RBC’s proposed acquisition in U.S. faces Fed scrutiny

Royal Bank of Canada has been asked by the Federal Reserve in Washington to address a claim the Canadian bank “collaborated” to extend credit to a customer of City National Corp., a Los Angeles-based private and commercial bank RBC is proposing to buy for $5.4 billion US, before the acquisition was approved by regulators.

A letter sent to the Canadian bank’s New York law firm, and obtained by the Financial Post, indicates the credit transaction in question took place in May, four months after the yet-to-be approved acquisition was announced.

“In your response, discuss in detail whether RBC exercises a controlling influence over the management or policies of CNC or CNB without prior approval of the Board,” the Canadian bank’s legal adviser was instructed in the letter from Carol Evans, assistant director in the consumer and community affairs branch of the board of governors of the Federal Reserve System.

“In addition, discuss whether, since entering into the proposed transaction, RBC and CNB have collaborated, or plan to collaborate, on extending credit to any borrower, and describe the nature and circumstances of those collaborations,” adds the letter, dated June 29, 2015.

A spokesperson for RBC, Canada’s biggest bank, declined to comment on the specifics or response to the query from the Fed, which the letter says is based on allegations made by a “commenter” who weighed in as the two banks seek approval from the Fed to come together.

“We do not comment on communications with regulators and governments,” Tanis Feasby, RBC’s director of communications for wealth management and insurance, said in an emailed statement.

Gerard Comizio, chair of the global banking practice at New York law firm Paul Hastings LLP, said it is not uncommon for banks to be faced with questions from the Fed following a mandatory public comment period.

“As a practical matter, you can throw anything up on the ceiling that you want when you write one of these comment letters,” he said, “but the Fed, under the law, is required to review them carefully.”

Public comments that raise questions about adherence to bank merger and acquisition rules would be followed up, Comizio said, because of the strict nature of those rules.

“You’re not allowed to own the cow or get the milk before the deal closes,” he said. The rules “basically say you can’t control the bank and its operations until you’ve received regulatory approvals.”

Lawrence Baxter, a law professor at Duke University who specializes in banking regulation, said the Fed is vigilant about such complaints but is unlikely to block a merger unless there are repeated instances of bankers appearing to “jump the gun” on a merger approval.

“It could be that the Fed is looking to see if there’s been a pattern — or this is a one-off thing and somebody’s knuckles need to be rapped,” said Baxter.

“It sounds to me like a hiccup in the process and they have to act on it. But it would be quite surprising if it was something so substantial that they could nix the merger unless, let’s say, it was compounded by some attempt at a cover up or some dishonesty in responding or something like that.”

RBC, which has extensive capital markets operations in the United States and owned retail bank operations there until 2011, has dealt with U.S. regulators in the past. Late last year, for example, the Canadian bank settled a claim with the U.S. Commodity Futures Trading Commission (CFTC) over allegations of “wash trading.”

RBC’s purchase of City National marks a major expansion by the Canadian bank into high net worth private and commercial banking in the United States.

The planned marriage drew initial opposition from several consumer and community advocacy groups in the United States, according to a report last month in the Los Angeles Times. But the U.S. lender, which earned the nickname “bank to the stars” because of long-standing Hollywood connections, has since won them over with pledges including a multiyear plan to inject $11 billion US in loans and other support to aid small businesses and low-income neighbourhoods, according to the report.

The California-based National Diversity Coalition, which had corralled 4,200 protest letters and called on the Federal Reserve to hold hearings into how the public would benefit from bringing the banks together, was the latest to reverse course and now supports the union, according to the L.A. Times story.

The letter to RBC’s U.S. counsel from the Fed inquired about other issues related to the proposed combination, including how City National and RBC would monitor the five-year community support commitment to small business and low-income communities.

Other queries focused on details of the planned structure to provide oversight of fair lending regulatory requirements and other compliance issues. The correspondence indicates there was an earlier exchange of information in April about the planned acquisition of the U.S. lender, which was founded in 1954.

City National’s strong funding ties to the entertainment business include extending loans to Frank Sinatra and Arnold Schwarzenegger. More recently, those connections have been forged through the establishment of offices in New York and Nashville. City national also specializes in high-net-worth clients and lending in the tech and health care sectors.