussed above, the proposed revision
expanded the Statement of Policy to include elements not previously
covered, such as references to optional conversion transactions, branch
closings in connection with merger transactions, and interstate and
interim merger transactions. The proposed Statement of Policy also
included a number of clarifications and refinements, such as a
clarification 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.
The FDIC received two letters specifically commenting on the
proposed revisions. Both letters were from depository institution trade
associations and both expressed support for the revisions. No
unfavorable comments were received. No changes were made as a result of
comments received; however, a reference to the recently adopted
Interagency Statement on Branch Names was added to the section
discussing related considerations. The Interagency Statement, which
addresses the potential for customer confusion about deposit insurance
when an insured institution operates a branch under a trade name
different from that of the institution, was adopted May 1, 1998, with
an effective date of July 1, 1998. See FDIC, Financial Institution
Letter 46-98, (May 1, 1998).
With this exception, and with the exception of a few minor
editorial changes, the Board is adopting the revised Statement of
Policy as proposed. The revised Statement of Policy is intended to be
read in conjunction with the revised merger provisions of newly-amended
part 303 (Applications) of the FDIC's regulations, which is published
elsewhere in this issue of the Federal Register.
The Statement of Policy is revised by the Board to read as follows:
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
(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 ``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
The Bank Merger Act prohibits the FDIC from approving any proposed
merger transaction that would result in a monopoly, or 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
transaction 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 transaction 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 transaction to prevent the probable
failure of one of the institutions involved.
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 (DOS) 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 Sec. 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 transaction 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 appropriate regional director (DOS)
following compliance with the publication requirement. See
Sec. 303.7(b) of the FDIC rules and regulations (12 CFR 303.7(b)).
4. Reports on competitive factors. As required by law, the FDIC
reports on the competitive factors involved in a proposed merger
transaction 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 upon request will 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 transaction 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 engage in
a merger transaction may find additional guidance in the reported bases
for FDIC approval or denial in prior merger transaction 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 N.W., Washington, D.C. 20434.
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 acting on 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 relevant product market(s) within the relevant geographic
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 transaction 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
2. Relevant 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 transaction. 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 geographic market.
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 1 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
transaction would not significantly increase concentration in an
unconcentrated market, a favorable finding will be made on the
\1\ 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 the merging institutions 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) 2 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).
\2\ 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: 100\2\ = 10,000; for a market with five
competitors with equal market shares, the HHI would be: 20\2\ +
20\2\ + 20\2\ + 20\2\ + 20\2\ = 2,000.
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 it is more than 1,800, it reflects an increase of
less than 200 points from the pre-merger HHI. Where a proposed merger
transaction 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 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
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
transaction likely would create a stronger, more efficient institution
able to compete more vigorously in the relevant geographic markets.
4. Consideration of the public interest. The FDIC will deny any
proposed merger transaction whose overall effect likely would be 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
transaction 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(s) and that the expected benefits cannot reasonably
be achieved through other, less anticompetitive means.
Where a proposed merger transaction is the only reasonable
alternative to the probable failure of an insured depository
institution, the FDIC may approve an otherwise anticompetitive merger
transaction. The FDIC usually will 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 transaction are clearly greater
than those costs 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 transaction 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 its
Convenience and Needs Factor
In assessing the convenience and needs of the community to be
served, the FDIC will consider such elements as the extent to which the
proposed merger transaction is likely to benefit the general public
through higher lending limits, new or expanded services, reduced
prices, increased convenience in utilizing the services and facilities
of the resulting institution, or other means. 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 merger transactions. Where a proposed
transaction is an interstate merger transaction 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. 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 merger transactions 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. See 2 FDIC Law, Regulations, Related Acts 5391.
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.
6. Trade names. Where an acquired bank or branch is to be operated
under a different trade name than the acquiring bank, the FDIC will
review the adequacy of the steps taken to minimize the potential for
customer confusion about deposit insurance coverage. Applicants may
refer to the Interagency Statement on Branch Names for additional
guidance. See FDIC, Financial Institution Letter, 46-98 (May 1, 1998).
By order of the Board of Directors.
Dated at Washington, D.C., this 7th day of July, 1998.
Federal Deposit Insurance Corporation.
Deputy Executive Secretary.
[FR Doc. 98-21489 Filed 8-19-98; 8:45 am]
BILLING CODE 6714-01-P