On June 20, 2023, Jonathan Kanter, the Assistant Attorney General for the Department of Justice’s Antitrust Division, gave a speech at the Brookings Institution outlining his thoughts on promoting competition in banking. Recently, Acting Comptroller Hsu and Treasury Secretary Yellen expressed a willingness to being open-minded concerning bank mergers and “acting in a timely manner on applications”;[1] however Kanter’s speech, and the failure to produce the long-anticipated merger guidelines, suggest that at least large bank mergers will face significant and potentially opaque antitrust scrutiny for the foreseeable future.
As described below, in contrast to DOJ’s current practice of evaluating the competitive effects of bank mergers primarily based in the first instance on how the merger would affect the concentration of deposits in local markets, Kanter explained that DOJ will now look at a broader range of competitive factors on a more fact-specific basis. These factors include “fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service.” In addition, DOJ will consider how banks competing in multiple markets may implicitly coordinate anticompetitively with each other.
Kanter also stated that moving forward, DOJ would play a more advisory role in providing analysis of competitive factors to the Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, as they undertake their evaluations of merger transactions. As such, DOJ would play a more limited role in fashioning remedies and set a higher bar in accepting divestitures as a way to address competitive issues. Kanter noted, however, that DOJ retained the power to challenge mergers approved by banking agencies that DOJ found to be anticompetitive. The speech did not indicate when updated guidelines on bank mergers would become public.
Background
Statutory Framework
The Bank Holding Company Act and the Bank Merger Act (together, the “Bank Merger Statutes”) prohibit the federal banking agencies from allowing a bank or bank holding company to acquire another bank if, among other factors, the transaction “would result in a monopoly. . . in any part of the United States, or . . . whose effect in any section of the country may be substantially to lessen competition . . . unless [the agency] finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.”[2] (In addition to competitive factors, banking agencies must consider a merger applicant’s financial and managerial resources, the convenience and needs of the community to be served, including the applicant’s Community Reinvestment Act (“CRA”) performance, and risk to U.S. financial stability.)
The Bank Merger Statutes require the relevant banking agency to request a “competitive factors” report from DOJ, which outlines DOJ’s view on the effects of the transaction on competition, and generally must be provided to the banking agency within 30 days. Upon receiving approval from a banking agency, the parties typically must wait 30 days to consummate the transaction, during which time the DOJ may bring suit to set aside the merger on anticompetitive grounds. If the 30 days expire without DOJ bringing suit, the transaction may no longer be challenged in court on anticompetitive grounds.
The 1995 Guidelines
In 1995, DOJ and the banking agencies released guidelines (the “1995 Guidelines”) to speed the DOJ’s and agencies’ review of competitive factors, “reduce regulatory burden on the banking industry,” and help market participants “identify proposed mergers that clearly do not have significant adverse effects on competition.”
The 1995 Guidelines explain that, historically, when analyzing the competitive effects of a bank merger, the DOJ and the banking agencies primarily consider how the merger would affect the concentration of deposits, attributed to branches, in each market in which the merging banks compete. Specifically, for each such market, DOJ calculates the Herfindahl-Hirschman Index (“HHI”) by summing the squares of each bank’s share of deposits in a given market. A higher HHI indicates the market is more concentrated.
The 1995 Guidelines provide that a transaction that does not result in a post-merger HHI of over 1800 and an increase in HHI of 200 (“1800/200 Threshold”), in a given market, presumptively does not raise competitive issues. To the extent a transaction is below the 1800/200 Threshold, the agencies and DOJ likely would not apply further scrutiny to the competitive effects of a transaction.
If a transaction nears the 1800/200 Threshold but does not fully reflect competition for loans to small- and medium-sized businesses, or if the transaction exceeds the 1800/200 Threshold, DOJ and the agencies may consider additional information. For example, DOJ may consider HHI scores based on commercial loans. The 1995 Guidelines also encourage parties to a transaction exceeding the 1800/200 Threshold to submit information such as evidence of expected increases in commercial lending or evidence of entry and growth of other institutions in a particular market. Finally, the 1995 Guidelines provide that “significant anticompetitive problem[s]” are “often possible to resolve . . . by agreeing to make an appropriate divesture.” Under current practice, DOJ regularly negotiates such divestitures with merger applicants.
Requests for Comment to Update DOJ Guidelines, and Biden’s Executive Order
In September 2020, DOJ, under President Trump, issued a request for comment on revising the 1995 Guidelines, specifically with a view towards incorporating fintechs into the competitive analysis for bank mergers due to their increasing role in the banking industry. The DOJ never published a response to that request for comments.
In July 2021, President Biden issued a sweeping Executive Order on competition that specifically directed the DOJ and the banking agencies to “adopt a plan . . . for the revitalization of merger oversight.”[3] Following the Executive Order, DOJ issued a second request for comments, this time focusing on additional factors that DOJ should consider when reviewing bank mergers.
DOJ’s Approach Going Forward
Kanter’s speech explains that DOJ will reduce its reliance on deposit shares and branch overlaps when evaluating bank mergers moving forward. Instead, it will consider a broader range of competitive factors including “fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service.” Kanter’s comments during the Q&A session following his speech suggested DOJ would also consider factors such as a so-called “too-big-to-fail subsidy,” purportedly enjoyed by the largest U.S. banks, and in some cases may consider fintech firms in the competition analysis.
In further contrast to the historical practice of considering competitive effects on a market-by-market basis, DOJ will consider “coordinated effects and multi-market contacts,” referring to theories that purport that banks competing against each other in multiple markets implicitly collude with each other to suppress interest paid on deposits.[4] Additionally, DOJ will consider how a proposed merger will affect competition for specific customer segments, including how a merger might affect relationship lending or branch networks. Many of the factors discussed in Kanter’s speech track positions taken in a December 2022 law journal article by Jeremy Kress, a University of Michigan professor and a former Federal Reserve Board attorney who serves as an adviser to the DOJ with respect to bank merger policy. More generally, during his speech and the subsequent Q&A, Kanter emphasized that the factors that inform the analysis may be specific to each transaction.
While considering a broader range of competitive factors, DOJ will play less of a role in identifying mitigants to competitive concerns. For example, DOJ will not address whether the anticompetitive effects of a merger might be outweighed by the convenience and needs of the community to be served. Further, DOJ will step back from its role in negotiating divestitures, and will “maintain a high bar” to approve divestitures.
As such, Kanter describes DOJ’s role as advisory – providing competitive analysis to the banking agencies, which can then determine whether the analysis is consistent with approval, and if not, fashion appropriate remedies or analyze whether the convenience and needs of the community outweigh competitive concerns. However, this is unlikely to signal DOJ taking a deferential role, as Kanter reminds us of DOJ’s ability to challenge in court a merger that it believes is anticompetitive even after a banking agency approves it.
Outlook for Bank Mergers
The new approach espoused by Kanter appears more complex and subjective than historical methods and does not suggest any impact from the recent bank failures. Moreover, in addition to competitive considerations, regulators assess a merger applicant’s financial and managerial resources, the convenience and needs of the community to be served (including CRA performance) and risk to U.S. financial stability. As such, the banking agencies’ anticipated finalization of new CRA rules, as well as their reevaluation of the financial stability factor may further modify the bank merger regulatory framework.[5] Detailed analysis as to how to approach “live” bank mergers from a regulatory perspective will be more important than ever. Pursuit of failed banks, when available, may become even more desirable.
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[1] Statement of Michael J. Hsu before the House Financial Services Committee at 5 (May 16, 2023), available here; Matt Egan, Janet Yellen told bank CEOs more mergers may be necessary, sources say, CNN (May 19, 2023), available here.
[2] 12 U.S.C. § 1842(c)(1); 12 U.S.C. § 1828(c)(5).
[3] See our Debevoise in Depth on the Executive Order, available here.
[4] John Hatfield & Jonathan Wallen, Many Markets Make Good Neighbors: Multimarket Contact and Deposit Banking (Jan. 28, 2022), available here.
[5] See our client updates on the proposed CRA rules and the financial stability factor.
