Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Antitrust Analysis in Banking: Goals, Methods, and Justifications in a Changed Environment

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Antitrust Analysis in Banking: Goals, Methods, and Justifications in a Changed Environment

Article excerpt

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Antitrust analysis (also known as competitive analysis) of bank mergers has used the same basic procedures for decades, even though the banking market has experienced significant shifts. Do these changes in the banking market call for changes in competitive analysis - or perhaps its cessation? We argue that continued use of these procedures makes sense.

The goal of competitive analysis is to protect competition in banking markets. Bank supervisors, along with the Department of Justice, perform competitive analysis for any proposed bank merger or acquisition. Consequently, before completing a bank merger or acquisition, a bank must seek approval from the government agency responsible for its supervision. When there are few competitors in a market, banks in that area might have the opportunity to exercise market power, thus diminishing economic efficiency. Banks with significant market power will tend to limit their output in order to drive up prices, thereby earning excess profits. For example, in a market with only one bank (a monopolist) fewer loans are likely to be made and interest rates are likely to be higher (earning high profits for the monopolist), than in a market with many competitors. Economic efficiency is reduced in two ways when market power (also known as monopoly power) is high. First, too little of the monopolized good-in this case loans-is produced. Second, resources will be wasted as the monopolist attempts to defend its monopoly position against potential entrants, and by consumers' attempts to find alternative providers offering lower-prices.

What should be the focus of efforts to protect competition in banking markets? The focus was established by the Supreme Court in the 1960s when the Court ruled that two basic principles should guide competitive analysis. First, when reviewing the merger of two banks, competition only from other banks should be considered in the analysis, excluding all other depository institutions and nondepositories (such as mutual funds).1 Second, the focus is to be on banks with operations near the merging banks, i.e., in the same local market. Today's banking marketplace, however, is very different than the market of the 1960s. Thrifts, credit unions, and nondepository institutions are now able to compete with banks directly because of the elimination of restrictive regulations. Technological improvements mean that products from competitors located outside the merging banks' local market currently are conveniently accessible to consumers in that local market. Consequently, one must wonder if analysis of the competitive effect of mergers should change.2

While before the 1980s, and certainly in the 1960s, law and regulation restricted depository institutions from entering new banking markets to compete with incumbent depositories; today such restrictions have been removed (Walter 2006). Furthermore, depository institutions face nondepository competitors that did not exist 30 years ago. For example, money market mutual funds, which did not exist until 1972, now offer deposit-like products in competition with depositories (Cook and Duffield 1993, 157). Additionally, consumers and businesses are less dependent on local depositories for banking products. Widespread access to the internet, 800 number call centers, and other information technology advances mean that bank customers can, at fairly low cost, obtain loans from and make deposits in distant financial institutions.

Current analysis focuses on competition in local markets with emphasis on competition in the deposit market. Why? Aside from the Supreme Court rulings of the 1960s, there are other reasons for focusing on local market competition. A great majority of consumers persist in holding deposits in institutions with branches near the consumer's home or work, despite the availability of similar products offered by competitors outside the local market. …

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