Anthony W. Cyrnak

English

Research Papers in Economics

FABSF
December 26, 1986 WEEKLY LETTER
Banking Antitrust in Transition
Since 1979, there has been an unusually strong
merger movementintheUnitedStates banking
industry. Banking mergers have grown dramat-
ically not only in number, but also in size (see
chart). The causes of this wave of mergers are a
matter of debate, but most observers agree that a
desire for geographic expansion and for self-pro-
tective growth in anticipation of interstate bank-
ing have been important.
Many of these mergers have involved large
banks of regional and national significance, but,
unlike the 1960s and 1970s, federal authorities
have rejected very few on the basis of antitrust
concerns. As a result, many analysts have con-
cluded that banking antitrust standards are more
lenient now than at any time in the past. Some
observers have even suggested that antitrust con-
cerns are essentially a "dead" issue in today's
banking mergers.
What has happened, then, in the 1980s to cause
this apparent turnabout in the application of
antitrust standards? This Letter identifies a num-
ber of developments that have contributed to the
greater leniency in current banking antitrust.
Background
Unlike other U.S. industries, banking in general
has been subject to antitrust review for only a
few decades. Prior to the passage ofthe Bank
Merger Act of 1960, banking was widely held to
be separate from "commerce" and therefore not
subject to antitrust laws. The Supreme Court's
1963 decision involving the Philadelphia
National Bank, however, removed any doubts as
to the applicability of antitrust to banking.
In this landmark case, the Court found commer-
cial banks to offer a unique "cluster" of prod-
ucts that comprised a separate line of commerce
subject to the antitrust standards of Section 7 of
the Clayton Act (1914). This important antitrust
law prohibits mergers when "in any line of com-
merce in any section ofthe country the effect of
such acquisition may be to substantially lessen
competition." The Supreme Court reaffirmed its
stancejn~tbePhiladelphia National case in later
cases involving the Phillipsburg National Bank
(1970) and the Connecticut National Bank (1974).
Since the 1960s, the task of reviewing the anti-
trust effects of proposed commercial bank mer-
gers and bank holding company (BHC)
acquisitions has rested primarily with the three
federal banking agencies. jurisdiction over mer-
gers is determined by the charter class and
Federal Reserve System membership status of
the surviving bank. The Federal Deposit Insur-
ance Corporation (FDIC) has jurisdiction over
state nonmember banks, the Federal Reserve
System over state member banks and all acquisi-
tions involving bank holding companies, and the
Comptroller of the Currency over national
banks. The Department of justice (DOj) also
plays a role in banking antitrust in that it may,
within 30 days of agency approval, bring suit to
prevent any merger.
Antitrust analysis
Since the Supreme Court's decision in the Phila-
delphia National case, the three banking agen-
cies have taken a more or less uniform analytical
approach to assessing bank mergers. Of primary
importance in that approach is the theory that
banking market structure influences market con-
duct which, in turn, influences market perfor-
mance. It has generally been assumed that
markets with more banking firms and less
deposit concentration will exhibit greater com-
petition and lower profits. (This structure-con-
duct-performance hypothesis is not accepted by
all economists although numerous empirical
investigations in both the industrial and banking
sectors tend to support it.)
Assessing the antitrust effects of a bank merger,
therefore, entails judging the likely impact
of a proposed merger on the structure ofthe
market in which the merging banks are located.
To do this requires the delineation of a relevant
geographic market and the identification of allFRBSF
commercial banking competitors. So-called
"horizontal mergers" occur between banks in
the same geographic market and eliminate
"existing competition." "Market extension"
mergers are those that occur between banks
located in separate geographic markets; such
mergers may eliminate "potential" or" pmbable
future" competition.
The competitive importance of a bank is gener-
ally estimated by its share of market deposits.
Thus, horizontal mergers alter market structure
and increase a merging bank's marketpower by
combining the bank's deposits with those of a
competitor. Similarly, substantial market power
can be obtained quickly by a banking firm that
wishes to enter a new market and does so via a
market extension merger with a leading com-
petitor in the new market. From an antitrust
viewpoint, either type of merger may, at times,
be undesirable if the banking markets involved
are noncompetitive.
What has changed?
Prior to this decade, it was common for the
banking agencies to reject pmposed bank mer-
gers and BHC acquisitions for antitrust reasons.
Since 1980, legislative changes, judicial rulings,
and agency decisions have combined to create a
regulatory climate that has pmduced far fewer
rejections of both horizontal and marketexten-
sion mergers.
On thelegislative side, it is difficult to understate
the importance of the Depository Institutions
Deregulation and Monetary Control Act of 1980
and the Garn-St Germain Act of 1982. These
two laws substantially increased the "banking"
powers (asset and liability) of thrift institutions
and further weakened the much-attacked con-
cept of commercial banking as a separate line of
commerce. As a result, the banking agencies
and the DOJ have recognized thrift institutions
as at least partial competitors of commercial
banks. Including thrifts in the competitive frame-
work tends to lead to a new view of market
structure as being more atomistic and less con-
centrated than in the past. Within this new view,
horizontal bank mergers now tend to cause
fewer objectionable changes in competition.
The inclusion of thrifts as banking competitors
has also made it less likely that regulators would
reject market extension mergers under existing
antitrust laws. Prior to 1980, market extension
bank mergers and BHC acquisitions were disap-
proved with some regularity. A 1981 ruling by
the u.s. Fifth Circuit Court of Appeals, however,
changed this by overturning the Federal
Reserve's 1980 rejection of two market exten-
sion acquisitions in Texas. (In another important
198LdedsJon, this Court also ruled that no
banking acquisition or merger could be denied
for competitive reasons unless the merger or
acquisition constituted an antitrust violation.
Thus, the antitrust standards of the banking
agencies cannot be more strict than those of the
DOJ.)
Although careful not to invalidate the theory of
potential and probable future competition, the
Court delineated four specific criteria that would
have to be met before a market extension mer-
ger could be rejected on antitrust grounds: (1)
the target market is operating noncompetitively
(i.e., it is highly concentrated), (2) the acquiring
firm is a likely entrant (either foothold or de
novo) into the target market, (3) there are few
likely potential entrants, and (4) alternative entry
by the acquiring firm would significantly
encourage competition in the market structure.
Experience since this ruling has demonstrated
that most banking markets are reasonably com-
petitive - that is, not highly concentrated -
when thrifts are included as banking competi-
tors. This is especially true of states such as Cal-
ifornia and Florida where thrifts are prevalent.
Also, because of the branching powers that
thrifts generally enjoy there are almost always
more than a "few" potential entrants into any
banking market. The number of potential
entrants into many banking markets has also
increased dramatically because of recent
changes in interstate banking laws that now per-
mit entry into local markets by out-of-state firms.
The combined impact ofthe 1980 and 1982 leg-
islation and the 1981 Fifth Circuit Court ruling
on market extension mergers has been signifi-
cant. No banking agency has denied a market
extension merger since 1980.
Agency rulings in merger cases since 1980 have
also contributed to more lenient antitrust stan-
dards. One such ruling by the Comptroller of the
Currency (OCC) in 1984 further expanded the
universe of firms that the OCC considers to be
competitors to banks. The ruling was made in
connection with the approval of a horizontalA development unrelated to the line of com-
merce issue but one that has greatly facilitated
bank mergers in the 1980s has been the use of
branch and deposit divestitures to eliminate or
reduce the negative antitrust effects of certain
horizontal mergers. In contrast to the industrial
sector, where selective divestitures in mergers
have been acceptable for many years, bank reg-
ulators have discouraged the use of selective
divestitures in bank mergers prior to this decade.
merger of two Pennsylvania banks and gave
competitive weight not only to thrifts but also to
certain nonbanking firms such as finance com-
panies and brokerage firms - some of which
had no physical presence in the relevant geo-
graphic market.
Similarly, in 1985 the FDIC adopted new
explicit merger guidelines that support the
notion of a disaggregated (multiproduct) line of
commerce in banking. As a result, future bank
mergers decided by the OCC and the FDIC are
virtually certain to assign a competitive role for
firms traditionally believed to be noncompetitive
with banks.
Finally, some observers believe that the Depart-
ment ofJustice also has promoted a climate of
leniency toward bank mergers during the 1980s.
In addition to indicating (in 1980) that it
intended to be more receptive to mergers in gen-
eral, the DOJ has twice (in 1982 and 1984)
revised its horizontal merger guidelines in ways
that most observers agree allow more mergers.
The DOj's infrequent legal challenges to bank
mergers in recent years has underlined the view
that the DOJ has become more receptive to
bank mergers.
Anthony W. Cyrnak
Conclusion
The current merger movement in banking is
being abetted by antitrust practices and stan-
dards that have become significantly more
lenient during the 1980s. The current antitrust
climate in banking is largely the result of the
changing nature of banking and recent legisla-
tive, judicial, and agency rulings. One important
consequence of these developments has been a
retreat from the traditional concept of commer-
cial banking as a separate line of commerce and
a leaning toward a view of banking as a multi-
product activity in which numerous types of
financial services firms engage. Because of these
developments, it appears that existing antitrust
laws and standards will not be important con-
straints on the industry consolidation that is
expected to occur as the result of extensive
interstate banking.
Now, proposed mergers between large banking
firms that operated in one or more common
markets can almost always meet agency stan-
dards governing the elimination of existing com-
petition through such divestitures. The banking
agencies currently also allow firms to "fine
tune" theirmergerproposals by reducing or
eliminatingaltogether the amount of deposits
and assets to be acquired in markets where
existing competition is an important issue.
a
40
10
20
50
30
60
$ Billions
Bank Mergers Soar in Recent Years
* 1984 Figures Are Preliminary
. :
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Assets Acquired/ --..-.. - .....' Ou:::t:1:...L.I:L-LJ-L.L..L--l.-LL...L.....1--l.-L..L...L....I----L-.l-l....J.....J
1960 1962 1964 1966 1968 1970 1972 1974 1978 1978 1980 1982 1984'
400
100
200
Number
500
300
600
Opinionsexpressed in this newsletterdo not necessarily reflect theviews of themanagementofthe Federal Reserve Bank ofSan
Francisco, orof the Board of Governorsofthe Federal Reserve System. . . .
Editorialcommentsmay beaddressed totheeditor(GregoryTong) ortotheauthor....FreecopIesofFederal Reserve pubhca~lOns
can beobtainedfrom the Public Information Department, Federal Reserve Bank ofSan Francisco, P.O. Box 7702, San FranCISco
94120. Phone (415) 974-2246.uo~6UiljSOm ljo~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
12/3/86
Change
from
11/26/86
Change from,12/4/85
Dollar
Loans, Leases and Investments1 2 204,087 324 4,662 2.3
Loans and Leases1 6 183,827 480 3,060 1.6
Commercial and Industrial 51,044 966 - 1,025 - 1.9
Real estate 67,134 166 1,238 1.8
Loans to Individuals 39,677 - 48 1,598 4.1
Leases 5,593 16 169 3.1
U. 5. Treasury and Agency Securities2 12,679 24 1,405 12.4
OtherSecurities2 7,582 - 178 198 2.6
Total Deposits 210,264 1,654 6,238 3.0
Demand Deposits 57,550 1,039 6,069 11.7
Demand Deposits Adjusted3 39,900 2,663 6,112 18.0
OtherTransaction Balances4 18,951 723 3,846 25.4
Total Non-Transaction Balances6 133,762 - 110 - 3,678 - 2.6
MoneyMarket Deposit
Accounts-Total 46,561 158 783 1.7
Time Deposits in Amounts of
$100,000 or more 32,053 - 302 - 5,943 - 15.6
Other Liabilities for Borrowed MoneyS 27,162 799 - 626 - 2.2
Two WeekAverages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+)jDeficiency(-)
Borrowings
Netfree reserves (+)jNet borrowed(-)
Period ended
12/1/86
93
23
70
Period ended
11/17/86
66
63
3
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes u.s. governmentand depository institution deposits and cash items
4 ATS, NOW, Super NOW and 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

Banking antitrust in transition

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Banking antitrust in transition

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