Three takeaways from regulators' approval of the BB&T-SunTrust merger

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The moment BB&T and SunTrust announced their merger plans early in the year, the questions started: Will regulators approve the megadeal? What kind of hoops might the banks have to jump through to get the OK? What impact would the final decision have on bank M&A?

Now we know the answer to two of those questions. The banks have secured the approval of the Federal Reserve and Federal Deposit Insurance Corp. BB&T and SunTrust plan within the next month to complete the $28 billion combination that will create Truist Financial, a $450 billion-asset bank based in Charlotte, N.C. It is the biggest bank merger in at least 15 years.

While some conditions were imposed, including a consent order tied to deceptive practices at SunTrust, regulators were far from overbearing during the approval process. And there was minimal resistance from outsiders; 90% of the comment letters about the merger were supportive of it.

The speculation about what happens next will heat up. The relatively smooth approval process could embolden other deal-minded banks, though their window of opportunity may close quickly depending on the outcome of the presidential and congressional elections next year.

Here are three key takeaways stemming from BB&T and SunTrust's experience in getting the green light.

The process could encourage other mergers

The speed of the regulators’ approval, and a lack of onerous conditions or restrictions, likely will be viewed favorably by other big banks that are mulling a merger or acquisition.

Less than 10 months elapsed between the deal’s announcement and its approval, and the branch divestitures — 30 locations and $2.4 billion in deposits — were relatively modest, industry observers said.

“If I’m running a similarly sized bank as one of these two, I take this as a very positive sign,” said Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets in Dallas. “I think that’s true whether you’re a buyer, seller or looking at a merger of equals.”

Regulators, on occasion, use deal approvals to interpret and explain how they are enforcing existing laws. For instance, the Fed used its approval of BB&T’s 2015 purchase of Susquehanna Bancshares to introduce how it would assess a deal's impact on financial stability under the Dodd-Frank Act.

Tuesday’s orders really didn’t introduce anything new thinking or approaches. In fact, the Fed and FDIC made it clear that they had no statutory reason to reject the merger.

FDIC Chairman Jelena McWilliams said in an interview this fall that, while the FDIC has “some flexibility and discretion” to interpret statutory requirements, the agency must approve a merger if existing legal requirements are met.

“You’ll see others take that as clearly encouraging that they could pull this kind of thing off … so long as they have their ducks in a row,” Thompson said.

The 2020 election could become a deadline for dealmakers

Dealmakers may be motivated to proceed quickly given the upcoming election year.

The existing regulatory leadership has largely proven business-friendly under President Trump. But that environment could change drastically if Republicans lose the White House or the Senate. Democrats, including presidential hopeful and Sen. Elizabeth Warren, D-Mass., regularly air concerns about the risks of deregulation.

A Democratic Congress could pursue legislation to toughen the legal process for reviewing big-bank M&A.

“Why run the risk of what happens next November?” said Jon Winick, CEO of the bank adviser Clark Street Capital in Chicago. “The longer you wait the more likely a regulator might slow-walk a deal to see what the new boss is thinking.”

In large measure, the BB&T-SunTrust merger has been billed as a way to scale up, bolster the combined bank’s ability to invest in technology and compete with megabanks such as Bank of America and JPMorgan Chase.

Using that logic, any regional bank could pursue a similar combination.

“I’ve always looked at that merger as Exhibit A on the need for all banks to worry about their technology,” Winick said.

The 'too big to fail' discussion will intensify

Though regulators said they had no legal reason to hold up the deal, Martin Gruenberg, a former FDIC chairman and currently a member of the agency's board, issued his own statement to raise concerns about Truist’s impact on financial stability.

Truist will become the biggest bank ever regulated by the FDIC, supplanting BB&T. That has prompted questions about the agency's ability to appropriately oversee a large institution.

"Regulating and supervising large banks, while not traditionally under the FDIC’s business model, is something that we’re absolutely capable of doing,” McWilliams said earlier this year.

"We have on-the-ground expertise,” she added. “We have offices all around the country. We have staff that’s good and experienced in large bank supervision. And don’t forget we have the backup supervision of the largest banks in the United States. Our teams go in and we have examiners who are embedded with examiners at the [Office of the Comptroller of the Currency] and Fed."

Still, the FDIC must brace for a worst-case scenario should Truist fail, Gruenberg warned. If that were to occur, there might be a dearth of buyers, which would force the FDIC to establish a bridge bank and take over the failed bank.

Regional banks “are not required to maintain a minimum amount of long-term unsecured debt to absorb losses in the event of failure,” Gruenberg said, noting that BB&T and SunTrust collectively hold about $16 billion in unsecured debt.

“The effect of large numbers of account holders suffering losses on uninsured deposits at a failed regional bank could trigger knock-on consequences for other banks, particularly in a stressed economic environment,” he added.

The specter of a big-bank failure still exists a decade after the financial crisis, said Tom Vartanian, executive director of the Financial Regulation & Technology Institute at George Mason University's Scalia Law School.

“The question is whether the system has the means to deal with it,” Vartanian said.

“What they’ve done is create another megabank,” said Kevin Jacques, finance chair at Baldwin Wallace University who formerly worked on risk management matters at the Office of the Comptroller of the Currency.

“For me, it is not a question of if we will have another financial crisis, but when,” Jacques added. “We had enough megabanks last time around to deal with, and now we have another. I hope this doesn’t come back to bite the regulators."

Paul Davis and Hannah Lang contributed to this article.

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