The rampant consolidation in the banking industry has forced the Federal Reserve, Justice Department, and Federal Trade Commission to reevaluate their approaches to the merger process.

The changes already made and under consideration are generally evolutionary rather than revolutionary. But they could lead to more emphasis on small-business lending and Community Reinvestment Act efforts.

The most recent proposal to grab the regulatory spotlight is one that could open the door to more deals - cost-savings analysis.

The theory here is that an in-market merger can reduce expenses so much that the bank can actually lower prices and still make higher profits. Using cost-savings analysis, the agencies could approve in-market unions even if the resulting bank would dominate the market.

The Justice Department and the Federal Trade Commission launched a task force last month to determine whether they should give more credence to this theory, which is routinely rejected in current merger applications.

Also, the Federal Reserve Board will release a study early next year looking at whether large in-market mergers actually produce the savings that banks' claimed. Banking lawyers said this study could lay the foundation for adoption of cost-savings analysis.

Another proposal, however, could cool merger mania. At least two Federal Reserve governors are pushing a new test for judging the anticompetitive effects of a deal.

Fed Governors Edward Kelley and Janet Yellen have both said the agency should consider replacing its reliance on deposits as a proxy for overall market competition. Instead, they say the Fed should look at a merger's effect on each of the bank's lines of business. This is the same test the Justice Department uses.

The change would affect in-market mergers mostly. These institutions would have to worry that their dominance of a particular market niche - such as small-business lending - would cause the Fed to reject the entire deal as being anticompetitive.

Banks merging outside of their market wouldn't have to worry - their unions wouldn't raise any competitive concerns because the new institution wouldn't be increasing its share of any particular market niche.

None of the agencies are expected to act soon on either reform, but regulators have fine-tuned their approaches to mergers during the past year.

A change to the antitrust test centers on the treatment of thrift deposits during a merger review. The Justice Department ignores thrifts during its initial antitrust review, but if it detects a possible competitive problem, it will rerun the test counting 50% of thrifts' deposits provided the institutions engage in some commercial lending activity.

The Justice Department adopted the change a year ago. It previously counted all thrifts at 20%.

The agencies also have made clear that they take small-business lending seriously. They ordered Wells Fargo & Co. to increase its divestitures in order to attract other small-business lenders into the California market.

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