The proposed merger between Fleet Financial Group and Shawmut National Corp. may expose the classic differences in thinking that the Department of Justice and the Federal Reserve bring to anti-trust review.
H. Rodgin Cohen, a prominent banking attorney, told attendees at a University of Miami School of Law conference that the Fed shouldn't have many problems with the merger's effect on the Boston market.
The reason: The central bank includes all of the surrounding suburbs when looking for competition.
According to Mike Greenspan, a partner at Thompson & Mitchell, the Fed looks at commuting patterns and other data to indicate how far people will travel to get banking services.
Boston, with its bank-rich northern and western suburbs, doesn't come close to being highly concentrated, even with the Shawmut-Fleet merger.
But Justice in other cases has "lopped off" the suburbs and concentrated instead on inner-city small business lending. Mr. Cohen, a partner at Sullivan & Cromwell, said Justice has taken this approach in Rochester, Minn., and Cincinnati.
Justice takes a narrower approach because it believes that people are not willing to travel as far for a small business loan, Mr. Greenspan said.
Apply this policy to the Boston market for the Fleet-Shawmut merger, and "you could have problems," Mr. Cohen said.
But why are there problems? The culprit is the Herfindahl Hirschman index, which measures a bank's share of a market. Regulators calculate the HHI, as it's called, by taking a bank's market share and squaring it. So, a bank with 10% of the market has an HHI of 100 and one with 50% of the market has a 2,500.
Both the Fed and Justice use the index to screen mergers. They calculate each bank's HHI and then add them. If the sum is less than 1,800 or if the larger institution would gain less than 200 from the merger, they normally don't investigate further.
But they do scrutinize deals with HHIs above 1,800, and they don't usually approve deals where the HHI rises above 2,200.
With all of this emphasis on market share, bankers wanting to merge have a strong self-interest in persuading regulators to take as broad a look as possible at the geographic boundaries of the market, because the broader the review, the lower each institution's share will be.
This is where the Fed and Justice Department's differing views of the market come into play. If Justice looks at a smaller market than the Fed, then each bank's market share normally will be higher. That means mergers are more likely to break the 1,800 threshold.
Or bankers can argue that the government should look at more than commercial bank deposits when determining a market's size. Rather, it should account for thrifts, out-of-market competitors, and nonbanks. This approach, which boosts the number of competitors, also lowers each bank's market share.
The good news is that banks have persuaded Justice to expand its view of the market. "If you have a good argument, they are prepared to listen," Mr. Cohen said.
George Rozanski, an attorney in Justice's antitrust division, said the department is open to comments. "Having a productive dialogue makes everyone's job easier," he said.
But, he said, the department is not convinced that the market for small business lending is as broad as some suggest. And small businesses often can't obtain credit from nonbanks or out-of-market competitors.
So, until a bank can change Justice's views, the industry must accept that department will continue to look at mergers much more aggressively than the regulators.