When Regulators Overhaul Bank Merger Rules, They Should Heed Key Lessons From NCRC’s Community Benefits Agreements


Biden officials want to strengthen merger review processes. Here's what they can learn from NCRC's work with banks.

Regulators are only supposed to approve a bank merger if it clearly benefits the public. Although that’s been the law for 63 years, you’d be forgiven for not knowing it: Banking regulators haven’t denied a merger application since 2003. Antitrust enforcement in other sectors has been ineffectual for even longer. 

That appears to be changing, thankfully, as a new crop of advocates and regulators push to revitalize anti-monopoly work across the whole of government. As President Biden has elevated watchdogs who are critical of the status quo approach to antitrust enforcement, the subject of merger review has received new attention – with many such voices agitating for significant changes to the system.

The Biden team is beginning to overhaul merger review rules writ large – and the banking sector is a major focus in that work. It is crucial that overhauled merger rules restore the proper role of public interest. The people leading this effort appear eager to meet that challenge. But it would be easy for their well-intentioned efforts to miss a key trick: Unless policymakers clearly affirm that public interest analyses will be predicated on what actual community groups say they need, the reform effort will fall short of fulfilling Congress’s long-neglected statutory intent. 

As applied to banking, merger reform should center on one important question: How can we determine whether communities, and not just bank shareholders, are benefitting from bank mergers?

Regulators should address this question by conditioning any merger approval on the successful creation of a community benefits agreement (CBA). 

CBAs are a set of commitments made to local communities by a bank. They come from a dialogue between bank leaders and local community development organizations. The deals contain explicit goals for bank activity such as mortgage lending to the underserved, loans for small businesses, community development financing, locating branches in low- and moderate-income census tracts, philanthropy and supplier diversity. 

Since 2016, the National Community Reinvestment Coalition (NCRC) has facilitated 27 CBAs with 21 banks. Those agreements brought more than $574 billion in cash, loans and services back into disinvested communities. Those commitments have delivered concrete and meaningful benefits for everyday people in those places, including significant increases in lending to Black borrowers and increases in the goods and services purchased by banks from BIPOC-and-woman-owned businesses. 

In 2021, due to financing from First Financial Bank, a new grocery store opened in a former food desert in Cincinnati. In 2020, First Merchants Bank increased its philanthropic support for nonprofits with BIPOC leadership by 154%. First Merchants Bank is one of eight banks that have created a new metric for tracking and increasing support for nonprofits led by people of color as a result of CBAs. In the first year of our 2018 CBA with First Horizon Bank, then known as First Tennessee Bank, they invested $9 million more in Equity Equivalent (EQ2) investments with Community Development Financial Institutions (CDFIs) than they did the year before. 

These kinds of bottom-up actions differentiate community-driven CBAs from decisions made unilaterally on the 50th floor of a bank’s headquarters. 

The construction of the grocery store in a food desert underscores the unique power of a CBA. A CBA is more than a press release with a list of dreams – it’s a blueprint for community improvement driven by the local knowledge of community members. CBAs lead to understanding between banks and community groups. They include both clear goals and specific plans to measure how a post-merger bank ultimately fulfills its promises to serve a community’s needs.

This is only possible through consensus-driven convenings between communities and banks. NCRC-led CBAs are an intensive and high-participation affair. PNC’s 2021 CBA was shaped by 84 different community groups who attended listening sessions. In 2022, 76 groups signed NCRC’s CBA with M&T Bank and People’s Bank. Such efforts help banks understand individual markets – information that is especially valuable when an acquiring bank will move into new markets. 

We bring organizations into the bank merger process that otherwise would be unlikely to get involved, even though they have invaluable insight into their local economies. Housing counseling agencies, CDFIs and nonprofit developers partner with banks to achieve positive community outcomes. 

But unless there’s a CBA conversation happening, many of these local organizations do not currently engage in the bank merger review process, and they are unlikely to file a comment to a regulator. It takes time out of their day-to-day work in their communities, among other scarce resources. Sometimes they are hesitant to provide critical comments on bank performance for fear of harming a funding relationship. 

The regulators currently reviewing merger policies have a chance to fix that. They can mandate the same types of collaborative processes and direct communication that we facilitate when circumstances allow – which is to say, when the banks proposing to merge have leaders who are interested in talking to our members in the first place. Regulators could take that voluntary largesse element out of the picture entirely if they require that the review process seek out and honor the input of groups like our members.

Merger Reviews Must Consider Public Benefits

Mergers can present risks to the sustainability of local economies. Banks control capital flows, so when the connection between a bank and the surrounding community weakens, so does local capacity for self-guided growth. 

Such risk is especially pronounced in mergers where a local bank is set to be acquired by another one headquartered elsewhere. For example, when an acquiring bank sets its budget for Community Reinvestment Act (CRA) compliance staffing, some members of the acquired bank’s CRA staff may be deemed redundant. 

Academics say that cost efficiencies from scale automatically and always bring benefits, but in our members’ experience the opposite is true. Local expertise trumps the remote big bank every time. Bank leaders would be more likely to understand the value of the knowledge they’d lose by downsizing CRA staffs if they were required to participate in CBA discussions. And their institutions would benefit in many other ways from the information they gather at those meetings. Bankers receive valuable feedback on their community performance through our CBA listening sessions, enhancing their understanding of how products should be structured and marketed and of where opportunities exist to gain market share. A CBA creates efficiencies because of the scale of feedback – and it comes without paying for a marketing survey. 

These healthy-for-all dynamics are in harmony with what lawmakers have ordered regulators to do. Merger review law requires that the benefits of mergers not fall to banks alone. When Congress passed the Bank Merger Act, it created four criteria for evaluating merger applications. The second of those four was that all mergers should lead to a public benefit. 

Congress did not specify, however, the manner by which regulators would determine whether or not public needs and conveniences would be met. A CBA isn’t the only way to fulfill that need – it’s just the only one that can capture the whole truth of the matter, at more granular and better-informed levels than statistical analysis can deliver. It is a way to determine the particulars of making a merger help regular folks: Where, when, how and by whom.

Congress included the public-benefits pillar of merger law to balance the need for community interest with the gains banks experience from cost efficiencies. Some antitrust academics have held that consumer welfare is maximized when markets are competitive. That’s not what real-world evidence suggests. If those academics were right, how could it be that thousands of profit-boosting bank mergers have been consummated since the mid-1990s but most American households struggle with keeping ahead of their bills, in part because their bank uses junk fees to rake in money? How do these pro-merger voices reconcile their classroom theory with the persistent reality of a vast and widening racial wealth divide?  

Even if one sets this philosophical difference aside for a moment, the means by which the academics’ theory is currently incorporated into merger reviews is failing to do its intended job. The current framework for assessing competitiveness relies on a formula that is too simple in its analysis and too narrow in scope. 

Reviewers use a formula called the Herfindahl-Hirschman Index (HHI) to gauge market concentration. In banking, HHI looks at local market deposit concentrations to assess competitiveness. This is an abstract, ultrasimplified way of understanding a market – when markets are in reality quite specific and hypercomplex networks of human interactions. 

Bankers love the simplicity of HHI. Abstraction and a false sense of clarity tend to make their profit-motivated ideas look pretty good, resulting in hardly any “regulatory friction” in the deals that will make them rich. Where HHI math finds little reason for competition concern, regulators have shown less inclination to condition merger approval on demonstrations of public benefit. 

But this simplicity appeal is also HHI’s downfall. Banking is about much more than just taking deposits. It’s about loans, services and many other things that go beyond the sums of the squares of deposits. HHI should be replaced by something more nuanced, which more closely aligns with the views of consumers. 

The right analysis will consider all aspects of banking. In a farming community, for example, it would be important to understand how a merger would affect agricultural lending. But because HHI only looks at deposit holdings across an entire metropolitan area, a review process reliant on that abstract simple math would never reveal such a concern.

Critics have argued that regulators have allowed the bank merger review process to atrophy by prioritizing the competition prong of the Bank Merger Act above the public benefits criterion. Across all industry sectors, regulators have demonstrated the inclination to rubber-stamp merger applications. In his Executive Order Promoting Competition in the American Economy, President Biden noted that prudential regulators had not denied a publicly-announced merger application in more than 15 years.

Essential Elements of a Strong CBA Include Clear Goals, Public Input, and Post-Merger Accountability

Much of what’s been rotten in the merger landscape could be fixed by combining the two channels of regulatory action we’ve discussed thus far. If the feds both replace HHI with a new, more accurate competition gauge and require binding CBA-style programmatic commitments, there might be fewer mergers – but those mergers would be much more clearly defined to serve real people’s best interests alongside those of shareholders.

But if all they do is replace HHI with something that actually works, reformers will have let their own side down. All mergers and acquisitions should lead to a public benefit – not just those that threaten competition. 

That’s why regulator-required and -enforced CBA processes are vital to reform. But not all CBA-style deals are created equal. As we urge Washington to fold in formalized CBA constraints on mergers, we also want to share some of what we’ve learned about how to make such a deal stick, and how to maximize its efficiency. 

Effective CBAs establish specific baselines and set clear goals for increasing lending to underserved borrowers. This guarantees that banks, regulators, and the public all have a clear sense of how a bank is being evaluated on serving community needs after the merger. 

These lending goals are best achieved with strategies endorsed by community organizations that work every day to expand local economic opportunities. CBAs should also take a holistic approach to community impact and consider how banks can contribute to expanding opportunity. For example, many of our CBAs also include goals for supplier diversity and grants for nonprofits led by people of color or women, addressing heightened burdens facing underserved businesses and nonprofits. 

Effective CBAs also ensure the conversation doesn’t stop when the signatures are dry. Our written agreements call for the creation of Community Advisory Councils (CACs), where the same sorts of local grassroots and grasstops actors convene regularly and formally to hold banks accountable to the terms of their CBA. These councils have been very helpful in providing input on new product features and providing a forum for issues that come up after a CBA is finalized. 

But accountability isn’t assured under the present system. NCRC members have no hard-power accountability tools – only the soft-power accountability of blowing the whistle when a company like KeyBank betrays its CBA partners. Some banks will tout the CBA process when they need merger approval, only to neglect it afterward. This is another lesson regulators can crib from NCRC’s leadership experience in this space: They’ll need some sticks to go with their carrots. One such tool is a conditional rather than final approval of a proposed merger. The regulators could keep industry leaders honest by using conditional approvals – with formal consequences for noncompliance such as clawing back executive pay or restricting access to the government-sponsored entities that buy mortgages from private lenders, among a host of other possible tools. Such conditional approvals would also commit the government to regularly monitor real-world performance towards CBA goals. 

That’s some of what our CBAs can teach regulators who want to fix what’s broken in bank merger oversight. They should launch an interagency process to improve bank merger reviews – and as soon as possible. Reforms should start by conditioning all new approvals on establishing a new, binding and federally-enforced CBA, then move on to replacing the false simplicity of HHI with something better. 

These steps combined can give banks the clarity they want in a review framework while ensuring communities have their voices heard. 

That’s the only way to break the damaging cycle of the past decades, where working-class families increasingly struggle to make ends meet while banks merge and shutter, merge and shutter, pay a huge dividend to insiders then merge and shutter some more.

Adam Rust and Kevin Hill are Senior Policy Advisors at NCRC.

Photo of Treasury Department headquarters via Flickr.

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