How do the Federal Reserve and
the U.S. Department of Justice, Antitrust Division, analyze the competitive
effects of mergers and acquisitions under the Bank Holding Company
Act, the Bank Merger Act, and the Home Owners’ Loan Act?
This document offers information
about how the Federal Reserve and the U.S. Department of Justice,
Antitrust Division (Division) conduct their statutory responsibilities
to evaluate the competitive effects of mergers, acquisitions, and
other transactions when determining whether to approve these applications.
Given the increase in applications to acquire or merge following the
recent recession and changes to the application process resulting
from passage of the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, this document should be especially useful for banking
organizations that are contemplating acquisitions.
The discussion begins by focusing on the Federal
Reserve’s application review process and the factors considered by
the Federal Reserve in its competitive review. The discussion then
explains the role of the Division. The reviews by the Federal Reserve
and the Division, while independent, are for the most part very similar.
However, there are minor aspects of the review that differ, and the
document concludes with questions covering these potential differences.
The discussion focuses on applications filed under the Bank Holding
Company (BHC) Act, the Bank Merger Act, and the Home Owners’ Loan
Act. These types of applications include mergers and acquisitions
that can affect the competitive environment in retail banking markets
and that in some cases may raise competitive concerns. Analysis of
competitive effects in wholesale and nonbanking markets—which may
be local, regional, or national in scope—is undertaken on a case-by-case
basis and should be discussed with Reserve Bank or Board staff, and
the Division.
The FAQs below provide a basic outline of the application
review process. Each application, however, is unique and is evaluated
based on the circumstances of the specific transaction involved. If
you have questions that are not addressed below, please contact your
Federal Reserve Bank or the Board of Governors and the Division.
Q1. Where do I submit an application under the
Bank Holding Company Act or Bank Merger Act?
A1. Applications should be sent to the Reserve Bank in the district
in which the applicant’s headquarters office is located.
Q2. Under what circumstances should an application
be submitted?
A2. The primary types of applications
received by the Federal Reserve under the Bank Holding Company Act,
Bank Merger Act, and the Home Owners’ Loan Act include
1:
Primary types
of applications received by the Federal Reserve under the Bank Holding
Company Act
| Statute and
section |
Type
of application* |
| Bank
Holding Company Act |
Formation of a Bank Holding
Company (BHC) |
| Bank to become a subsidiary
of a BHC |
| BHC to acquire a bank |
| BHC to acquire the assets
of a bank |
| BHC to acquire or merge
with another BHC |
| BHC to engage in nonbanking
activities (including acquiring a savings association) |
| Federal
Deposit Insurance Act (Bank Merger Act) |
State member bank to acquire
another insured depository institution |
| Home Owners’ Loan
Act |
Savings and Loan Holding
Company (SLHC) to acquire a federal savings association |
| SLHC to acquire or merge with another
SLHC |
| Change in Bank Control Act |
Change in ownership of
a bank |
| Depository Institution Management
Interlocks Act |
Overlap of management
between BHCs or SLHCs |
* Other types of applications or notices
may require an analysis of competition. |
** Applications
of these types are most likely to raise competitive issues. |
Q3. What is the initial step in evaluating
competitive effects of an application?
A3. The
competitive analysis of banking acquisitions begins with an initial
screen based on market shares and market concentration for the local
banking markets in which the parties to a transaction have overlapping
operations. Market shares for a local banking market are based on
the deposits of the depository institutions in the market, as discussed
in question 4, below. The Herfindahl-Hirschman index (HHI) is the
usual measure of market concentration and is calculated as the sum
of squared market shares in a local banking market. The definition
of local banking markets is discussed in questions 10-13.
Q4. When can an application be approved by the Reserve
Bank and when is an application reviewed by the Board of Governors?
A4. To expedite the review and approval process,
the Board of Governors delegates approval authority to the relevant
Reserve Bank for applications that pass certain initial screens. These
screens include those that indicate the likely competitive effects
of the transaction. Once an application is received, the Reserve Bank
determines whether the application can be approved under delegated
authority.
The Board’s delegation criteria for competition state
that an application cannot be approved by a Reserve Bank under delegated
authority and must be reviewed by the Board if (i) the merger or acquisition
would raise the HHI by 200 points or more to a level of 1800 or higher
in any local banking market in which the parties to a transaction
have overlapping operations, or (ii) the merger or acquisition would
increase the post-transaction market share for the acquiring firm
to more than 35 percent in any overlapping market. Other factors unrelated
to competition also can preclude Reserve Bank approval under delegated
authority.
The initial HHI calculations are based upon deposit shares
of the depository institutions in a local banking market. For these initial calculations, the deposits of all institutions with a
commercial bank charter receive 100 percent weight and the deposits
of all institutions with a thrift charter (i.e., savings banks and
savings and loan institutions) receive 50 percent weight in computing
market shares.
Q5. Why do thrift deposits receive
50 percent weight in the preliminary HHI/market share screen?
A5. Because thrifts typically have not provided
a full range of retail banking products and services provided by commercial
banks, their deposits are given 50 percent weight. In addition, thrifts
have not been active in commercial lending, as legal restrictions
historically have limited commercial lending by thrifts. Although
these legal restrictions have been relaxed to some extent, many thrifts
remain less active competitors than commercial banks in commercial
lending markets.
The one exception to the partial weighting of thrifts
in the initial screen is when a thrift is a subsidiary of a BHC. In
such situations, the thrift is assumed to operate as an integral part
of its parent and receives 100 percent weight, as do all commercial
banks.
Q6. What happens if my application exceeds
the delegation criteria in one or more local banking markets?
A6. If an application exceeds delegation criteria
in one or more local banking markets, then the application cannot
be delegated to the Reserve Bank for approval, and it must be acted
upon by the Board of Governors. Board and Reserve Bank staff provide
an analysis of the competitive effects of the transaction to the Board
members, who vote to approve or deny the application. A simple majority
vote is required for Board action.
Q7. Where
can I find information about Federal Reserve banking markets and calculate
market shares and HHIs for a possible transaction?
A7. The Federal Reserve Bank of St. Louis maintains a
website called CASSIDITM (cassidi.stlouisfed.org/) that
includes up-to-date information about Federal Reserve banking markets
for all 12 districts. CASSIDITM also allows calculation of preliminary
market shares and HHI changes for potential transactions.
Note that for an application that
does not meet the initial delegation screen for competition, the market
shares ultimately considered by the Board in its analysis may differ
from the preliminary data presented by CASSIDITM because
they will reflect adjustments made to account for the facts and circumstances
of the particular case (see discussion below).
Q8. How does the Federal Reserve define anti-trust markets?
A8. An antitrust market is the particular market
in which a product or service is sold. There are two aspects to any
antitrust market. First, the market includes all products that are
considered to be close substitutes by consumers of the product. Second,
the market covers the geographic area within which consumers consider
providers of the product or service to be close substitutes for each
other.
Q9. What product markets does the Federal
Reserve typically consider for bank merger applications?
A9. As a result of judicial precedent, the regulatory
agencies have adopted a product market limited to the “cluster” of
commercial banking products and services.
2 This definition applies to
those bank products and services that are provided to most households
and small businesses, rather than to those products that are provided
to wealthy individuals or major corporations. In certain applications,
the Board will investigate the competitive effects in other, more
specific product markets, such as credit card issuance or mortgage
lending. These distinct product markets have been determined to include
products that may be obtained separately from other commercial banking
products or services, and whose geographic markets may be regional
or national in scope.
Q10. How does the Federal
Reserve define geographic antitrust markets?
A10. Consistent with the Horizontal Merger Guidelines issued by the
Department of Justice and Federal Trade Commission, the Federal Reserve
defines geographic
antitrust markets based solely on factors
related to demand and substitution—i.e., possible consumer responses
to changes in the rates, fees, or other characteristics of banking
services.
3 As such, consumer substitution behavior, broadly defined, is
central to the definition of antitrust markets. The characteristics
of the depository institutions matter only insofar as they affect
consumer choice.
It is important to note that financial institution “service
areas” are not equivalent to antitrust markets. For example, a bank’s
branch network may span several local banking markets or cover only
a small fraction of a local banking market.
Q11. What data does the Federal Reserve use to measure overall banking
activity in a market?
A11. The primary data
used to construct market shares and HHIs for local banking markets
are deposits obtained from the Federal Deposit Insurance Corporation’s
Summary of Deposits (SOD, available at www2.fdic.gov/sod/). These
data include the location of each branch of all FDIC-insured banking
institutions and the dollar value of deposits at each branch. These
branch-level deposits allow the calculation of total deposits for
each institution in a local banking market. Deposits are considered
a reasonable indicator of the level of activity or output of a depository
institution, because deposit accounts are widely held by consumers
and small businesses and are held in combination with other commercial
banking products. In addition, for smaller institutions, deposits
may be considered a measure of a bank’s lending capacity.
Q12. How are local geographic banking markets initially
defined for a specific transaction?
A12. The
Federal Reserve has divided the United States and U.S. territories
into more than 1,500 local banking markets. The Federal Reserve does
not define geographic markets that are specific to each application
for a number of reasons, including the large number of applications
that must be processed; the need for timely processing of applications;
and a desire to allow industry participants to reasonably anticipate
how the Board will view the competitive effects of a potential application
before the application is filed. However, for any transaction, the
geographic markets are examined carefully to ensure that the market
definitions are appropriate.
Q13. What geographic
markets does the Federal Reserve typically consider for bank merger
and bank acquisition applications?
A13. Many
geographic markets follow Metropolitan Statistical Area (MSA) definitions
or rural county lines, but some markets comprise multiple MSAs/counties
or parts of MSAs/counties, reflecting that economic activity does
not always track political boundaries. Up-to-date geographic market
definitions are available on CASSIDITM or from staff at
the relevant Reserve Bank.
Q14. What information
is used to define geographic markets?
A14. The
Federal Reserve uses various information sources to determine the
scope of geographic markets. These data focus on economic integration
of different regions as it pertains to consumer price sensitivity
and willingness to switch banks. The information used most frequently
to define geographic banking markets includes commuting patterns,
shopping patterns, interviews with local government and business leaders,
and surveys of local households or small businesses. These data provide
information on where the consumer can practicably turn to for services.
Q15. Can I dispute the geographic market definition?
A15. As a matter of course, the Federal Reserve
Board and Reserve Banks review market definitions for markets where
competitive thresholds for delegation are exceeded to ensure that
those definitions are still appropriate. Applicants also may dispute
the definition of a geographic market relevant to their application
by proposing an alternative market definition and providing evidence
supporting the alternative. Such evidence should focus on retail banking
customers’ substitution behavior or on the economic integration of
the relevant economic areas for the proposed geographic market definition.
Q16. What types of institutions are included in
the HHI calculations?
A16. The preliminary
market structure calculations made by the Reserve Bank to determine
whether an application meets the delegation criteria for competition
include the deposits of commercial banks weighted at 100 percent and
the deposits of thrifts (i.e., savings banks and savings and loan
institutions) weighted at 50 percent.
For cases that may not be delegated, the Board may choose
to give the deposits of some thrifts a weight of 100 percent
and/or include the deposits of some credit unions, generally
weighted at 50 percent, as discussed below in questions 17 through
19.
Q17. When do thrift deposits get 100 percent
weight?
A17. Thrifts that are active commercial
lenders with full-time commercial lending staff may receive 100 percent
weighting in HHI/market share calculations. Among other factors, Board
staff consider the amount of commercial and industrial (C&I) loans
made by a thrift, relative to its other lending activities or overall
assets, as well as its C&I lending relative to the C&I lending
activity of local commercial banks.
Q18. When
are credit unions included in the HHI calculations?
A18. If an application exceeds the delegation criteria
in a given market in the initial screen, Board and Reserve Bank staff
will consider whether any credit unions should be included in the
structural concentration calculations, because they exert competitive
pressure on banks in the market. Credit unions are typically included
in these calculations if two conditions are met: (1) the field of
membership includes all, or almost all, of the market population,
and (2) the credit union’s branches are easily accessible to the general
public. In such instances, a credit union’s deposits will be given
50 percent weight.
Q19. Under what circumstances
would a credit union get 100 percent weight in the HHI calculation?
A19. If a credit union has significant commercial
lending and has staff available for small business services (special
tellers, lending officers, business-only teller windows, etc.), then
its deposits may be eligible for 100 percent weighting. To date, it
has been very rare for a credit union’s deposits to receive more than
50 percent weight.
Total C&I lending as a percentage of assets is an
important factor in this consideration. The C&I lending of a credit
union includes C&I loans, unsecured business loans, and unsecured
revolving lines of credit for business purposes.
4Q20. What happens
when a bank acquires a thrift?
A20. If a bank
or a BHC acquires a thrift institution, the thrift’s deposits are
given 100 percent weight in calculating post-merger merger market
shares and HHIs, even if that thrift’s deposits were weighted at 50
percent prior to the acquisition. This reflects the Board’s expectation
that the thrift will be operated like a typical commercial bank after
the acquisition and will be an active commercial lender.
Q21. What is a mitigating factor?
A21. A mitigating factor is a characteristic of a particular
market that suggests that the market is more competitive than traditional
structural measures would indicate. A transaction with greater structural
effects (i.e., a high resulting market share and level of and change
in the HHI), would require stronger mitigating factors to allow approval
of the application. For example, an application that would result
in a change in the HHI of 500 to a level of 2500 in a given market
would require stronger mitigating factors for approval than would
an application that would result in a change of 210 to a level of
1900.
Q22. What general mitigating factors are
considered by the Board?
A22. In the past,
the Board has considered mitigating factors such as (1) the attractiveness
of a market for entry or the ease of entry into the market, especially
actual de novo entry into the market; (2) the number of competitors;
(3) the number of competitors with significant market shares; (4)
the effects of a shrinking market; and (5) whether the target bank
is failing or experiencing severe financial difficulties. In addition,
applications can present unique facts that are deemed to mitigate
the structural effects of a transaction.
Q23. What are centrally booked deposits and how does the Board account
for them?
A23. Central booking occurs when
a bank records deposits at a central office and does not book the
deposits to a branch that is connected to the location of the depositor.
As a result, centrally booked deposits of an applicant can overstate
the presence of an institution in the local banking market. The applicant
should alert Reserve Bank or Board staff about centrally booked deposits
when they trigger antitrust concerns. The Board has made adjustments
for centrally booked deposits in market share calculations in certain
cases where the applicant has provided supporting evidence and where
similar adjustments can be made to the deposits of other competitors
in the market.
Q24. How does the Board
treat government deposits?
A24. Significant
government deposits held at branches in a local market are handled
in much the same way as centrally booked deposits. The applicant should
indicate that it has significant government deposits in a particular
market, and Reserve Bank or Board staff will determine what, if any,
adjustments should be made.
Q25. How does the
Board treat specialty banks?
A25. Depository
institutions that provide only specialized services are generally
not included in local market share calculations. Such institutions
include credit card banks and trust companies. In certain types of
applications, the Board may consider these types of institutions when
examining competition in product markets.
Q26. How does the Board treat Internet banks?
A26. Deposits of Internet banks are generally not included in local
market share calculations, because it is not possible, given current
data, to determine where the depositors of such banks are located.
Q27. What remedies are there for a transaction
that could be potentially denied for antitrust reasons?
A27. When staff’s analysis suggests that a proposed merger
is likely to have significant anticompetitive effects in one or more
local banking markets, divestiture of branches in those markets is
a potential remedy. A divestiture typically involves the sale of one
or more branches, including the assets and deposits associated with
those branches, to a third party. An application for a transaction
that includes a proposed divestiture that would cause the structural
effects of the transaction to meet the delegation criteria for competition
(i.e., a change in the HHI of less than 200 points or a post-merger
HHI of less than 1800, and a post-merger market share below 35 percent)
is unlikely to be denied for competitive reasons. An application accompanied
by a divestiture proposal which, after taking into account the effects
of the divestiture, does not meet the delegation criteria may be approved
based on the presence of adequate mitigating factors. However, there
are no general guidelines for determining the level of divestiture
that would be necessary to allow the Board to approve a potentially
anticompetitive application.
Q28. What is the
role of the Division in reviewing applications filed under the Bank
Holding Company Act, the Bank Merger Act, or the Home Owners’ Loan
Act?
A28. The Division conducts a concurrent
competitive review of the applications and provides comments to the
responsible banking agency, such as the Federal Reserve, concerning
the competitive factors involved in the proposed transactions. For
transactions that are subject to a 30-day, post-approval waiting period,
the waiting period may be shortened to 15 days
only with the
concurrence of the Division.
5 If the Division concludes that a transaction raises competitive
concerns, the Division may bring a court action under the antitrust
laws to challenge the transaction. For most cases, the commencement
of a court action will stay the effectiveness of the banking agency’s
approval of the application.
6Q29. How does the Division’s review of the competitive
effects of a transaction differ from the review by the Federal Reserve?
A29. In the initial screening of the bank applications,
similar to the Federal Reserve, the Division performs HHI analysis
using SOD data. However, unlike the Federal Reserve, the Division
does not have pre-defined geographic markets for screening bank applications,
and it reviews the competitive effects of each transaction on a case-by-case
basis. The Division may use the Federal Reserve’s pre-defined banking
markets in its initial review, but it is not bound by those banking
markets.
The Division generally reviews the competitive effects
of a proposed transaction in each of two product markets: (i) retail
banking products and services, and (ii) small business banking products
and services.
7 The
geographic area in which a retail banking customer is willing to travel
for banking services may differ from that of a small business customer.
The Division has found that retail banking customers generally prefer
to bank where they live or where they work, but small business customers
may be geographically more limited. Unlike the geographic market for
retail banking customers, the geographic market for small business
banking may be smaller than the Federal Reserve’s pre-defined banking
markets. Accordingly, a transaction that meets the Federal Reserve’s
HHI delegation threshold still may raise concerns in the Division’s
review.
Q30. What additional information should
be provided in an application to assist in the Division’s competitive
review?
A30. In addition to performing HHI
analysis for the Federal Reserve’s pre-defined banking markets, applicants
may wish to perform HHI analysis for each county of overlap. If a
transaction would result in a concentration level that exceeds the
Federal Reserve’s HHI delegation threshold in either a Federal Reserve
pre-defined banking market or a county, the parties may wish to provide
additional information in the application. Information that would
assist in the Division’s review includes:
i. the amount of business loans, such as
C&I loans, booked to the branches of the applicant and the target
in the market(s) that exceed(s) the Federal Reserve’s HHI delegation
threshold;
ii. discussion of small business banking
competition, including competition from thrifts and/or credit unions;
iii. small business loan originations reported
under the Community Reinvestment Act (CRA), market surveys conducted
by the parties, or other data used for measuring market shares of
competitors in small business banking.
Applicants
are encouraged to contact the Division at antitrust.bank@usdoj.gov
to discuss any proposed transaction that may trigger further review
by the Division.
Q31. Are thrifts included
in the Division’s HHI analysis?
A31. In reviewing
the competitive effects of a transaction in the retail banking market,
deposits of thrifts generally are included in the Division’s HHI analysis
and are given 100 percent weight. However, for the small business
banking market, thrifts are not included in the HHI analysis unless they provide the full array of banking products and services
to small business banking customers. To determine whether a thrift
is an active competitor in small business banking, the Division will
review the outstanding C&I loans, the product offerings, and the
commercial lending operations of the institution. In general, if the
C&I loans of a thrift constitute less than 2 percent of its total
assets, the thrift will not be considered an active competitor in
small business banking.
Q32. Are credit unions
included in the Division’s HHI analysis?
A32. The
Division may include the deposits of a credit union in the HHI analysis
if the credit union meets certain criteria. Similar to the conditions
set forth by the Federal Reserve, to be considered an active competitor
in retail banking, a credit union must have a community-based field
of membership, making it easily accessible to customers looking for
banking alternatives in the market. For small business banking, the
Division will evaluate factors similar to those considered in the
analysis of thrifts to determine whether a credit union is an active
competitor. Unlike thrifts, however, credit unions do not provide
deposit data to the FDIC. Reliable branch-level data may not be readily
available for HHI calculations. Therefore, in such cases, the presence
of credit unions that meet these criteria will be considered a mitigating
factor in evaluating the competitive effects of a transaction.
Q33. What happens when the Division determines that
an application warrants further review?
A33. When
the Division determines that a proposed transaction warrants further
review, the Division will open an investigation. The Division will
seek additional information and documents from the parties to the
transaction and will conduct interviews with third parties to gain
a better understanding of banking competition in the local markets.
Additional materials sought by the Division in an investigation from
the parties may include:
i. branch-level information, such as a description
of each branch located in the market(s) under investigation and information
concerning the branch operation, service area, and deposits and loans
booked to the branch;
ii. information concerning the lending operations
of the banks, such as the number of commercial loan officers and their
outstanding loan portfolios;
iii. documents relating to competition,
such as market studies, pricing surveys, and lost business reports;
and
iv. documents concerning the transaction,
such as presentations to the board of directors.
In most cases, the Division seeks cooperation from the parties by
requesting voluntary production of information and documents. The
Division, however, may issue Civil Investigative Demands (subpoenas)
in an investigation, if warranted.
Q34. When
the Division concludes that a transaction is likely to have anticompetitive
effects, how are the concerns typically addressed?
A34. The Division often resolves its concerns by seeking
a divestiture of branches, including the total customer relationships
(deposits and loans), to another bank. The Division believes that
branch divestiture is an effective remedy because it provides a banking
alternative and helps to replace the competition lost as a result
of the proposed transaction. The Division usually requires that the
parties divest the branches of the target institution. The divestiture
must provide a branch network with locations that would allow a bank
to compete effectively in the market. In addition, the Division imposes
obligations on the parties to preserve the divestiture assets and
to ensure that the conversion process will not result in significant
customer run-off. To minimize customer confusion, the divestiture
branches should be conveyed directly from the target institution to
the divestiture buyer. Furthermore, the purchaser of the divestiture
branches must be approved by the Division as competitively suitable.
In certain cases, the Division may seek a remedy other than a branch
divestiture to resolve antitrust concerns.
Q35. How does the Division implement the remedy?
A35. Usually, the Division and the parties will enter into a Letter
of Agreement (LOA) that sets forth the terms and conditions of a divestiture
agreement. The parties will include compliance with the LOA as a commitment
to the banking agency in connection with their bank application for
the proposed transaction. In addition, the LOA will be incorporated
in the Division’s report to the banking agency as a condition of the
Division’s concurrence in approving the transaction.
Q36. What happens if the Division cannot resolve its antitrust
concerns with the parties through a divestiture agreement?
A36. The Division and the parties usually are able
to reach an agreement to resolve the competitive concerns through
a divestiture agreement. But if the Division concludes that a transaction
raises antitrust concerns and cannot resolve its concerns with the
parties, the Division will issue a report to the banking supervisory
agency opposing the approval of the bank application. If the banking
agency nonetheless approves the transaction, the Division generally
has 30 days after the agency approval to challenge the proposed transaction
in court.
8Frequently asked questions of Oct. 9, 2014
