Federal Reserve Moves To Ease Up Restrictions On Banks Buying Rivals

The Federal Reserve Board is making it easier for banks to acquire rivals, even if the union would hurt competition.

Stephen A. Rhoades, the Fed's associate director for research and statistics, told an American Bar Association committee on Wednesday that the central bank would stop challenging deals that result in Herfindahl Hirschman Index scores of 2,200 or less. It also will not scrutinize deals where the HHI rises by less than 250 points.

Regulators compute an HHI score by taking the merged institution's share of deposits in the market and then squaring it. It is the government's primary tool for determining the antitrust effects of mergers. The Fed previously questioned any deal where the HHI rose above 1,800 or by more than 200 points.

This means deals involving aggregate market shares of less than 47% or increases of less than 16 percentage points would not be challenged.

"If you are within the new numbers, the case is likely to go through," Mr. Rhoades said. "If you have anything above those numbers, then you will have to show extreme mitigating circumstances."

The Justice Department also has backed away from reviewing all mergers in less-competitive markets, although it has retained the 1,800/200 HHI guidelines in those markets.

"There has not been any talk internally about changing the screening guidelines," Robert Kramer, chief of litigation in the antitrust division, said in an interview. "But as a practical matter, the department is almost never challenging mergers in the range the Fed is talking about."

The Fed announcement drew immediate support from industry lawyers. "This is fabulous," said David S. Neill, a partner at the New York law firm of Wachtell, Lipton, Rosen & Katz. "It is an acknowledgement that there is a lot of out-of-market competition out there."

Bruce J. Prager, a partner at the New York law firm of Latham & Watkins, said the change would not reduce competition for banking services. "This will not allow deals to get through that are harmful," he said. "It just makes the process more efficient and less costly to the merging parties."

But Michael A. Greenspan, a partner at the Washington office of the Thompson, Coburn law firm, cautioned the Fed may spend even more time scrutinizing deals where the HHI rises above 2,200. "You were always worried about these deals being approved," he said. "But now the Fed is suggesting that they will have a higher burden than in the past."

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