In its March 2017 approval of People United Financial, Inc.’s merger with Suffolk Bancorp (the “Peoples United Order”), the Federal Reserve Board eased the approval criteria for certain smaller bank merger transactions by expanding its presumption regarding proposals that do not raise material financial stability concerns and providing for approval under delegated authority for such proposals.  The Dodd-Frank Act amended Section 3 of the Bank Holding Company Act to require the Federal Reserve to consider the “extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system.”

In a 2012 approval order, the Federal Reserve established a presumption that a proposal that involves an acquisition of less than $2 billion in assets, that results in a firm with less than $25 billion in total assets, or that represents a corporate reorganization, may be presumed not to raise material financial stability concerns absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risks factors.  In the Peoples United Order, the Federal Reserve indicated that since establishing this presumption in 2012, its experience has been that proposals involving an acquisition of less than $10 billion in assets, or that results in a firm with less than $100 billion in total assets, generally do not create institutions that pose systemic risks and typically have not involved, or resulted in, firms with activities, structures and operations that are complex or opaque.

Accordingly, the Federal Reserve Board now presumes that a proposal does not raise material financial stability concerns if the assets to be acquired are less than $10 billion or the resulting firm has less than $100 billion in total assets, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risk factors.  Corporate reorganizations are also still presumed not to raise financial stability concerns.  Further, the Federal Reserve Board delegated to the Reserve Banks the authority to approve applications and notices in connection with proposals that meet this new presumption and otherwise meet the criteria for delegated authority.

Given the overall landscape of the U.S. banking market, this shift in regulatory approach is unlikely to affect very many transactions.  There are only 294 institutions between the old $2 billion and new $10 billion thresholds at the end of 2016.  However, it looks like the newly announced merger of PacWest Bancorp and CU Bancorp may be the first to take advantage of the new relief.  With CU Bancorp at $3 billion in assets and the pro forma organization looking at $25 billion, the regulatory relief should provided should facilitate the transaction.

Even if the practical impact (both for affected mergers and the overall industry) are relatively minor, hopefully the shift also indicates a rationalization of the Federal Reserve’s thinking with regard to smarter regulation.  Material financial stability concerns simply shouldn’t be a concern in these transactions, and removing hurdles to allow their completion is appreciated regulatory relief.