Justice Department Is Reviewing Antitrust Rules in Bank Mergers

The Justice Department is conducting a review of the criteria it uses to determine when a bank merger violates antitrust laws.

The agency currently bases its decision largely on the proportion of deposits that would be controlled by the merged institution.

Marketplace Has Changed

Now it has formed a task force of bank regulators to study whether that yardstick should be revised because of changes in the marketplace that have made banking customers less dependent on local institutions.

Among those changes: the proliferation of credit cards and automated teller machines, the growth of loan production offices, and the rise of nonbank competitors.

"We are trying to educate ourselves," Charles James, deputy assistant attorney general for antitrust, said in an interview on Wednesday.

The study comes at time when the industry is poised for massive consolidation. In just the past couple of weeks, mega-mergers were announced that would create the nation's second-largest and third-largest banks.

It also reflects renewed interest in antitrust enforcement by the Justice Department after a decade of dormancy. But most observers don't think the agency intends to slow the industry's consolidation.

Bringing the Law Up to Date

Regulators on the task force said the aim is to bring antitrust law into sync with a much-changed industry. Mr. James said the agency had not yet decided that any change was necessary, but he added that the task force's findings "very well could change how we think about the facts."

The conclusions will be sent to the attorney general, Treasury secretary, and banking agency heads by Oct. 31, regulators said.

Under current rules, if the Justice Department determines that a merged institution would be too dominant, it can block the deal or force the banks to divest some branches to dilute their market concentration.

Faulty Market Measures

Bank regulators, particularly the Federal Deposit Insurance Corp., have argued that the traditional focus on market concentration can be inaccurate, especially if one of the merging banks is failing. But the old rules remain in effect, creating some uncertainty in bankers' minds.

This year, the Justice Department has intervened in two bank merger cases, requiring divestitures before permitting the deals to go through.

"Justice is looking closely at in-market mergers," said a lawyer at one of the bank regulatory agencies. "They are not as loose about things as the Reagan Justice Department was."

Fleet Deal Delayed

The agency alarmed banking lawyers when it held up the third-largest bank bailout in government history -- Fleet/Norstar Financial Group's acquisition of the failed Bank of New England -- because of an alleged overconcentration in Maine. Rather than litigate over a mere $85 million in deposits at six branches, and despite enjoying support from the FDIC and Federal Reserve Board, Fleet complied by agreeing to divest the offices.

The Fleet case followed Justice's demands for divestitures last March when Hawaii's second- and fourth-largest banks combined.

"These two cases show that this is not a totally quiescent Justice Department, which is the picture everybody has in their minds," said Michael A. Greenspan, a lawyer with Thompson & Mitchell in Washington who represented Fleet in the BNE deal.

But Justice officials disagree.

"Those two enforcement actions cannot be seen as evidence of a general policy shift because I think they are very unique," Mr. James said. "We're certainly not in the process of revving up if the consolidation occurs.

"We look at these [mergers] on a very, very specific basis," he said.

Effect on Bidders

The FDIC, however, is worried that Justice's stance in the Fleet case will discourage bidders from future deals -- or at least depress the bids.

In several letters in May and June to the Fed, FDIC director of resolutions Harrison Young argued that deposit concentration is a poor measure of the level of competition in a market.

"Deposit data are a flawed proxy for actual market capacity and performance by depository institutions," Mr. Young wrote on June 24. He pointed out that BNE's December 1990 deposit figures, cited in Justice's analysis, substantially overstated deposits because many people pulled their funds from BNE after regulators seized it on Jan. 6.

In addition to deposits, Justice also insists on considering bank deposit and credit services as a package and measuring a merger's impact on various types of customers.

Smaller Firms Affected

For example, in a "Competitive Impact Statement" on the BNE deal filed July 10 with the U.S. District Court for the District of Maine, Justice said that when Fleet assumed BNE's Maine branches some small and medium-size businesses would see competition reduced for their deposits and loans.

Again, Mr. Young disagreed. He argued that the competitive analysis should focus more on the availability of individual services, like handling payrolls or advancing a line of credit. Thrifts in Maine decrease the concentration of the commercial banking market by providing competitive deposit services, while loan production offices of out-of-state banks compete for credit business, Mr. Young noted.

While Mr. James said he could not judge whether Justice's intervention in the Fleet case would discourage future bidders, he insisted that the department did not slow the deal.

"We are certainly sensitive to the failing-bank situation," Mr. James said. "The resolution process was not impeded at all."

Balancing Act

Although it is generally agreed that the banking industry needs to consolidate, the benefit of in-market mergers must be weighed against the cost of concentration.

Senate Banking Committee Chairman Donald W. Riegle Jr., D-Mich., is pushing legislation that would cap the amount of domestic deposits a single bank could control. No institution could hold as much as 10% of the nation's banking assets or 30% of the domestic deposits in any one state.

The national cap would not crimp combinations, since even the nation's largest bank, Citibank, only holds 2.15% of all U.S. banking assets. But the state-by-state cap could block some mergers as banks exceeding the limit may not be acquired.

In the Washington metropolitan area, for example, Riggs National Bank already controls 35% of deposits while American Security Bank, a subsidiary of MNC Financial Inc., holds 31%, according to an internal Senate Banking Committee memo.

Connecticut National Bank, a Shawmut National Corp. unit, has 33% of its state's deposits, while Fleet National Bank owns 67% of Rhode Island's.

NCNB Corp.'s combination with C&S/Sovran Corp. will give them 30.6% of the South Carolina market, but it would not be impeded by the Riegle bill. The legislation would out-law out-of-state acquisitions only when the acquired bank already holds 30% of a state's deposits.

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