Authors
In a world awash with data describing all sorts of phenomena, looking at variations in the overall volume and types of banking applications can provide insights into changing trends in the banking industry.
Banking laws and regulations frequently require banking organizations to obtain the approval of state and federal banking agencies before making acquisitions and engaging in certain activities. The Federal Reserve System (System) reviews applications from the banking organizations it supervises, including state member banks, bank holding companies, and savings and loan holding companies. For example, the System’s approval is needed for a bank holding company to merge with another bank holding company, a state member bank to establish a branch, and a savings and loan holding company to acquire an additional savings bank.
Changes in national and regional economies, changes in federal and state banking laws and regulations, and even changes in tax laws can cause the volume of banking applications to both rise and fall. The System tracks this activity and provides a public, semiannual report on banking applications volume, the Banking Applications Activity Semiannual Report. The report analyzes a variety of volume-related data, including the number of applications, or “proposals,” reviewed, type and number of dispositions (for example, proposals approved or withdrawn), and the number of proposals approved by type of application (such as branch establishment).
While the report does not provide data at a Reserve Bank district level, we compared the Federal Reserve Bank of Minneapolis’ banking application data with the report’s data. Since the report’s breakdown by application type is limited to approved proposals by community banking organizations (CBO),1 we limited our review of Ninth District banking application data2 to CBO banking application data. These data represent much of the Ninth District’s banking activity because the majority of its banking organizations are CBOs.3 Moreover, because the COVID-19 pandemic has had far-reaching effects, we looked at the years immediately preceding the pandemic, its 2020 peak, and the ongoing recovery to identify the pandemic’s impact on banking application activity.
Looking at the Systemwide volume of CBO banking applications between 2018 and 2022, we see that volume decreased in 2020 compared to the two previous years, with the most marked decrease occurring among mergers and acquisitions (M&A) applications (Figure 1). Given the economic turmoil caused by the pandemic, it is unsurprising that M&A activity slowed. However, the number of approved CBO banking applications rebounded in 2021. The report attributes this increase to the “reduction in uncertainty … in relation to economic effects of the COVID-19 pandemic.”
As shown in Figure 2, the Ninth District also saw a decline in the number of CBO banking proposals in 2020, with M&A proposals likewise showing a marked decrease. Consistent with System data, the overall number of CBO banking proposals approved was higher in 2021 than in the three previous years. The increase in Ninth District application volume supports the report’s conclusion regarding System application activity in 2021.
At the Systemwide level, the increase in the number of change in control notices approved in 2021 is notable. Similarly, even though the Ninth District has historically seen change in control notices represent a substantial proportion of its banking application volume, the number approved in 2021 exceeded the number approved in both 2018 and 2019, not to mention 2020. Anecdotally, the higher number of change in control notices approved in 2021 may be related to estate-planning stock transfers involving family-owned banking organizations, many of which are CBOs. Ninth District bankers and consultants regularly mention the pandemic as a factor in shareholder families deciding to accelerate the transfer of their shares to trusts or to children and grandchildren.
Although the System has not yet published banking application data for the first half of 2022, annualized data from the Ninth District for this time period suggest that 2022 will see application volume in line with, or higher than, application volume in 2021. However, economic volatility and continued pandemic-related disruptions (such as supply chain issues), along with other national and global challenges, may serve as a damper on activity in the second half of 2022. Only time—and the data—will tell.
Endnotes
1 CBOs are banking organizations with total consolidated assets of $10 billion or less.
2 The Ninth District comprises Minnesota, Montana, North Dakota, South Dakota, the Upper Peninsula of Michigan, and 26 counties in northwestern Wisconsin.
3 Applications included are limited to change in control notices, membership applications, notices under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), mergers and acquisitions, and branch establishments. Mergers and acquisitions applications include applications by bank holding companies, savings and loan holding companies, and state member banks proposing to acquire an ownership interest in or merge with another banking organization, including formations. To help ensure that our data set matched the System’s as closely as possible, we counted certain related applications as a single proposal, and we limited the applications reviewed to the same application types.
