Academic journal article Federal Reserve Bank of St. Louis Review

Banking Antitrust: Are the Assumptions Still Valid?

Academic journal article Federal Reserve Bank of St. Louis Review

Banking Antitrust: Are the Assumptions Still Valid?

Article excerpt

The federal bank and the regulatory agencies U.S. Department of Justice (DOJ) scrutinize bank mergers and acquisitions for potential antitrust violations. To perform this antitrust analysis, the federal regulators make assumptions about the geographic scope of banking markets, the types of competitors that banks face in these market areas, and the nature of banking services. The authorities assume that the relevant geographic market is a local area where banks compete to offer financial services to households and small businesses. That market area is often approximated by a metropolitan area for mergers involving banks in urban areas and by a county for those involving banks in rural areas. The antitrust authorities assume that the relevant competitors are banks with offices in the same market area. They further assume that the relevant product for antitrust analysis is a cluster of financial services that is unique to banking. In some analyses, however, the focus is on competition among banks to provide individual categories of deposit and loan services. Antitrust agencies typically use a bank's deposits as the measure of output of financial services each bank provides.

The assumptions that underlie banking antitrust have been subject to criticism in recent years (Austin and Bernard, 2001 ; Jackson and Eisenbeis, 1997; Moore, 1998; Petersen and Rajan, 2002; Radecki, 1998, 2000; and Santomero, 1999). Some critics focus on assumptions about the relevance of local markets for antitrust analysis. They argue that financial innovation and changes in banking regulations, including nationwide branch banking since 1997, have undermined the relevance of using local areas for competitive analysis. Innovative financial firms are now able to offer services, such as loans and investment options, to customers in areas where the firms do not have offices. In addition, the threat of entry by out-of-market financial firms constrains the terms under which banks with offices in a given geographic area can offer services to local customers. Finally, studies indicate that banks with offices in many communities tend to offer financial services to all communities on the same terms. The results of these studies appear to undermine the assumption that the terms on which banks make their services available to customers depend to some extent on the structure of local market areas. Shull and Hanweck (2001) also criticize the focus on local markets in banking antitrust analysis, arguing that it is not constraining consolidation of the banking industry at the national level.

Critics also focus on the assumption that a cluster of banking services is the relevant product in antitrust analysis. They argue that the success of nonbank financial firms in providing services to households and small businesses has undermined the premises that commercial banks are the relevant competitors in antitrust analysis and that a bank's relevant product is a "cluster of banking services." (1)

The large literature on the topic of banking antitrust dates from the 1960s, when bank mergers in the United States became subject to the federal antitrust statutes. This article, by summarizing the results of empirical studies written or published since the early 1990s, assesses whether these more recent studies provide empirical support for the current assumptions that underlie banking antitrust analysis. (2)


Antitrust analysis of bank mergers and acquisitions dates back to 1963, when the U.S. Supreme Court held that commercial banking, like other industries in the United States, is subject to the Sherman Antitrust Act of 1890 and the Clayton Act of 1914. (3) In its opinion, the Court noted that the test for anticompetitive behavior is whether the effect of a bank merger "may be substantially to lessen competition ... in any line of commerce in any section of the country. …

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