It has been several years since the financial crisis, and now banks seeking acquisitions know that they need to have high levels of capital, strong management teams and good asset quality if they hope to get the deal across the regulatory finish line. The key handicap these days, however, is the increased scrutiny on compliance issues at both the acquiring bank and the target bank.
After two years and two extensions of its drop dead date, the M&T Corp-Hudson City Bancorp deal remains in a highly visible state of regulatory purgatory. Others are suffering in a less visible way, and for a broader range of compliance reasons than the anti-money laundering (AML) problems that trapped M&T. Moreover, compliance-related delays can arise from problems at the target even when the acquirer has a strong rating and systems. One of the newest reasons for the delay in M&A regulatory approvals arises because of increased regulatory expectations around consumer financial protection.
For many banks, the results of consumer compliance exam reports are not quite as good as they were a few years ago. For some banks and thrifts, the increased examination standards are an unpleasant surprise, demanding increased infrastructure and investment at a time when there are many competing demands. Just as expectations and examinations gradually increased in intensity in the AML arena a few years ago, they are now increasing in the consumer protection arena, with the expectations of the Consumer Financial Protection Bureau (CFPB) informing the consumer compliance and enforcement practices of the traditional banking agencies. These agencies do not want to appear lax as compared to the CFPB. The CFPB examines banks above $10 billion in assets, but as a result of other banking agencies’ focus, consumer compliance is now a concern even for those banks that are not subject to CFPB examination and enforcement authority. This is leading to two new trends:
- For those banks that are subject to CFPB jurisdiction, we are increasingly seeing that the Federal Reserve will seek informal assurances from the CFPB that the most recent exam report is or will be satisfactory before approving an acquisition at the bank holding company level.
- A threatened, but unresolved memoranda of understanding or cease and desist in the consumer compliance area, whether at the acquirer or the target, can delay approvals of an acquisition even when all other issues are resolved. This is especially the case when after the closing there is a change of primary regulator.
Whether and how long this trend will hold is unclear but, for now, it is sometimes a reason for an unexpected delay.
As a result, bank boards and managements need to think carefully about consumer compliance issues as they consider their strategic options. There is, of course, a bit of a chicken-and-egg problem here. Community and smaller regional banks may need to get larger in order to have the scale to invest in the new infrastructure that the rising standards demand and yet perceived current problems with poor consumer compliance marks can prevent or delay acquisitions that might bring about scale and scope. The art is to avoid the trap.