During the Bush administration, the Department of Justice has showed a renewed interest in the possible anticompetitive effects of bank mergers.
The department has used its leverage to negotiate divestitures as conditions for completing some very large merger deals.
Under the Clinton administration, some observers have predicted, required divestitures could be so large in certain cases as to render mergers unattractive or impractical.
This is unlikely.
What we have witnessed reflects the Justice Department's natural inclination to remain involved in the process of bank consolidation - which the department recognizes will continue and perhaps accelerate.
Larger divestitures resulted from the application of fairly mechanical rules to markets that had become more concentrated through in-market bank acquisitions and thrift resolutions.
Meanwhile, there has been an attempt to define "lending to small businesses" as a discrete market within banking. Many of the recent divestiture orders were aimed at keeping such markets competitive. (This trend will be examined in more detail in the second installment of this commentary.)
However, any attempt to push the current thinking too far and risk a court test would probably reduce the Justice Department's influence. The new administration is unlikely to take that risk.
The current era of bank antitrust enforcement started in 1963, when the Supreme Court decided the Philadelphia National Bank case.
In that decision, section 7 of the Clayton Antitrust Act was held to be applicable to banking.
The court pronounced that the merger of two large Philadelphia banks would be expected to reduce competition substantially. The "line of commerce" was defined as commercial banking, and the market as Philadelphia and three nearby counties.
In this case, the court:
* Established a geographic market that was relatively localized and corresponded to that portion of a metropolitan area in which both banks were permitted to branch.
* Defined a line of commerce as the cluster of products and services then constituting commercial banking.
The court thereby established standards that have been chipped away at but never totally abandoned, despite three decades of dramatic changes in the industry.
In a 1970 case, the high court reaffirmed the geographic and product-market standards of the Philadelphia decision when it concluded that the merger of two small banks in Phillipsburg, N.J., would violate the antitrust laws.
The Phillipsburg decision effectively shut down bank mergers of significant direct competitors for more than a decade.
During the 1970s, many states lifted the barriers to geographic expansion through merger or holding-company acquisition. The focus of consolidation turned from in-market deals to attempts to extend banking markets.
The interest of the Justice Department, therefore, turned to the theory of potential competition, which it had applied in some industrial situations.
The potential-competition doctrine claims that the most likely entrants into a market should not be allowed to enter by acquiring a leading local firm.
Accordingly, the Justice Department brought a number of lawsuits challenging the acquisition of leading banks in local markets by larger, statewide players.
However, the government has been consistently unsuccessful in demonstrating that any such market-extension merger violated the antitrust laws. Such efforts failed because the government could never prove that the acquirer was one of a few potential entrants; or that in banking, market entry by means of a toe-hold is likely to encourage competition significantly.
Although there was a gradual recognition that competition from thrift …