Public Benefits and Bank Mergers

Posted by Josh Silver on December 16, 2015

Community organizations are generally aware that when a bank wants to acquire another bank, it must submit a merger application to a federal agency. But many community organizations may not be aware that federal agencies are required to take public comments into consideration when deciding whether to approve the merger, approve it with conditions, or deny it.

In other words, a merger represents an important opportunity for community groups to weigh in regarding credit needs in communities and whether banks are meeting these needs.

The Federal Reserve Board considers most mergers but the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation can also be involved depending on whether a bank is chartered by a state or federal government.

The Bank Merger Act requires the federal agencies to consider the “probable effect of the transaction in meeting the convenience and needs of the community to be served.” So what does the “probable effect of the transaction in meeting the convenience and needs” really mean?

During merger proceedings, the federal agencies consider the performance of the banks in lending, investing, and providing services to minority and low- and moderate-income communities. Banks have responsibilities under the Community Reinvestment Act (CRA) and the fair lending laws to meet needs for credit in a non-discriminatory manner. This is an important aspect of merger application review but CRA and fair lending performance refers to past performance in the last two or three years.

“Probable effect” refers to the impact of bank mergers on future performance in serving communities, particularly underserved communities. The “probable effect” is also referred to as the “public benefit” standard.

Certainly, past performance will provide a guide towards likely future performance. If a bank performed poorly in the past and received a low CRA rating, the future performance is likely to be poor or mediocre at best. However, future performance could also be different from past performance. For example, suppose a bank did well on its CRA exam and received a good rating. The future performance could still decline after a merger if the bank closed several branches after its merger in a cost-cutting move. Hence, review of the merger application by federal agencies and the public is important to determine the likely impacts on future performance.

A number of banks try to satisfy the forward looking requirement by vague promises that they will continue to comply with their CRA and fair lending requirements. However, NCRC and our member organizations maintain that assessing the “probable effect” of a merger entails using objective measures of performance in determining whether a proposed merger will have public benefits in the future. For example, will the number and percent of branches in low- and moderate-income communities increase or decrease after the merger is consummated?

A couple of years ago, NCRC and our member organizations opposed a proposal by Renasant Bank located in Mississippi to acquire another mid-size bank. Renasant’s percent of loans to minorities and low- and moderate-income borrowers was much lower than its peers in a number of metropolitan areas. NCRC asked for a specific plan and performance measures indicating how the bank would improve. The FDIC responded in a conditional merger approval requiring the bank to develop an “action plan” that would indicate how it would improve lending performance to be at or above the level of its peers within three years.

NCRC applauded the FDIC’s move but noted that the “action plan” was to be submitted to the agency directly without the public being able to comment upon its adequacy before submission. Ultimately, NCRC and our members want banks to develop such plans and submit them as part of their application. This would help significantly in the implementation of the public benefit standard.

The federal agencies provide information on their websites about pending mergers so you will be able to identify bank mergers in your community that can influence access to credit and basic banking services. You can then decide whether to comment to the federal agency. The comment can either be about past and likely future performance of the bank or about a need that you would want the bank to address.

Community groups should not be intimidated by the process. If you observe a need for a particular type of community development financing or any other need that hasn't been addressed for a while, a bank merger application is a good time to raise this need. After all, the banks are required to provide a public benefit arising from their merger.

There is no guarantee that the banks will address the need you present. But there is a better guarantee that the need will remain unaddressed if you don’t raise it to the attention of the banks and their regulators.

(Photo credit: Steven Martin, via flickr, CC BY-NC-ND 2.0)

About the author more »

Josh B. Silver is a senior advisor at NCRC, where he produces white papers on the Community Reinvestment Act and fair lending policy and issues. He also serves as an expert on affordable housing and community reinvestment. He returned to NCRC after serving as a development manager engaged in fundraising and research at Manna, Inc., a housing nonprofit developer and counseling agency serving the District of Columbia. He also previously served as Vice President of Research and Policy at NCRC for 19 years. In that capacity, Mr. Silver developed NCRC’s policy positions, produced various research studies, engaged in proposal writing and fundraising, and supervised a staff of research and policy analysts. He has written NCRC testimony submitted to Congress on topics including financial modernization, predatory lending, and the effectiveness of the Community Reinvestment Act (CRA) as well as numerous comment letters to federal banking agencies on subjects ranging from the merger application process and the content and accuracy of home and small business data. Prior to NCRC, Mr. Silver worked at the Urban Institute for five years, where he specialized in housing market analysis and program evaluation. He holds a Master’s degree in public affairs from the Lyndon Johnson School of Public Affairs at the University of Texas in Austin.

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