Bank mergers ; Wells Fargo Bank ; Crocker National Corporation ; Banks and banking - California

Frederick T. Furlong

English

Research Papers in Economics

FRBSF WEEKLY LETTER
November 28, 1986
The Wells Fargo-Crocker Acquisition
On May 30, 1986,theJargesthankingacquisic
tion in history was consummated. Wells Fargo &
Company acquired Crocker National Corpora-
tion from its parentholding company, Midland,
pic. This acquisition combined the third and fifth
largest banking organizations in California, and
made Wells Fargo the second largest bank hold-
ing company in the state. The acquisition
involved over 700 branches and $31 billion in
domestic deposits. Nationally, the combination
lifted Wells Fargo from eighth to fourth largest in
terms of consolidated domestic deposits.
In the past, concern over possible anti-competi-
tive effects probably would have made such a
union very difficult, if not impossible. Yet the
acquisition gained approval with few complica-
tions from bank regulatory agencies and the
Department ofjustice. Prior to receiving the
approval to buy Crocker, Wells Fargo committed
to sell only seven small offices with combined
deposits of approximately $225 million, or less
than 1 percent of the combined deposits ofthe
two banking organizations.
Why was Wells Fargo able to secure regulatory
approval for an acquisition that probably would
have been unthinkable only a few years ago?
The main reason is the increased acceptance in
antitrust analysis of savings and loan associa-
tions and savings banks as capable competitors
with commercial banks. Indeed, competition
from savings and loans in California is probably
the single most important factor that made the
approval of the acquisition of Crocker by Wells
Fargo possible with only minimal divestitures. A
secondary reason is that more liberal antitrust
standards are being applied to mergers and
acquisitions in banking because of greater com-
petition from nondepository financial firms.
Regulators
Wells Fargo's proposal to acquire Crocker was
evaluated by three agencies. The Federal
Reserve had a central role because Wells Fargo
& Company and Crocker National Corporation
are bank holding companies. The Office of the
Comptroller of the Currency (OCC) reviewed the
appJicatioohecause it is the primary regulator of
the nationally chartered Wells Fargo Bank, N.A.
- the bank subsidiary ofthe holding company.
The Department ofjustice (DOj) was involved
because it has oversight responsibility in anti-
trust matters for all types of firms.
Considering competitive effects
Competitive analysis for the Wells Fargo-
Crocker proposal centered on the effects ofthe
acquisition in the 36 local banking markets in
which the two organizations were represented.
These markets comprised all the major metro-
politan areas in California as well as smaller
rural markets consisting of counties or parts of
counties. Before the acquisition couldhe
approved, the regulatory agencies had to deter-
mine that the combination of the two banking
organizations would not substantially lessen
competition or, if itdid, that the anti-competitive
effects were outweighed by the "convenience
and needs" considerations in the communities
involved. Convenience and needs factors would
be positive ifthe combination were to improve
or expand banking services within thecommu-
nities in question.
Market concentration
The usual starting point in determining whether
a merger or an acquisition in banking might be
anti-competitive is the concentration of banking
activity in the relevant markets. The traditional
belief is that the smaller the number of firms
dominating a market, the more likely those firms
will be able to raise prices. In other words, when
one or a few banks account for most of the
activity in a market, they will find it easier to
"conspire" (either overtly or covertly) to fix
interest rates on loans and deposits. Bank regula~
tors therefore are concerned that increased mar~
ket concentration will lead to higher interest
rates on loans and lower yields on deposits.
Many in economics and the legal profession
question the connection between market con-
centration and anti-competitive behavior. Vig-
orous competition can exist with only a handful
of competitors, or even less. Moreover, attemptsFABSF
by private firms to limit competition among
themselves tend to be undermined by incentives
to cheat on formal or informal agreements to
"fix" prices (interest rates) and by the potential
or actual entry of new competitors. As a result,
regulatorsno,-,\, ta~ea moreflexible vie,-,\, ofthe
relation betWeen concentration and anti-com-
petitive behavior for antitrust purposes.
Nevertheless,.evidence regarding market con-
centration continues to playa key role in the
approval of merger or acquisition applications.
In fact, the Department ofjustice has established
guidelines indicating when a merger or acquisi-
tion likely would be challenged based on the
impact on marketconcentration. In its
guidelines, the DOj uses the Herfindahl-Hirsch-
man Index (HHI) for measuring concentration.
The HHI is the sum of the squares ofthe per-
centage point shares ofthe firms in a market.
With one firm in a market, this index would
equal itsmaximum value of 10,000 (100%2). If
there were three firms in a market with market
shares ofsay, 50%,25% and 25%, respectively,
theHHI wouldfall to 3750 points (50%2 +
25%2 + 25%2),Asthe number offirms
increases and themarketshares of individual
firms shrink,the HHI approaches its theoretical
minimum ofZero. Thus, a higher HHI indicates
greater market concentration.
New antitrust standards
Under DOj guidelines, onlyma,rkets withHHls
of greater than1800 points are considered
highly <::oncentrated. In February 1985, the DOj
indicated that it is not likely to challenge bank
mergers and acquisitions unless the HHI after
the mergeris 18QOOr higher and the combina-
tionofthe banking organizations increases the
HHI by at I~ast 200 points.
This. standard represented an appreciable relaxa-
tion ofprevious guidelines in recognition of
cgmpetilign from nondepositOrY financial
institutions. While these institutions are not
included directlyinthecalculation ofmarket
shares u.sed to detElrmine market concentrations,
the DOj reasons that the provision of financial
servi.ces. bynonbanks.should.Iessen the potential
for adverse competitive effects that may result
from concentration in banking alone,
The more liberal DOj guidelines made it some-
what easier for the Wells Fargo-Crocker acquisi-
tion to meet approval. Using the new DOj
guidelines and considering only deposits for
commercial banks as measures of market shares,
potential adverse effects on competition were
notissuesTn2fofthe 36 markets in which the
two organizations competed. In contrast, only
15 of the markets involved in the acquisition
would have satisfied the pre-1985 standards.
Thrifts as competitors
Along with the new DOj "yardstick" that
accounts for indirect nonbank competition, the
competitive realities in financial markets caused
the DOJ and bank regulatory agencies in anti-
trust analysis to treat thrifts as direct competitors
with commercial banks. In the past, antitrust
analysis viewed commercial banking as consist-
ing of an integrated, and inseparable, set of
activities. Since thrifts (particularly savings and
loans) could not offer a full array of bank-like
services, they were not treated as direct com-
petitors with banks.
Financial deregulation has brought the impor-
tance ofthrifts as direct competitors to the fore-
front. Savings and loans and savings banks now
offer transaction accounts to households and
businesses and make consumer, commercial,
and industrial loans. The question is no longer
whether thrift competition should be weighed
when determining the competitive implications
of bank mergers and acquisitions, but how
heavily.
The Federal Reserve Board generally includes
thrift deposits with a 50 percent weight when
determining total deposits and market shares.
The DOJ separates banking into commercial and
consumer activities, and usually assigns thrift
deposits a weight of 20 percent for the former
and 100 percent for the latter. The Office of the
Comptroller of the Currency treats thrifts as full
competitors with commercial banks.
Thrifts make the difference
In all the different approaches among the agen-
cies, including thrift deposits in market share
calculations radically lowers the measured con-
centration in most banking markets in California.
Using the Federal Reserve's approach, for exam-pie, the HHI for the banking market in the San
Francisco area was about 2000 points before the
Wells Fargo-Crocker acquisition, when only
commercial banks were considered. The market
therefore fit the DOj's definition of highly con-
centrated (HHI of 1800 or more). When savings
and loans also were indLided (withaScfpercent
weight), the HHI by the Federal Reserve's cal-
culation was around 1200 points.
If thrifts had been excluded, the combination of
Wells Fargo and Crocker would have raised the
HHI in the San Francisco area by more than 400
points in a highly concentrated market, and
therefore would have exceeded the DOJ
guidelines mentioned earlier. By considering
thrifts, the San Francisco area market remained
only moderately concentrated after the
combination.
Overall, the explicit inclusion ofthrift institu-
tions in the analysis of the Wells Fargo-Crocker
acquisition reduced from 15 to 7 the number of
markets in which the effects on competition
could have been found to be substantially
adverse in the absence of any divestitures. The
15 markets would have involvedclose to $20
billion in combined Wells Fargo and Crocker
deposits, compared to $1 billion in the 7 mar-
kets in which Wells Fargo did make divestitures.
Without the consideration given to thrift institu-
tions in local banking markets in California,
approval of the Wells Fargo-Crocker acquisition
would have been much more difficult to secure
and almost surely would have required the
divestiture of substantially more than $225 mil-
lion in deposits.
Statewide concentration
The Federal Reserve's analyses of mergers and
acquisitions involving large banking organiza-
tions often deal with the issue of statewide, and
sometimes even national, concentration of
financial resources. However, in the Wells
Fargo~CrocKercase~ the largest banking
acquisition to date - the concentration of
resources was not a major issue in part because
banking itself has become less concentrated in
California. On a statewide basis, the HHI for
banks fell from about 1700 points in 1980 to
around 1350 points in 1985. Judged from this
lower base, California was moderately concen-
trated in terms of banking deposits even after the
union of Wells Fargo and Crocker, not highly
concentrated as would have been true i111980.
The prominence ofthrift institutions in California
is another reason that the statewide concentra-
tion of resources was not a serious issue in the
Wells Fargo-Crocker acquisition. Savings and
loan deposits in California are about equal to the
total domestic deposits of commercial banks in
the state. Moreover, 33 of 49 depository institu-
tions with domestic deposits greater than $1 biI-
lion in California are savings and loans.
As was true for the evaluation of the competitive
factors in local markets, the treatment ofthrifts
as direct competitors with commercial banks
helped mute concerns over any concentration of
financial resources in California that may have
resulted from Wells Fargo & Company's pur-
chase of Crocker National Corporation.
Frederick T. Furlong
Opinionsexpressed in this newsletterdo not necessarily reflect the views ofthe managementofthe Federal Reserve Bank ofSan
Francisco,orofthe Board ofGovernorsofthe Federal Reserve System.
Editorialcommentsmaybeaddressedtotheeditor(GregoryTong) ortotheauthor....Freecopiesof Federal Reservepublications
can beobtainedfrom the Public Information Department, Federal Reserve Bank ofSan Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 974-2246.uo~6U!4S0m 4o~n U060JO 0POI\0U
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and liabilities
Large Commercial Banks
Amount
Outstanding
11/5/86
Change
from
10/29/86
Change from 11/6/85
Dollar Percent!
Loans, Leases and Investmentsl 2 202,548 989 4,935 2.4
Loans and Leasesl 6 182,158 1,130 3,565 1.9
Commercial and Industrial 50,270 958 - 1,054 - 2.0
Real estate 67,000 129 1,416 2.1
Loans to Individuals 39,520 - 91 1,650 4.3
Leases 5,584 - 4 183 3.3
U.S. Treasury and Agency Securities2 12,520 - 119 699 5.9
Other Securities2 7,870 - 22 669 9.2
Total Deposits 207,733 4,901 5,960 2.9
Demand Deposits 55,159 4,475 6,155 12.5
Demand Deposits Adjusted3 37,826 2;351 - 7,264 - 16.1
OtherTransaction Balances4 18,398 950 3,669 24.9
Total Non-Transaction Balances6 134,175 - 524 - 3,864 - 2.7
MoneyMarket Deposit
Accounts-Total 46,392 48 913 2.0
Time Deposits inAmountsof
$100,000or more 32,794 - 358 - 5,802 - 15.0
Other Liabilities for BorrowedMoneyS 24,574 - 1,370 - 246 - 0.9
Two WeekAverages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+l/Deficiency(-l
Borrowings
Netfree reserves (+l/Netborrowed(- l
Period ended
11/3/86
21
64
42
Period ended
10/20/86
59
12
48
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading accountsecurities
3 Excludes U.S. governmentand depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
S Includes borrowingvia FRB, TT&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percent change

The Wells Fargo-Crocker acquisition

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The Wells Fargo-Crocker acquisition

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