Regulating antitrust compliance in the banking industry has become a crowded affair.

The Federal Reserve, the Department of Justice, and state attorneys general can all be expected to exact their own demands from banks trying to merge. And experts think the combination will prove deadly to some deals.

In evaluating antitrust compliance, the Federal Reserve uses the Herfindahl-Hirschman Index, which examines how a given merger would upset the competitive balance in depositis.

Two years ago the Department of Justice added a new test, departing from established standards and using middle-market lending as an antitrust criterion.

Consequently, banks with merger hopes face twice the risk of forced divestitures. In effect, "Suddenly a $30 million divestiture could become a $70 million divestiture and ruin the economics of a deal," said Thomas Erb, a lawyer with Louis, Rice & Fingerish in St. Louis.

And while the Federal Reserve counts 50% of an area's thrift deposits in its analysis -- thereby making compliance with the Herfindahl-Hirschman index easier for an acquirer -- Justice uses only 20% of a thrift's deposits in its analysis.

"With the Department of Justice defining markets differently than just Herfindahl-Hirschman, there is the potential for more significantly adverse decisions," said Charles James, a partner with Jones, Day, Reavis & Pogue in Washington, D.C., and assistant attorney general for antiturst during the last year of the Bush administration.

A significantly adverse decision occurs when Justice disagrees with the Fed's approval of a merger.

In other industries, an antitrust case must go through the courts. But the Justice Department can stay a bank merger automatically, potentially holding it up for years.

As a result, no bank has litigated a merger case to conclusion in almost a decade.

Anthony Nani, chief of the Justice Department section that regulates bank M&A, denies that the agency is obstructionist. He pointed out that the department has investigated only one-half of 1% of the 9,000 bank deals in the last five years.

But according to a recent report written by a group of antitrust lawyers and published by the Bureau of National Affairs, Justice often diverged from the banking agencies in cases where there has been a real competitive question.

And the department does not include finance, leasing, and other financial service companies in its calculation of how mergers affect deposit or middle-market lending competitiveness, the report said.

Despite this Justice Department minefield, experts say it is state rules that will become banks' greatest obstacles.

"State attorneys general have been very active in recent bank mergers, and in some cases where states felt divestiture was necessary, that has added yet another complicating factor to the mix," said Michael B. Mierzewski, a partner with Arnold & Porter.

State caps on the percentage of consumer deposits that can be held by any one institution could also frustrate bankers attempting to consolidate their companies, he added. The federal interstate branching law's 30% deposit cap is voluntary, he pointed out, so states can still have the last word.

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