Antitrust Law Daily Wrap Up, MERGERS & ACQUISITIONS NEWS: FAQs outline how Fed, Antitrust Division analyze bank mergers, acquisitions, (Oct 10, 2014)

By Richard A. Roth, J.D.

Noting the increase in bank merger and acquisition applications in the wake of the financial crisis and changes in the approval process brought about by the Dodd-Frank Act, the Federal Reserve Board has issued a series of frequently asked questions and answers that are intended to outline how it, and the Justice Department Antitrust Division, analyze proposed transactions for potential harmful effects on competition. The FAQs focus on the market for retail banking services and on applications under the Bank Holding Company Act, Bank Merger Act, and Home Owners’ Loan Act.

A number of different types of transactions require prior Fed approval under one of the three statutes. These include bank or savings and loan holding company formation, holding company acquisitions of depository institutions, and mergers of holding companies. The Fed and the Antitrust Division both review applications for harmful effects on competition, and both have the authority to act against transactions if harmful effects could result. The FAQs include a discussion of the differences between the two reviews.

In some cases, an application can be approved by the relevant Federal Reserve Bank without a need for consideration by the Fed. This is permitted when the transaction would not result in a significant increase in concentration in any market where the two holding companies or institutions both have operations. If there would be a significant increase, the Fed itself must consider the application.

Market shares and concentration. The standard measure of market concentration is the Herfindahl-Hirschman index (HHI), the FAQs say. The HHI is calculated by totaling the squared market shares of all of the competitors. For example, a market with five competitors that each had 20 percent of the market would have an HHI of 2000 (20 squared times five). A market equally divided between two competitors would have an HHI of 5000 (50 squared times two), making it a much more concentrated market.

A bank’s market share initially is determined by its share of deposits, based on information in the Federal Deposit Insurance Corporation’s Summary of Deposits, the FAQs say. Not all deposits are treated equally. Deposits in a savings association usually receive only a 50-percent weight because thrifts traditionally do not provide a full range of banking services. Deposits in credit unions might be completely disregarded and, if they are considered, also will receive only a 50-percent weight, the Fed adds.

Market definitions. For antitrust purposes, defining a market requires defining both a product market and a geographic market, according to the FAQs. The product market is the cluster of commercial banking products and services that customers would consider to be close substitutes for each other. Generally, this is limited to products and services provided to most households and to small businesses, the Fed says. Products and services provided only to wealthy consumers or large companies usually are disregarded.

The geographic market is the geographic area within which products or services offered by one of the institutions would be considered to be close substitutes for those offered by the other institution. The Fed has defined more than 1,500 geographic markets but, in special cases like credit cards or mortgages, geographic markets may be regional or even nation-wide.

Consumer substitution behavior is what matters, the FAQs emphasize. The specific characteristics of the depository institutions do not matter unless they affect consumer behavior.

Anticompetitive effects. An application that meets the standard for consideration by an FRBank rather than the Fed likely will not be denied for competition reasons. These standards are that the transaction will raise the HHI by less than 200 points or result in a post-merger HHI of less than 1800, and the institution that results from the transaction will have a market share of less than 35 percent.

The FAQs also say that the inclusion of branch divestitures that will bring the transaction under the thresholds is likely to permit the approval of the application. Otherwise, the applicant must show mitigating factors, such as:

• the attractiveness of the market to new competitors and the ease of entry into the market, with a particular emphasis on de novo entries;

• the number of competitors;

• the number of competitors that hold a significant share of the total deposits;

• the effects of a shrinking market; and

• the poor financial condition of the institution to be acquired.

The FAQs note that “there are no general guidelines for determining the level of divestiture that would be necessary to allow the Board to approve a potentially anticompetitive application.”

Department of Justice review. The Department of Justice (DOJ) will begin its review by performing the same HHI calculations as the Fed, the FAQs say. However, the DOJ does not rely on the Fed’s pre-defined geographic markets, instead carrying out a case-by-case analysis. The DOJ will provide comments to the Fed on its competition concerns, but it also has the authority to act independently to block a merger or acquisition.

The Department looks at two separate product markets, separating retail products and services from small business products and services, in the belief that consumers will bank near either where they live or where they work, while small business customers are more limited. Deposits held by savings associations are fully included in the retail product analysis but completely excluded from the small business analysis, the FAQs say.

DOJ concerns frequently can be resolved by divesting branches, with the agency preferring the divestiture of branches owned by the institution being acquired. Such a divestiture should be structured in a way that will create a competitive branch network and minimize any consumer confusion.

News: Antitrust AcquisitionsMergers