FDIC vice chairman dissents on new merger guidance

WASHINGTON — Federal Deposit Insurance Corp. Vice Chairman Travis Hill opposed his agency’s updated merger guidance, saying the new holistic metrics for measuring competition are overly broad and introduce undue uncertainty.

“The notion that the FDIC can look at any product or consumer segments, I think adds a lot of unpredictability,” he said Monday, at a fireside chat hosted by Women in Housing and Finance. “The FDIC can look at any product market and segment it by any group of consumers, and you may get very different answers, depending on how you choose to segment it.”

Under federal law, the FDIC has the power to approve or deny bank mergers on the grounds of promoting financial stability, protecting depositors and promoting competition. Previously, the FDIC relied on a metric known as the Herfindahl-Hirschman Index to assess the competitive impact of bank mergers. The HHI measures market concentration by summing the squares of the market shares of all firms in a market, with higher values indicating less competition.

The FDIC’s updated guidance stated it would no longer rely solely on metrics like the HHI due to the evolving banking landscape. Instead, the FDIC would take a more comprehensive approach, evaluating the overall impact of a proposed merger on competition, including factors like the presence of local bank competitors, the share of deposits affected, and the merger’s effects on specific products or services.

Hill said banks would generally be well-advised to err on the side of providing more, rather than less, information when applying for merger approval going forward, given the new guidelines. Hill also disagreed with the move away from the HHI, saying while the index’s thresholds have imperfections, they “have long served as a predictable proxy for deposit concentrations.” 

He also pushed back on the underlying premise of what he sees as tougher merger guidelines in the FDIC final statement of policy. 

While proponents of tougher guidance argue the industry is becoming more consolidated, he said it is already competitive. Hill said while there were more banks in the past, a smaller number of banks can today compete in a greater geographic area, something previously not possible. He said the FDIC’s guidance should reflect the nationwide nature of banking competition and seek to address the underlying causes of why banks merge.

“For consumers who are looking for banking or financial products, generally, oftentimes, there are many, readily substitutable products that are available from across the country using the internet, which was not the case decades ago,” he said. “We should focus on addressing the underlying causes of consolidation … rather than trying to put these artificial constraints on banks merging.” 

According to Jim DiSalvo, a banking structure specialist at the Federal Reserve Bank of Philadelphia, deposit markets have become more concentrated over time. The HHI for deposits increased in this time, climbing from 139 in 2000, to 409 in 2015. Since then, the concentration has eased, with the index falling 20 points to 389 as of 2019. DiSalvo said that although deposits have become more concentrated since 2000, they may no longer be an adequate proxy for all of a bank’s products and services.

Hill also reiterated his opposition to expanding the definition of brokered deposits. The FDIC board’s proposal would reverse a Trump-era rule that narrowed the definition of deposits considered brokered and therefore off limits to less-than-well-capitalized banks. The proposal aims to eliminate a clause in the 2020 rule that allowed deposit brokers working with only one bank to avoid being classified as brokered deposits. 

The proposal also redefines “deposit broker” to include entities receiving fees for deposit placements. Under the 2020 rule, a broker is exempt if less than 25% of its assets under administration for customers are placed with depository institutions. The proposal would lower that threshold to 10%, reducing the number of intermediaries who would qualify for the exception. A coalition of financial industry groups in August urged the FDIC to extend the comment period and provide more data regarding proposed restrictions on banks’ use of brokered deposits.

Hill doubled down on his established opposition to expanding the definition of brokered deposits, saying the new proposal would encompass products that are not risky for less-than-well-capitalized banks to hold. He says many banks using deposits that would be classified as brokered under the proposal have shown strength.

“Brokered deposits has become this overarching term that encompasses an array of different types of deposit arrangements, many of which do not share characteristics with each other,” he said. “There have been a whole host of enforcement actions, there have been partner banks announcing they’re getting out of business, there have been cyber attacks and other types of negative media attention, and we have not seen even the slightest hint of a deposit run at any of these banks… in some cases, we have the opposite, where we have deposit inflows coming into the banks even as all these things are going on.”

Hill said a federal prohibition on less-than-well-capitalized banks receiving such deposits is meant to capture extreme scenarios, not the kind of partnerships that characterize many of the existing relationships in modern bank-fintech arrangements.

“The law is trying to capture the idea that if the bank falls below the level of capitalized it can go to a money broker and basically buy brokered deposits and gamble for resurrection,” he said. “That’s not something that, at least [with] the traditional FinTech partnerships that we think about, is at all realistic.”

Hill also touched on the headwinds facing proposed capital requirements for large banks under the Basel III endgame proposal. 

The proposal, rooted in the Basel Committee on Banking Supervision’s framework for enhancing financial stability, has been mired in contention among an unlikely alliance of bipartisan FDIC board members. The Biden administration’s Consumer Financial Protection Bureau Director Rohit Chopra, alongside Republican appointees Hill and Jonathan McKernan, are leading the opposition. Chopra decries the regulations, which were weakened after regulators and industry alike expressed disapproval with the requirements. Hill and McKernan, however, resist capital increases from a pro-industry perspective, saying banks are already sufficiently capitalized.

This discord has effectively stalled the proposal, as the board lacks the necessary votes to advance the measure. The impasse will likely delay the finalization of the Basel III endgame until after the 2024 elections.

Hill said he had no knowledge of when the disagreement might be settled, and said even with revisions, the rule still needs work. Hill said while the most recent iteration of the proposal — previewed in September by Federal Reserve Vice Chair for Supervision Michael Barr — includes improvements over last year’s version, he also indicated that it still has several unresolved issues. These include what he believes is a contradiction of market-based risk-weighted capital requirements. Hill said the Fundamental Review of the Trading Book — which is used to calculate a bank’s market-based risks under the proposal — duplicates requirements contained in the existing market shock scenario in the Fed’s annual stress test.

“The whole point of the FRTB was to address a problem with the existing market risk framework … that it does not go far enough into the extreme tails in terms of what it requires banks to capitalize against,” he said. “In the U.S., we already have global market shock that is designed to address those tail risks … capitalizing for that level of extreme event in both the underlying framework and the stress capital buffer is going to effectively make a number of these activities uneconomical for banks to engage in.”