Academic journal article Federal Reserve Bulletin

Bank Merger Policy and the New CRA Data

Academic journal article Federal Reserve Bulletin

Bank Merger Policy and the New CRA Data

Article excerpt

Anthony W. Cyrnak, of the Board's Division of Research and Statistics, prepared this article. Dennis W. Campbell provided research assistance.

One consequence of the current merger trend in the banking industry has been heightened interest in the analytical framework and data used by federal authorities to assess the competitive effects of bank mergers and bank holding company acquisitions (see box "Federal Antitrust Review of Bank Mergers"). Although the analytical methods used by the bank regulatory agencies and the Department of Justice are similar, some differences have emerged over time. Two issues related to these differences can now be examined using data collected for the first time as a result of 1995 changes in the regulations implementing the Community Reinvestment Act (CRA).

One of the issues is whether locally based commercial banks and savings institutions ("in-market" firms) face significant competition in small business lending from banks and savings institutions based outside local banking markets ("out-of-market" firms). This issue is important because, in the view of some banking industry observers, the presence and competitive influence of out-of-market firms in local banking markets warrant greater recognition by banking regulators and the Department of Justice. If the competitive role of out-of-market institutions were more fully recognized, they argue, more banking markets would be viewed as structurally competitive, and bank mergers within these markets would raise fewer antitrust concerns.(1) The new CRA data can shed some light on this issue by providing information about the number of, and lending activity of, out-of-market small business lenders in urban and rural banking markets.

The other issue is whether levels of concentration within U.S. banking markets differ significantly when measured by small business loan originations rather than by bank deposits. Legal precedent and economic theory have traditionally supported the use of total bank deposits as the basis on which to calculate market concentration. This practice has been reexamined in recent years, however, as industry observers have questioned whether competition in local banking markets might be better measured on the basis of some other variable, notably loans to small businesses.(2) Competition in small business lending, some have argued, is more local than is competition for deposits and better reflects the competitive realities of local banking markets.

The measurement of market concentration plays a key role in the competitive analysis of proposed bank mergers (see box "Concentration, the HHI, and the Department of Justice Merger Guidelines"). Generally, banking regulators and the Department of Justice intensively review any proposed merger that would add significantly to and result in a high degree of market concentration. Importantly, concentration indexes can be calculated using various types of data depending on the type of product for which competition is being analyzed. The use of different data, moreover, is likely to result in different calculated levels of concentration. Thus, the choice of a product market and the type of data used to measure concentration could influence the regulatory outcome of a merger proposal.

The new CRA data make it possible to consider this second issue by examining the level of concentration within U.S. banking markets using a base other than bank deposits, namely small business loan originations. The results of this examination may suggest whether, on average, antitrust standards are likely to be more or less difficult to meet when concentration measures are based on small business loans rather than on deposits.


Antitrust policy in the United States generally recognizes that competition results in lower prices and better service for consumers. Thus, a primary goal of banking antitrust policy is to prevent the creation of, or an increase in, market power such that a firm could impose above-competitive prices and earn excess profits at the expense of consumers. …

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