The recent approvals by the Federal Reserve and the Office of the Comptroller of the Currency of Bank of Montreal’s acquisition of Bank of the West punctuated a challenging year for obtaining regulatory approvals for bank M&A. Recessionary fears, lower stock valuations and concerns about a highly politicized regulatory environment combined to tamp down merger activity in the sector. This provided a sharp contrast to 2021, when a number of large bank deals were announced, including the Bank of Montreal acquisition, as well as U.S. Bancorp’s acquisition of MUFG Union Bank – all of which took a protracted amount of time to get regulatory approval. The biggest deal in 2022, Toronto Dominion’s $13.4 billion pending acquisition of First Horizon announced in February, was an outlier as large and regional banks generally refrained from big ticket bank M&A, assuming a more defensive posture.

Indeed, bank M&A in 2022 was marked as much by the deals that did not happen as the deals that did. In this regard, an unusual number of bank deals were terminated because of failure to obtain regulatory approval. Most notably, in November, State Street’s $3.5 billion proposed purchase of Brown Brothers Harriman’s investor services was terminated because of State Street’s inability to obtain regulatory approval after more than 14 months of trying. Regulatory resistance to pending mergers extended beyond large U.S. banks. Other transactions that were also terminated in 2022 reportedly for regulatory reasons ranged from one of the largest foreign banks – UBS’ $1.4 billion attempted acquisition of Wealthfront – to a frequent community bank acquirer – OceanFirst’s $186 million attempted merger with Partners Bancorp.

As 2022 began, uncertainty was the overriding theme for the regulatory environment. Directionally, the Administration had made clear that it was skeptical about the benefits of bank M&A. In issuing a July 2021 Executive Order, the Administration made a number of startlingly negative observations about bank M&A that, in retrospect, were early indicators of current regulatory sentiments:

  • Over the past four decades, the U.S. has lost 70% of its banks – many as a result of mergers and acquisitions.

  • Communities of color are disproportionately affected by these closures.

  • The federal agencies have not formally denied a bank merger application in more than 15 years.

  • Excessive consolidation raises costs for consumers, restricts credit to small businesses and harms low-income communities.

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  • Branch closures can reduce small business lending and lead to higher interest rates.

The reaction by the bank regulators was muted at that time. Since then, the heads of the CFPB and the FDIC, as well as the Federal Reserve’s Vice Chair for Supervision, have been confirmed and it is becoming clear that the regulatory environment for bank M&A has morphed from uncertainty to one of the most difficult since the period following the financial crisis of 2008-2009.

Changes to the Approval Process

In 2022, the regulatory approval process for bank M&A changed in some fundamental ways. The popular perception is that this is only true for transactions involving large banks – e.g., those with total assets in excess of $100 billion or $250 billion. However, inordinate delays have impacted transactions of all sizes. For larger deals, and even for smaller deals where the regulators have taken issue, the process now takes substantially longer than in the past and frequently more than a year.

Beyond timing, the regulatory approval process has changed in other important ways and calls for a different playbook than in prior years. A few examples:

  • Community groups are newly empowered. Community groups have long had the ability to delay the approval of a bank merger by filing a protest with the bank regulators. However, their relative impact on the processing of applications ebbs and flows depending on the political climate. Currently, they enjoy an unusual amount of influence and some have direct lines of communication with senior policymakers. In a time-consuming process, the regulators now painstakingly vet any claims made by the community groups in their protests – whether or not substantiated – and expect detailed responses from the acquiring banks.
  • In the three largest deals since 2021 – Bank of Montreal/Bank of the West, U.S. Bancorp/MUFG Union Bank and Toronto Dominion/First Horizon – the Federal Reserve and the OCC took the unusual step of holding virtual day-long public meetings in which community groups were gifted with the opportunity to testify about the merger at a highly visible forum with extensive media coverage. Procedurally, these meetings add several months to an already extended approval process.

  • Bank of Montreal and U.S. Bancorp also announced community benefit plans of historic proportions aimed at lending and investing in underserved areas, philanthropy and workforce and supplier diversity. U.S. Bancorp’s outsized plan was the largest and called for approximately $100 billion over five years, while Bank of Montreal’s called for approximately $40 billion. To be clear, none of the regulators require these plans and the plans are not advisable for the vast majority of bank deals. For very large transactions, however, these plans can reduce the number of protests that are filed from a few hundred to a few dozen and thereby shorten the approval process.

  • Bank merger applications are subject to heightened scrutiny. Typically, at least two regulatory applications are filed in connection with a bank acquisition. The first is with the Federal Reserve for approval for the buyer’s bank holding company to acquire the target bank holding company or bank. In some cases, a waiver can be obtained for this. The second application is filed with the primary regulator of the buyer’s bank for permission to merge with the target bank.

  • Historically, the Federal Reserve application process has tended to be longer and more detailed than the bank merger application process. Normally, the Federal Reserve issues its approval after or at the same time as the bank-level regulator. This dynamic is changing. In Umpqua’s pending merger with Columbia, the Federal Reserve approved the transaction last October – a full year after the transaction had been announced. However, the FDIC did not approve the bank-level merger until this month – almost 15 months post- announcement. The FDIC’s process was exhaustive and focused intensely on the competitive impact of the merger – which had generally not been an area of focus for the FDIC in the past.

  • Branch closings and divestitures are heavily scrutinized. Branch closings in the context of bank M&A now receive heavy focus by the Department of Justice and the bank regulators. Rightly or wrongly, they are associated with reductions in service, particularly among low- and moderate-income communities, a decline in small business lending, as well as job losses. Large in-market mergers with extensive branch closures may not be possible in the current environment.


Similarly, the DOJ is rethinking how to analyze the competitive impact of bank mergers and whether the current construct is too lenient. The bank regulators are also considering modifying their approach.

  • A recent example is the FDIC’s approval of the bank merger between Umpqua and Columbia. In that transaction, the DOJ and the regulators required minimal branch divestitures representing approximately 1.4% of the combined bank’s total deposits. Nevertheless, the FDIC imposed two 11th hour conditions that were unprecedented for the agency:

    • First, the merger between Umpqua’s and Columbia’s banks could not be completed until after the divestitures had closed. In sharp contrast, the DOJ and the Federal Reserve followed their longstanding practice of just requiring that Columbia execute, before consummation of its merger with Umpqua, branch sale agreements with competitively suitable buyers and complete the divestitures within 180 days after its merger with Umpqua.
    • Second, possibly reflecting an Administration bias against noncompete agreements, the FDIC required that Columbia waive any existing noncompete agreements and not enter into any new ones with employees working in any of the divestiture markets. This condition mirrored one imposed by the DOJ on the transaction and is in line with the Federal Trade Commission’s recently proposed rule banning many types of noncompete agreements.

Implications for Potential Transactions

The regulatory environment for bank M&A is cyclical and we have witnessed challenging periods before. Even the most difficult times have not prevented truly compelling strategic transactions from being completed, provided that both parties are firmly committed to seeing through a potentially long and difficult process. Successful transactions must be based on a careful assessment of the regulatory and other risks premised on careful due diligence and detailed discussions with the applicable regulators. It is no longer enough to just have discussions with the regulators pre-signing – frequent communications with senior regulatory officials from signing to approval are now essential. In-person meetings are preferable to virtual ones. Regulatory concerns are shifting in both fundamental and nuanced ways and it is important to gain a full appreciation of them.

Conversely, transaction terms where one party bears a disproportionate share of the regulatory risk suggest a lack of commitment by the other party. A recent example is Toronto Dominion’s pending acquisition of First Horizon. In that transaction, TD agreed to a term that is virtually unprecedented in a major U.S. bank acquisition – a “ticking fee” that increases the total purchase price each day that the deal does not close. Commencing on November 27, 2022 – nine months following the announcement of the transaction – the purchase price increases every day by $0.0017808 in cash per share of issued and outstanding First Horizon common stock – or nearly $1 million per day – until the day immediately prior to the closing of the merger. Toronto Dominion has said that it now hopes to close the acquisition by the end of April 2023, which would result in a ticking fee of approximately $148 million – an astonishing amount for a regulatory delay that would be in line with other transactions of this size. Second, if TD fails to obtain the requisite regulatory approvals, TD will pay First Horizon $25 million. Terms such as these are antithetical to the notion of a merger as a partnership. To the contrary, a ticking fee can provide a buyer and a seller with diametrically opposite incentives as to the timing of the closing and we believe that they are unwise.

The structure of a transaction can also significantly impact the likelihood and timing of regulatory approval. NYCB’s acquisition of Flagstar was announced in April 2021. After failing to obtain regulatory approval for one year, the parties reversed the direction of the bank merger so that NYCB’s FDIC-regulated bank merged into Flagstar’s OCC-regulated bank. By doing so, the parties effectively substituted the OCC for the FDIC as the regulator responsible for approving the bank-level merger with the hope that the OCC would be more accommodating. The gambit worked, the OCC approved the bank merger six months later and Federal Reserve approval followed shortly thereafter. Similarly, in March 2022, Veritex, a Texas-based bank holding company, announced that it had entered into an agreement to acquire StoneCastle Cash Insured Sweep, LLC, a deposit gathering platform also known as interLink. In September, Veritex announced that StoneCastle had terminated the agreement and that FDIC approval had not yet been received. In December, Webster Financial announced a deal to acquire interLink that was structured in a way that did not trigger prior FDIC approval and was able to close the transaction a few weeks later.

We note that it is premature to draw a conclusion that the FDIC is more or less friendly to bank M&A than the other regulators. The Federal Reserve’s Vice Chair for Supervision has only been in office for six months. The OCC is headed by an Acting Comptroller and it has become apparent that for a senior bank regulator to be nominated and confirmed, he or she must have progressive support. Notably, in a recent speech, the Acting Comptroller discussed how some banks become too big to manage (for which he coined the acronym “TBTM”) and that the ultimate remedy “is to simplify it – by divesting businesses, curtailing operations, and reducing complexity” – the opposite of bank M&A. He even explained how a poorly executed merger integration can lead to TBTM:

  • Rushed integrations can lead to diseconomies of scale.

  • Merged banks that simply stitch their systems together often must add workarounds and manual processes.

  • Changes in oversight intensity can weaken alignment across units and increase the fragmentation and multiplicity of business processes.

  • The use of consultants can become reliance, creating governance complexities, muddying accountability and adding to long-term costs.

  • The stature of risk managers and control functions may be diluted or become more varied, leading to inconsistencies and creating gaps where weak practices and excessive risk-taking can flourish.

Unless addressed early and often, these problems can worsen and compound as the combined bank grows and expands.

Contractually, the parties to a bank merger should prepare themselves for what may be an extended approval process by putting in place effective retention plans for key executives and employees. Sellers should also ensure that they have sufficient flexibility under the merger agreement’s interim operating covenants to operate their businesses until closing. There should also be clear agreement between the buyer and seller that neither party will take any action that would delay regulatory approval. A little over five months after Toronto Dominion announced its acquisition of First Horizon, it also announced the acquisition of Cowen, an investment bank. While Cowen does not own a bank, the acquisition likely prompted Toronto Dominion to supplement its regulatory applications to acquire First Horizon. At this time, neither transaction has closed.

* U.S. subsidiary bank level.