The Justice Department has begun imposing new antitrust policies on bank mergers that could unexpectedly complicate future deals, a prominent merger and acquisition attorney says.

David S. Neill, a partner with the New York law firm of Wachtel, Lipton, Rosen & Katz, said the policies appear to go beyond guidelines issued by the Justice Department and the bank regulatory agencies in March 1995.

The policies have turned up in recent transactions handled by his firm.

"I don't know that this is going stop banks from merging," Mr. Neill said. "There's a lot of excess capacity in banks, and they're going to be driven to merge, and Justice understands that."

But, he added, "to the extent that uncertainty exists" about the Justice Department review process, "it's more difficult to plan for a merger."

In a recent article for Bank and Corporate Governance Law Reporter, Mr. Neill noted four areas of concern being raised by the Justice Department's antitrust division.

*The division is imposing a loan-to-asset test that is not described in the guidelines, "Bank Merger Competitive Review."

*The department is raising fresh concerns about the possibility that one or two large banks might dominate fringe players in a given metropolitan region.

*Its request that merging banks reallocate commercial deposit accounts to branches by customer ZIP code is cause for worry, Mr. Neill argues, in part because it is inconsistent with the Federal Reserve's policy in this area.

*The department has also begun focusing more on the impact of proposed mergers on middle-market banking.

On the first point, Mr. Neill said the Justice Department has begun to impose a 2% loan-to-asset test when it determines which institutions to include in its analysis of competition in a deposit market.

"If an institution does not hold 2% of its assets in commercial loans, Justice will exclude it from the market," he said. "That would have the effect of making the market more concentrated" - and that could result in a more stringent test of whether a proposed deal is anticompetitive.

"The Justice Department's 2% test bears some resemblance to an analytical method which the Federal Reserve has used in the past to justify higher-than-usual levels of thrift inclusion," Mr. Neill wrote. But he added that the differences between the two tests "can be important."

In the Fed test, thrifts with a commercial loan ratio of 0% to 3% are included in the market at 50% of deposits, and those with ratios of 3% to 6% are included at 75% of deposits. The Justice Department takes an "all or nothing" approach, Mr. Neill said.

What's more, the Justice Department applies its 2% test to individual subsidiaries, without regard to the loans of its parent.

"Thus, the department would exclude a thrift which failed the 2% test even if that thrift were owned by a large commercial bank holding company," Mr. Neill wrote. "The Fed, by contrast, automatically includes at 100% of deposits any thrift that is owned by a bank holding company."

Mr. Neill argued that measuring small-business lending would give a more accurate picture of the impact of a merger on a given market.

"For large banks," he pointed out, "the total (commercial) loan volumes will include very large corporate loans made to nonlocally limited, national accounts, and will thus cause the ratios for those banks to overstate the actual amount of lending to small business."

Second, the Justice Department's new concern that some deals may result in a tiered or skewed market structure were raised in a speech earlier this year by Constance Robinson, the director of operations at the antiturust division, Mr. Neill said.

Mr. Neill quoted Ms. Robinson as saying the department "will take a hard look at certain increasingly concentrating regions and markets, especially where a merger would leave a metropolitan area with one or two dominant firms, and a fringe of small independent banks which may not be able to compete significantly for small and medium sized loans."

Ms. Robinson did not respond to a phone call requesting comment.

The problem, according to Mr. Neill, is that there is no clear criteria that merger partners can use to determine whether their deal passes the test or what divestitures would be needed to comply.

He also argued that this new approach "appears to render moot" the Department's Herfindahl-Hirschman Index, the traditional measure of deposit concentration for antitrust review.

The third issue, deposit reallocation, first came up in the merger of Fleet Financial Group and Shawmut National Corp. The issue is critical in determining the size and location of divestitures the Department may require before approving a merger, Mr. Neill said.

The Department hopes to avoid splitting a loan and deposits of a single customer among several branches.

"While the procedure may reduce concentration in markets where the parties are headquartered," Mr. Nell wrote, "it may correspondingly increase concentration in other, nonheadquarter markets."

Mr. Neill noted that the Federal Reserve has been resistant to the reallocation of accounts, reasoning that all of the competitors in a market would have to engage in similar deposit reallocation for the methodology to be consistently applied.

He said the danger, in theory, is that banks may overdivest in order to reach the "highest common denominator" of the two agencies' approaches to the issue.

And fourth, the Department's new emphasis on middle-market banking was evident in the Bank of Boston-Bay Banks merger, in which the parties agreed to divest $860 million in deposits to assuage the concerns.

Mr. Neill said the Justice Department's emphasis on this aspect of lending creates problems for banks because there is little publicly available information on the middle market.

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