Beware a National City-Ameritrust Merger

A preliminary analysis of the proposed merger of National City Corp. and Ameritrust Corp. raises serious questions as to its potential anticompetitive impact on the Cleveland market, where both are based.

In fact, this proposed merger would turn Cleveland into one of the most heavily concentrated markets in the country, establishing a precedent with anticompetitive implications for the substantial number of future banking combinations likely in future years.

National City, in a news release on its merger proposal, stated that it was convinced it "will not encounter regulatory difficulty." It views regulators as "likely to be enthusiastic in support of the merger."

These assumptions may be premature and overly optimistic.

Common Antitrust Calculations

Our analysis of the potential merger by no means represents a comprehensive one such as would be conducted by the Federal Reserve Board and the Department of Justice. The focus here is on the most common bank antitrust calculations using readily available bank data.

To be sure, the preliminary analysis should be expanded to consider other relevant and ameliorative factors such as thrift deposits, specific product markets, alternative market delineations, potential market entrants, and the like.

Nonetheless, because our preliminary findings are so clear in pointing to the excessive market concentration resulting from this proposed merger, it would be beneficial to encourage a dialogue on this important issue, particularly as Congress is debating the interstate branching issue.

While interstate and other procompetitive branching proposals are favored, regulatory and antitrust authorities must be mindful of the anticompetitive effects of mergers in particular markets.

The chapter titled "Interstate Banking and Branching" in the Treasury's banking reform package concluded with a sentence to that exact effect. Hopefully they mean what they say.

One-Bank Concentration Ratio

The most basic, and in many ways the most telling, indicator of the degree of concentration in a banking market is the percentage of deposits controlled by the largest bank.

This so-called one-bank concentration ratio is merely the deposit market share of the largest bank in the market. The higher the ratio, the greater the concentration. Including thrift (or other) deposits in the calculation of total market size would reduce a given bank's concentration ratio.

Banking markets are commonly assumed to be coterminous with the 325 metropolitan statistical areas designated by the Office of Management and Budget. But banking markets can differ by product, and the relevant banking market may not be the statistical area or other geographical entity.

Our preliminary analysis utilized June 30, 1989, Federal Reserve data from the midyear summary of deposit survey of the Federal Deposit Insurance Corp.

A red flag is usually raised when the one-bank concentration ratio exceeds 50%. In basic economic terms, when one firm controls over half of a given market it can behave more as a price maker rather than a price taker.

According to the 1989 data for all U.S. markets, there are only eight areas in the country where the one-bank deposit concentration ratio exceeds 50%. These include the following: Sioux Falls, S.D. (66.1%); Pine Bluff, Ark. (56.7%); Reno, Nev. (54.1%); Anchorage, Alaska (53.8%); Biloxi-Gulfport, Miss. (51.2%); Boise, Idaho (51.2%); Roanoke, Va. (50.8%); and Terre Haute, Ind. (50.1%).

The Cleveland market is defined as the four counties of Cuyahoga, Geauga, Lake, and Medina. National City, with 29.3% of the deposits in 1989, just exceeded Ameritrust at 27.8%. A combination of these two banks would yield a 57.2% one-bank concentration ratio in this $17.1 billion-deposit market. It would become the second most heavily concentrated market in the country, and the first major city with a one-bank ratio above 50%.

The |Citibank Anomaly'

Following a National City-Ameritrust combination, Cleveland would be the most concentrated market in the country, allowing for the "Citibank anomaly" in Sioux Falls. The latter is the base of Citibank (South Dakota), Citicorp's credit card bank, which attracts deposits from all over the country.

According to recently released June 30, 1990, deposit data from the FDIC, Ameritrust overtook National City in market share, by 29.4% to 26.5%. These figures would put the pro forma post-merger concentration ratio in the Cleveland statistical area to 55.9%.

A comprehensive analysis would include concentration ratios for the top two, three, and four banks, and so on. A post-merger Cleveland would have relatively high multiple-bank concentration ratios as well.

The same 1989 data show the post-merger, two-bank concentration ratio would be 77.0%, the three-bank ratio 85.8%, and the four-bank ratio 93.3%. These ratios would all indicate a highly concentrated market by most standards.

Determining Market Share

The most commonly used measure of concentration in a given market is the Herfindahl-Hirschmann Index. It represents the sum of the squares of each participant's market share, thereby providing a view of the distribution of market shares among participants.

The index is calculated for each market, while a concentration or market-share ratio is calculated for each bank. Two banks in different markets with identical one-bank concentration ratios may have different indexes depending upon the market shares of other participants.

The higher the HHI, the greater the market concentration. Current merger guidelines indicate that markets with HHIs above 1,800 are highly concentrated, and mergers in those areas might be challenged if the index is raised by more than 200 points. This is the 1,800/200 HHI standard often cited in Federal Reserve and Justice Department examinations of proposed mergers.

Super-Concentrated Market

This somewhat more sophisticated antitrust analysis clearly indicates that the proposed National City-Ameritrust merger would result in an excessively concentrated market.

Using the 1989 data, Cleveland's premerger HHI stood at 2,174. This would qualify as a highly concentrated market based upon the 1,800 guideline, but there are many markets in the nation with higher ratios.

The HHI, using the same 1989 data, would increase post-merger by more than 1,600 points to a very highly concentrated level of approximately 3,800. That would be one of the highest HHIs in the nation. The increase in the HHI would be more than eight times the 200 that raises a caution flag.

Four Markets Cited

We define a super-concentrated market as one with an HHI of 3,600 or more, at least double the Justice Department guideline for a highly concentrated market. Only four of the nation's markets had super-concentrated HHI ratios in 1989: Sioux Falls, S.D. (4,552); Pine Bluff, Ark. (4,356); Reno, Nev. (3,952); and Anchorage, Alaska (3,677).

It is not coincidental that these were the four most heavily concentrated markets based upon the one-bank concentration ratio. This is because a one-bank concentration ratio of 50% produces an HHI of at least 2,500 (50 squared). When the one-bank concentration ratio is 60%, the market is automatically super-concentrated with an HHI of at least 3,600 (60 squared). A post-merger Cleveland with a ratio of 3,800 would rank fourth in the nation, or third excluding the anomaly in Sioux Falls.

What is important, none of the other super-concentrated markets, or even those with HHIs exceeding 3,000, are anywhere near the size of metropolitan Cleveland.

Intramarket Mergers

Members of the bank consolidation school believe the best way U.S. banks can become competitive in a global marketplace is to consolidate - the sooner and the bigger the better.

But there is a big difference between intermarket mergers, in which the partners' business areas do not overlap, and intramarket mergers. The National City-Ameritrust merger would not only be an example of the latter, but would have a significant impact on a major markets.

Actions by the Federal Reserve Board and the Department of Justice that delayed two major intramarket mergers over the past year (Norwest Corp. acquiring First Minnesota Savings Bank and First Hawaiian Inc. acquiring First Interstate of Hawaii Inc.) indicate that bank antitrust analysis is no longer the oxymoron it was in most of the laissez-faire 1980s.

Avoiding Excess Concentration

Individual mergers must be approached on a case-by-case basis. Many large intramarket mergers, such as those rumored for New York (with a 1989 one-bank concentration ratio of only 17% and HHI of only 677), may clearly make sense and represent the type of consolidation that would be beneficial.

But consolidation in U.S. banking should not mean excessive concentration, and that is exactly what this analysis indicates would result from the proposed National City-Ameritrust merger. Excessively concentrated market structures should be discouraged because of the greater likelihood of anticompetitive conduct and socially undesirable performance.

National City has estimated the cost savings of the proposed merger at $125 million. No estimate, however, has been made of the potential social costs.

Research to date suggest that a comprehensive analysis of the anticompetitive impact of this proposed merger should be undertaken because its approval could be precedent-setting one that could profoundly change our banking structure.

Dr. Thomas is president of K. H. Thomas Associates, a Miami-based consulting firm, and a lecturer in finance at The Wharton School of the University of Pennsylvania.

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