Keeping Banking Competitive: Evaluating Proposed Bank Mergers and Acquisitions

By Darwish, Nisreen H. | Chicago Fed Letter, May 2014 | Go to article overview

Keeping Banking Competitive: Evaluating Proposed Bank Mergers and Acquisitions


Darwish, Nisreen H., Chicago Fed Letter


Like M&A in other industries, proposed bank M&A transactions are evaluated by regulators for whether they would raise antitrust concerns. In this Chicago Fed Letter, I describe the legal background for this approach to assessing potential bank M&A, as well as the analytical framework for the way it is currently implemented by the Federal Reserve.

Legal background

In the United States, the first two major restrictions on M&A-and still the two main laws that govern the legality of such transactions-are the Sherman Act of 1890 and the Clayton Act of 1914. The Sherman Act states that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize ... shall be deemed guilty of a felony."1 The Clayton Act added on to the Sherman Act by more clearly forbidding price discrimination, director interlocks, and M&A2 where the effect "may be substantially to lessen competition, or to tend to create a monopoly."3 These two statutes serve as the basis for the banking antitrust laws that followed.

The laws that directly address bank M&A are the Bank Holding Company (BHC) Act of 1956 and the Bank Merger Act of 1960, including their amendments of 1966. These acts set the general standards for assessing the probable competitive effect of a bank merger or acquisition in a market and also designated the regulatory agencies responsible for evaluating M&A proposals.4 However, they did not give any specific standards the regulatory agencies could go by in defining the relevant market dimensions. It was not until 1963 that the U.S. Supreme Court made rulings that established legal precedents still used today in determining what the appropriate product market and geographic market would be for banking antitrust analysis;5 I discuss these market parameters in more detail in subsequent sections.

For BHCs and banks regulated by the Fed, the initial analysis of a proposed merger or acquisition is submitted to the Reserve Bank in whose District the resulting firm would be headquartered.6 The Reserve Banks are delegated authority by the Board of Governors of the Federal Reserve System to approve transactions that do not raise any significant anticompetitive concerns. For transactions that do raise such concerns, the Board determines whether the proposal should be approved or denied.7

Defining product market

In line with the 1963 case, the Supreme Court determined in a 1970 case that the relevant product market for banking is "the cluster of products and services that full-service banks offer that as a matter of trade reality makes commercial banking a distinct line of commerce."8 Mainly because of cost advantages and settled consumer preferences in banking, the Supreme Court argued that banks did not compete with other financial institutions that supply one or more, but not all, of the same products and services. That said, while the entire set of products and services is considered to determine which firms are competitors, total deposits are typically used to measure concentration among the competitors by the Fed (which I explain in more detail later).

Given the 1963 and 1970 Supreme Court rulings, when evaluating proposed M&A, the Fed must identify institutions that offer products and services similar to those provided by the parties to a merger or acquisition. These institutions have traditionally been banks located in proximity to the parties. However, thrift institutions (or thrifts) and credit unions provide many similar products and, thus, are considered in the competitive analyses of banking M&A proposals.9 In analyzing a proposed merger or acquisition, the Fed takes into account competition from thrifts. For example, depending on how active thrifts are in commercial lending in a market, the Fed gives their deposits 50% or 100% weight when calculating that market's concentration.10 Because credit unions usually do not offer the full cluster of banking products and services, have restrictions on memberships, and may not be easily accessible, credit union deposits are typically excluded from the market analysis. …

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