On June 20, 2023, Assistant Attorney General Jonathan Kanter
addressed the Brookings Institute to discuss the 60-year
anniversary of a seminal Supreme Court of the United States case
concerning bank mergers: United States v. Philadelphia National
Bank. Kanter used the opportunity to announce a new approach
by DOJ to its assessment of bank mergers consistent with President
Biden’s July 2021 Executive Order on Promoting Competition in
the American Economy. The new approach removes predictability from
the merger review process and adds uncertainty as to how DOJ will
assess competitive harm in bank mergers in a similar fashion to DOJ’s recent withdrawal of support for
three policy statements that had permitted certain “safety
zones” in the healthcare sector.
Key Takeaways
- DOJ is modernizing the approach it has used to assess bank
mergers since 1995, shifting its focus from purely local
competition with an eye toward “all relevant dimensions of
competition.” - Banks can no longer rely solely on local branch deposit share
“screens” to identify proposed mergers that clearly do
not have significant adverse effects on competition for
predictability related to the review of a proposed
transaction. - DOJ will work with bank regulatory agencies to develop data
sources to improve competitive analysis in various potentially
relevant markets and identify additional factors and theories of
competitive harm in assessing bank mergers. - DOJ is purporting to focus on providing more detailed
competitive factor reports to the principal federal bank regulatory
agencies responsible for merger review under the Bank Merger Act
and the Bank Holding Company Act, reserving its enforcement powers
while deemphasizing its historical practice of using branch
divestitures, through letter agreements, to resolve its competitive
concerns with certain bank mergers.
Philadelphia National Bank and Bank Merger
Enforcement
Philadelphia National Bank involved a 1961 challenge to
the merger of the second and third largest banks in Philadelphia.
The Supreme Court held that the merger violated Section 7 of the
Clayton Act and, most notably, established that certain changes in
market structure and concentration alone can create a presumption
that a merger is so likely to substantially lessen competition that
it must be enjoined unless the merger parties can establish that
the merger is not likely to have anticompetitive effects. Antitrust
enforcers and courts consistently rely on this presumption, which
shifts the burden to the merging parties to disprove
anticompetitive effects. Kanter suggested that the Court “has
not since revisited or criticized these holdings, and the basis for
the structural presumption in merger review is even stronger today
than it was in 1963.”
In the wake of Philadelphia National Bank, Congress
established DOJ’s role in enforcing bank mergers through the
Bank Merger and Bank Holding Company Acts. The banking agencies
assess the competitive effects of a bank merger, and DOJ
independently enforces the Clayton Act, which has led to
overlapping divestiture obligations under which DOJ may require
different or greater divestiture obligations than the banking
agencies. DOJ also provides the banking agencies with a nonpublic
report articulating competitive factors related to the proposed
transaction. Thus, even if the banking agencies approve the merger,
DOJ retains authority to challenge the merger in federal court;
however, it has not done so since 1990, relying on Letter
Agreements for divestitures, in lieu of consent orders employed in
other industries.
In 1995, DOJ, the Office of the Comptroller of the Currency and
the Federal Reserve Board jointly developed the current Bank Merger
Competitive Review Guidelines, which provide important guidance
regarding the regulatory review for parties considering a bank
merger. The 1995 bank merger guidelines articulated two screens
intended “to identify proposed mergers that clearly do not
have significant adverse effects on competition.” Screen A,
principally employed by the bank regulatory agencies, analyzed
“competition in predefined markets developed by the Federal
Reserve” using total deposits as the metric for assessing
market shares and concentration. Screen B, employed by DOJ, focused
on narrower geographic markets and only included deposits of
commercial banks. The 1995 guidelines also promoted the use of
divestitures to resolve any issues with a proposed bank merger.
Indeed, DOJ’s practice has been to resolve any competitive
issues with a bank merger through a branch divestiture settlement
or letter of agreement before DOJ provides the banking agencies
with its competitive factors report. Each of the principal federal
bank regulatory agencies has its own bank merger guidelines or
policies, which vary among the agencies, and each agency is
considering revisions to those guidelines.1
How Is DOJ’s Approach Changing?
While DOJ still supports the structural presumption from
Philadelphia National Bank, it is abandoning the approach
articulated in the 1995 bank merger guidelines due to changes in
banking competition since that time. Kanter noted that local market
deposit concentration may be inadequate to assess the competitive
effects of a modern bank merger given the broader geographic and
business scope of current financial institutions. DOJ will not just
focus on local deposits and branch overlaps, but will analyze
“relevant competition in retail banking, small business
banking, and large- and mid-sized business banking… across a wide
range of appropriate metrics.” The identification of relevant
markets for (a) retail banking, (b) small business banking, (c)
middle market banking and (d) larger corporate banking services is
nothing new, as the DOJ has challenged bank mergers based on
alleged effects in such markets, and other relevant markets, for
decades. However, DOJ will assess the competitive effects on
“fees, interest rates, branch locations, product variety,
network effects, interoperability, and customer service” in a
given bank transaction. This statement suggests less deference to
market share screens based on local deposits as a surrogate for the
cluster of banking services identified as the relevant market in
Philadelphia National Bank, and more attention to
potential direct evidence of anticompetitive effects and
competitive harm through coordinated effects. Kanter also noted
that DOJ will pay more attention to the impact of competition in
financial technologies.
While Kanter noted that DOJ is still working with the Federal
Reserve, FDIC and Office of the Comptroller of the Currency on
updated bank merger guidelines, he advanced two important
considerations DOJ will assess in reviewing a bank merger. First,
DOJ “will closely scrutinize mergers that increase risks
associated with coordinated effects and multi-market contacts”
and “will also examine the extent to which a transaction
threatens to entrench power of the most dominant banks by excluding
existing or potential disruptive threats or rivals.” Second,
DOJ will focus on the impact of a particular bank merger on
different customer groups to “ensure that customers retain a
meaningful choice as to the type of bank with which they do
business by recognizing that different segments of customers have
different needs and that substitution across different types of
banks may be limited.” DOJ will no longer focus on remedies
agreements with parties.
Conclusion
Even though DOJ and banking agencies are still considering
updated bank merger guidelines, DOJ is changing how it approaches
its assessment of bank mergers. Until there is further
clarification or guidance from DOJ, this change is likely to lead
to unpredictability for parties considering a bank merger. The
different factors and theories of competitive harm that DOJ may
consider could be extensive. In the long run, revised bank merger
guidelines and identification of additional data sources of focus
in analysis may establish a more unified approach to bank merger
review among DOJ and the federal bank regulatory agencies. In the
short run, parties to bank mergers must continue to gather and
present the same types of data that they have in the past,
including local deposit share merger screen data and more detailed
competitive analysis where screens indicate further review. They
should expect additional questions, data requests and delays as the
enforcement policy continues to evolve.
For More Information
If you have any questions about this Alert, please
contact Sean P. McConnell, Michael S. Zullo, any of the attorneys in our Antitrust and Competition, any of the attorneys in our Banking and Finance Industry Group or the
attorney in the firm with whom you are regularly in contact.
Footnote
1. For notations on some of the differences between DOJ
enforcement policy and that of the Federal Reserve Board, see the
2014 Federal Reserve Board FAQs.
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prepared and published for informational purposes only and is not
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