Dive Brief:

• The Federal Deposit Insurance Corp. board on Monday approved a proposal to rescind the bank merger policy adopted last year, the agency said in a Monday release. 
• The FDIC will reinstate, on an interim basis, its previous merger policy statement while conducting “a broader re-evaluation” of its bank merger review process, the release said. Comments on the proposal will be accepted for 30 days after publication in the Federal Register.
• The board also withdrew a brokered deposits proposal, which “would have significantly disrupted many aspects of the deposit landscape,” along with proposals related to corporate governance, the Change in Bank Control Act and incentive-based compensation arrangements, according to a separate Monday release. 

Dive Insight:

The FDIC board’s actions Monday to ditch Biden-era policies are further evidence the banking agency is shifting gears following President Donald Trump’s return to the White House. Bankers and analysts have expected certain policies to be walked back as part of a lighter approach to regulation during Trump’s second term. 

The board appears to be quickly acting on priorities outlined by Acting Chairman Travis Hill in late January. Hill said he wanted to speed up the merger approval process and see the agency withdraw “problematic proposals” adopted in recent years, such as that concerning brokered deposits, or “hot money.” 

The brokered deposits proposal would have heightened banks’ standards for accepting such deposits and labeled more third parties as deposit brokers – a move former FDIC Chair Martin Gruenberg advocated for, pointing to recent bank failures or bankruptcies as underscoring the uncertain nature of third-party funding arrangements.

Last year, Hill criticized the proposal as “a poor use of our time and resources” because the deposit landscape is “too complex to continually decide which arrangements are brokered and which are not in a fair and risk-sensitive way.”  

The merger statement of policy, proposed about a year ago and finalized last September in a party line 3-2 vote, would have more closely scrutinized mergers creating banks with more than $100 billion in assets. Banks with $50 billion or more would have seen more scrutiny on merger impacts on local communities. The policy allowed the FDIC to consider concentrations beyond deposits, including small business and residential loan originations, when evaluating a merger’s competitive effects. 

Also last year, the Office of the Comptroller of the Currency updated its merger guidelines and the Justice Department withdrew from 1995 bank merger guidelines – all part of a broader Biden administration initiative to more closely scrutinize bank consolidation. 

The FDIC board’s move to scrap last year’s policy statement is designed to address concerns that it “added considerable uncertainty to the merger application process,” the release said.

“While the FDIC considers broader revisions to its merger policy, the FDIC is proposing to return to its historical approach, which is well-understood by market participants,” the release said. 

Many industry analysts believed it was only a matter of time before the Republican-led FDIC board reversed course on the merger policy. Grant Butler, a Boston-based partner at law firm K&L Gates, noted in January the statement of policy is easier to rescind than a final rule. Scrapping that while increasing the agency’s focus on processing bank merger applications more quickly “will be very helpful for M&A activity,” Butler said.

The FDIC board also tossed a rule designed to curb incentive-based compensation arrangements. It would have forced banks to claw back pay from executives who show an insensitivity to risk.   

Maybe more noticeable than what the board rescinded was what it didn’t, including a proposed rule that would require banks to bolster recordkeeping requirements for the fintech companies they partner with. Some industry analysts have said that proposal is likely to stick around in Trump 2.0, since the collapse and corresponding fallout surrounding middleware fintech Synapse highlighted a clear need for such account ownership information.

“That rule came out of a more thoughtful process designed to address a clear need to restore confidence in the banking system caused by recent record keeping failures by a few banks and their partners,” said James Stevens, an Atlanta-based partner at law firm Troutman Pepper Locke. “I expect this rule will stick around at least in some form. The big question is what the standards will be once the rules are finalized.”   

In January, though, Hill advocated for a “more open-minded approach to innovation and technology adoption,” including “a more transparent approach to fintech partnerships.”

The agency’s board has three members: Acting Chairman Travis Hill, Acting Comptroller of the Currency Rodney Hood and Russ Vought, acting director of the Consumer Financial Protection Bureau. All of are Republicans, and no more than three members of the FDIC’s board can be from the same political party, according to policy. 

With three directors, the board has a quorum, and can take any action. And there’s no legal requirement on how soon the two board vacancies must be filled, lawyers said.

“One might even say that it speeds things up because even in a 3-1/3-2 situation, the majority must consult with the minority and allow them time to deliberate/draft/etc.,” said Matthew Bisanz, a Washington, D.C.-based partner at law firm Mayer Brown.