Bank Mergers & Acquisitions: Federal Reserve Details New Financial Stability Analysis in Approving PNC’s Acquisition of RBC Bank (USA)

Sullivan & Cromwell LLP - January 18, 2012

A recent acquisition approval order of the Board of Governors of the Federal Reserve System (the “FRB”) provides the first analysis of the “financial stability” factor in Section 604(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This section amended Section 3(c) of the Bank Holding Company Act of 1956 (“BHC Act”) to require the FRB, when evaluating a proposed bank acquisition, merger, or consolidation, to consider “the extent to which [the] proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system”. Section 604(e) of the Dodd-Frank Act similarly amended Section 4(j)(2) of the BHC Act to require the FRB to consider financial stability concerns when reviewing notices by bank holding companies to engage in nonbanking activities.

On December 23, 2011, the FRB issued an order (the “Order”) explaining its reasons for approving the acquisition of RBC Bank (USA) (“RBC Bank”) by The PNC Financial Services Group, Inc. (“PNC”). (The FRB announced its approval of the transaction on December 19, 2011 but, unusually, the Order was not released until several days later.) The Order constitutes the first articulation by the FRB of how it will analyze proposed transactions under the new financial stability factor. The FRB stated in the Order, however, that it expects to issue a notice of proposed rulemaking implementing this change to Section 3(c) of the BHC Act as well as other provisions of the Dodd-Frank Act that require the FRB to consider the effect on financial stability of other proposals by financial institutions, and that this will afford the public an opportunity to provide comments on how the FRB should take financial stability into account when reviewing applications and notices.

Based on the extensive analysis in the Order, the FRB is likely to devote substantial attention to the financial stability factor in evaluating future applications under the BHC Act by, or that would create, organizations of significant size or complexity. The FRB approved the acquisition by PNC of RBC Bank, but it did so only by performing, as described in the Order, a detailed analysis of the likelihood that the transaction – which many observers believed not to present any significant systemic risk issues (given the sizes and business models of PNC and RBC Bank) – would create increased risk for the U.S. financial system. In performing this analysis, the FRB considered whether the acquisition would result in a material increase in risks to financial stability using, in part, the Basel Committee on Banking Supervision’s methodology to assess the systemic importance of globally active banking organizations. Although concluding that PNC’s acquisition of RBC Bank would not materially increase risks to the stability of the U.S. financial system, the analytical criteria described in the Order may call into question the future of bank mergers, acquisitions and consolidations by larger financial institutions, and increases the burden of the application process for all applicants.