The Federal Reserve has been a focal point this week, having raised the target range for the fed funds rate on Wednesday for only the third time in the last 10 years. The Federal Reserve did something after the close on Thursday, however, that didn't draw as much attention, but which could mean some interesting times lay ahead for the community and smaller regional banks.
After Thursday's close, the Federal Reserve announced that it approved the application by People's United Financial (PBCT) to merge with Suffolk Bancorp (SUBK). That was news in itself, yet the more scintillating news about bank merger activity was found on page 25 of the order approving the merger of these two bank holding companies.
Specifically, the Federal Reserve acknowledged that it will be softening its view on the threshold it has incorporated for determining if a bank merger could possibly pose a systemic risk.
In 2012 the Federal Reserve said a proposal involving an acquisition of less than $2 billion in assets, that results in a firm with less than $25 billion in total assets, would not be presumed to raise material financial stability concerns absent evidence that could refute that assumption. However, it was acknowledged in the People's United Financial-Suffolk Bancorp merger order that it has been the Federal Reserve's experience that proposals involving an acquisition of less than $10 billion in assets, or that result in a firm with less than $100 billion in total assets, are "generally not likely to create institutions that pose systemic risks."
The gist of that declaration is that it should now be easier for bank holding companies to win approval of merger proposals whereby the combined company would have less than $100 billion in total assets and doesn't present a significant increase in interconnectedness, complexity, cross-border activities, or other risk factors.
This consideration should arguably pave the way for a pickup in merger activity among smaller regional banks. An added inducement on that front is that many of the banks now have much higher stock prices than they did in 2012, providing them with the currency so to speak to push merger proposals in the interest of expanding their market share -- and they may very well do that now that the Federal Reserve has relaxed its bank holding company merger parameters.