The DOJ's Banking Guidelines Review
A few things to watch
On June 20 the Brookings Institution will host a discussion about promoting competition in banking. The main event is scheduled to be a keynote speech by Jonathan Kanter, Assistant Attorney General for the Antitrust Division, in which he will “outline his ideas” on that topic. A panel discussion with various other luminaries will follow.
The Department of Justice is in the process of reviewing its guidelines for evaluating bank mergers, last updated in 1995. AAG Kanter’s appearance thus is expected to serve as a preview of what the DOJ might have in mind for the updated guidelines.1
In advance of AAG Kanter’s remarks in a few weeks I thought it would be a good idea to look back at the letters filed with the DOJ in response to its 2020 and 2021 calls for comment.2 What follows is a brief and non-exhaustive overview of things to watch if/when new guidelines are released.
HHI Thresholds
Context
The DOJ begins its initial review of a proposed bank merger by using the Herfindahl-Hirschman Index (HHI), which looks at the sum of the squares of a bank’s deposit market square for all banks within a particular banking market. The general rule is that if a proposed merger would not result in a post-merger HHI of over 1800 in a given market and an increase in HHI of more than 200 in that market, the DOJ is less likely to conduct further competitive review of the transaction with respect to that market.3
The 1800/200 screening threshold used by the DOJ in evaluating bank mergers is lower than the highest HHI threshold set out in the DOJ’s 2010 horizontal merger guidelines, which say that a market is generally classified as highly concentrated if its HHI is above 2500.4 (Note that those guidelines are also now under review by the Biden Administration.)
Notable Comments
Calls to Raise Thresholds
Various groups and individuals have argued, both in response to the DOJ request for comment and elsewhere, that the HHI thresholds in the banking guidelines should be raised to be more consistent with the currently effective horizontal merger guidelines. For example:
Bank Policy Institute: “revise the 1995 Bank Merger Guidelines to reflect that proposed bank mergers do not give rise to a presumption of competitive harm unless the post-merger exceeds 2,500 points and increases more than 200 points.”
Wachtell Lipton: “We see no reason not to raise the screening threshold to at least 2200/250 in view of current and expected competitive dynamics in the industry. Inasmuch as the FRB economist’s proposal originated 23 years ago, and numerous mergers exceeding the 2200/250 threshold have been approved by the FRB and the Division in the last 25 years, even higher thresholds – possibly 2500/250 – are likely justified by subsequent developments.”
American Bar Association Antitrust Law Section: “At minimum, the Section believes that the HHI thresholds should be no more stringent than the HMG’s HHI thresholds and that the Division may be justified in applying higher HHI thresholds for the Banking Guidelines.”
Federal Reserve Board Governor Bowman: “Of note, some argue that these guidelines are uniquely strict because the 1,800 HHI level for banking is lower than the 2,500 level set in the Horizontal Merger Guidelines used to evaluate transactions in other industries.” [Later in the same speech:] “We need to capture these granular competitive effects across different geographic and product markets. One way to do this is by relaxing the deposit-market-based HHI thresholds in the current bank merger guidelines to reflect the increased competitive influence banks face from nonbanks today.”
Calls to Keep Thresholds the Same
Others believe the current thresholds are okay as is. For example, in a 2020 comment letter the OCC’s Deputy Comptroller for Licensing (still in the role today) wrote that “the OCC does not believe that the 1995 Banking Guidelines need to be updated to reflect the HHI thresholds in the more general 2010 Horizontal Merger Guidelines, which apply to other industries.” The letter went on to acknowledge, though, that HHI might not always be the most useful measure.5
Also supporting unchanged HHI thresholds, except perhaps for rural markets (see below) were the Independent Community Bankers of America: “The purpose of an HHI screen is to identify mergers that are potentially anticompetitive so that they can be subjected to further analysis. The 1800/200 standard is well-suited to this goal.”
Calls to Lower Thresholds
Still others believe that, if anything, the HHI screening threshold should be more restrictive. In comments in response to the DOJ’s second request for comment, Professor Jeremy Kress, who is now advising the DOJ on its review of the banking guidelines, called for the threshold to be lowered, perhaps to 1500/100.
As one possibility, the DOJ could commit to heightened scrutiny of a bank merger that would increase a market’s HHI by more than 100 points to a level above 1,500—the same HHI threshold at which nonbanking mergers “potentially raise[s] competitive concerns,” according to the DOJ’s general merger guidelines.
Professor Kress also does not see the comparison to the 2500 HHI threshold in the horizontal merger guidelines as on point.
The banking sector has argued—erroneously—that the 1800/200 threshold is already too stringent compared to the 2500/200 threshold that triggers a presumption of anti-competitiveness in other industries. The comparison to the 2010 Guidelines’ 2500/200 threshold, however, is inapposite. First, a proposed bank merger that exceeds the Bank Merger Guidelines’ HHI threshold merely receives enhanced scrutiny rather than a presumption of anti-competitiveness, as is the case for nonbank mergers that exceed the 2500/200 threshold. In this way, the Bank Merger Guidelines’ HHI screen is more akin to the 1500/100 threshold in the 2010 Guidelines for potentially anticompetitive mergers that “warrant scrutiny.” Second, the costs of “false negatives”—or misguided decisions to allow anticompetitive mergers—are higher in banking than in other industries.
Similarly, FTC Chair Lina Khan, who does not have a vote here but whose view may still be seen inside DOJ as persuasive authority, wrote a comment saying that the current HHI thresholds “appear to have permitted consolidation that reduced competition in consumer banking” and that “adjustments should therefore be considered to strengthen enforcement.”
As a signal of how things may have shifted, recall that the “Bank Merger Review Modernization Act” bill re-introduced in 2021 by Senator Elizabeth Warren and Representative Chuy García would have by law set 1800/200 as the threshold at which the banking regulators would be required to apply heightened scrutiny to proposed mergers. (The agencies would have been free to set a lower threshold if they wished.)
The idea behind Senator Warren’s bill was to set 1800/200 as the floor as a preemptive move in the context of rumors that the banking agencies were thinking of raising the threshold, for reasons similar to those mentioned by Governor Bowman. Now, however, I wonder if in light of the comments from Professor Kress and Chair Khan, progressives might be disappointed (and others perhaps relieved) if all the new DOJ banking guidelines do with respect to HHI thresholds is retain the 1800/200 threshold as is.
Rural Markets and Smaller Banks
Context
Still on the topic of HHIs, the DOJ’s 2020 request for comment asked if the Antitrust Division should “apply different screening criteria and HHI thresholds for urban vs rural markets.”
Notable Comments
Apply Different Rules for Rural Markets
The Independent Community Bankers Association in 2020 comments told the DOJ that it “should prioritize allowing mergers in rural and other small markets that preserve the financial viability of small banks so that these areas can continue to have a physical banking presence.” “In many rural counties, the number of bank and credit union branches can be counted on one hand” and thus “HHIs will appear artificially high, particularly if a portion of the county’s residents do their banking outside the county,” ICBA therefore believes that in rural areas “HHI thresholds of 1900/250 are more appropriate to flag deals for additional scrutiny.”
A letter from the Alabama Superintendent of Banks illustrates the potential issue:
Looking at the "top five" institutions in Alabama's 53 banking markets, relatively few in-market small bank combinations would pass the current screening criteria. In particular, transactions between two small banks appear to be almost impossible in banking markets that have less than $1 billion in total deposits. The same theme holds true when looking at the 84 institutions in Alabama with less than $500 million in assets. Most notably, 22 of those 84 institutions primarily operate (i.e., they have their greatest deposit amounts) in a banking market that has less than $500 million in total deposits. Not a single one of those 22 banks—many of which are very small—could satisfy the 1,800/200 threshold in a merger with the largest other Alabama-based small bank in the same market. In fact, the closest any of those 22 institutions could come would be in a transaction that would result in an HHI of 2,774 and an HHI change of 742.
The Missouri Bankers Association also gave what appears to be a real-life example:
For example, in a small or rural market served by five banks with one of those having over 50% of the market, if the 5th smallest bank proposes selling a facility ( or seeking a merger) to the 4th smallest bank, the 4th would still be 4th - and this bank facility sale ( or merged bank) would not cause them to move up the list, just eliminate the 5th bank. The Federal Reserve did not approve a transaction in this scenario due to the HHI competitive analysis. This despite showing that many people in that town/county drove to larger nearby metropolitan areas for work, shopping, etc.
So, the bank with the smallest branch - since the bank could not sell (or merge) to the interested bank - just closed the branch. As those customers disbursed about half ended up at the biggest bank in town (tracking to its 50% market share) making the largest bank even bigger and the market more concentrated. A sale to the 4th largest bank would have limited the concentration in this market as compared to the outcome of denying the branch sale or bank merger.
Wachtell Lipton, whose clients are typically larger banks, also supported higher HHI screening thresholds for rural markets in its 2020 comments:
Adopt higher concentration screening thresholds for rural markets than for non-rural markets, or, if the Division is disinclined to have different thresholds, specifically outline the mitigating factors that may be relevant to the Division’s analysis of competition in a rural market.
Finally, the OCC, too, in 2020 was open to different HHI screening criteria for rural markets, while at the same time stressing again that deposit-based HHI screens may not be the best metric for evaluating competitive effects.
The OCC believes that the DoJ should consider the dynamics of these markets when setting screening criteria and recognize the limitations of HHI thresholds for capturing the competitive landscape. Mindful of those considerations, it may make sense to apply less stringent HHI standards for rural markets (i.e., allow higher changes in HHI for bank mergers in rural markets). Perhaps more important than the thresholds of HHI screens, however, is to develop an approach that is less focused on deposits as a proxy for market power.
Mergers in Rural Areas Deserve More Scrutiny
Comments from Americans for Financial Reform took the other side, saying that as a general rule all markets should be evaluated in the same way and that, if anything, “urban core (cities) and rural areas should receive greater scrutiny because these markets are already considerably more concentrated than metropolitan areas.” For this same reason, AFR is against a de minimis exception for small deals.
These higher concentration levels in rural markets mean that the Department of Justice should not establish de minimus thresholds to approve smaller transactions without assessing the competitive effects of the mergers. In rural markets, it is possible for the merger of two smaller institutions to considerably increase the market concentration and give the merged bank impermissible market power to impose price hikes on customers. The current HHI thresholds are a better metric for assessing the potentially anticompetitive impacts of possible mergers than an arbitrary size limit that would leave rural communities vulnerable to local bank monopolies, cartels, or oligopolies.
Given the general direction of travel in federal merger policy, I would be mildly surprised if rural areas or small banks are given much, if any, of a special accommodation when it comes to the DOJ banking guidelines. Looking back at these comments, though, did remind me of CFPB Director Chopra’s assertion last year that “the Justice Department and the bank regulators have been relatively strict when reviewing small bank mergers.” I have never been sure whether Director Chopra actually meant that or whether this was just a rhetorical move to set up the second half of his claim, which was that the agencies have been “quite lax when evaluating big bank buyouts.”
Product Markets
Context
As explained in the Antitrust Division’s 2020 request for comment, “the Division generally reviews three separate product markets in banking matters: (1) retail banking products and services, (2) small business banking products and services, and (3) middle market banking products and services.”6
Notable Comments
Middle Market Banking
The Wachtell Lipton comment letter I’ve quoted a few times now engaged at length with this issue, particularly on the topic of middle-market banking.
First, Wachtell argued that the market for middle-market banking services, to the extent still a relevant product market at all, is competitive, and that “investigations into the middle-market should be extremely rare.” Second, to the extent DOJ does retain middle-market banking as a relevant product market, Wachtell recommended that DOJ:
Include a clear description of (1) middle-market banking products and services; (2) middle-market banking customers; and (3) the geographic market in which middle-market banking will be evaluated or, at the very least, the factors the Division will consider or evaluate in determining the geographic scope of such a market; and
Identify the general framework in which the Division will evaluate competition (i.e., shares versus bidding market). To the extent the Division continues to believe share data are useful in evaluating middle-market banking, the revised Banking Guidelines should describe the type of data and information that the Division would find persuasive in demonstrating share or competitive presence in the absence of publicly available reported data.
The 2020 comment letter from OCC Deputy Comptroller for Licensing Lybarger also took up the issue of middle-market banking, saying the DOJ should “consider further segmentation of the product market for middle market banking products and services, where antitrust concerns may go beyond deposit-related products and services.”
For example, middle-market firms may be large enough that their lending needs cannot be met by small community banks, but not large enough to be able to rely on global lenders or capital markets at an affordable cost. They rely on competition among regional and nationwide banks in middle market lending to provide them with competitively priced loans. Excessive concentration at the regional level in the market shares of middle market lending by regional and nationwide banks are important to track to ensure competition. It is also conceivable that underwriting of securities for middle market firms would be another area in which regional competition could be weak.
Calls for New Product Markets
While not aimed specifically at DOJ, the Warren-Garcia bank merger review bill would have required the banking agencies to consider competitive effects in each of the following product markets:
the cluster of commercial banking products and services, as described in United States v. Philadelphia National Bank;
commercial deposits;
loans to small businesses;
home mortgage loans;
any other financial product that “comprises a substantial portion” of the activities of each bank involved in the proposed merger.
Americans for Financial Reform in its comments added that any revised guidelines should address “market concentration in wholesale investment banking markets, as well as more local markets.”
Fintech and Non-Traditional Banks
Context
The Antitrust Division in its 2020 request for comment asked whether it should include non-traditional (e.g., online) banks in its competitive effects analysis. If so, the DOJ asked how it should go about doing so, given that “the geographic dispersion of deposits from online banks is not publicly available (by market or branch).”
In 2021, the DOJ followed up by noting that though “[c]ommentary in response focused on the use of online banking services,” DOJ is “also interested in whether and how internet-only banks (i.e. banks with no, or an extremely limited, physical branch network) factor into bank merger competitive review.”
Notable Comments
Several commenters agreed that it would be good to include non-traditional banks and other fintechs in the analysis.
ICBA: the DOJ “should account for the presence of fintechs and online peer-to-peer lending services by examining the level of competition in these markets on a national level.”
Wachtel Lipton: online banks “almost certainly should be” included in the competitive effects analysis; there is no principled reason to exclude online banks, thrifts, credit unions or fintechs because all actively compete for retail banking products and services.
American Bankers Association: DOJ should take into account, among other things, “Fintechs and other nonbank firms, which frequently unbundle financial services traditionally provided by banks through physical branches.”
Governor Bowman: “Each year, a larger percentage of community banks report fintech firms as their primary competitors for consumer loans, the Farm Credit System as their primary competitor for agricultural loans, and nonbanks as their primary competitor for mortgage loans.”
As for the question of how, Wachtell acknowledges that this is a thorny issue,7 but says raising the HHI thresholds would be helpful as an interim solution.
In the absence of geocoded deposit data or the collection of nationwide small business loan data from online lenders, we revert to our recommendation that the revised Banking Guidelines adopt higher HHI thresholds used to screen for potentially problematic transactions with respect to retail and small business markets to account for the unquantifiable impact online channels are having on competition.
This is probably another area, though, where banks have had to temper the expectations.
Professor Kress believes the emergence of fintechs and other nonbank competitors should not be used to justify loosening review standards, arguing that fintech does not substitute for traditional banks and that fintech does not penetrate many of the LMI and minority communities which are most at risk from further consolidation.8 Further, Professor Kress argues that the current 1800/200 HHI threshold is set at that level in part because the DOJ has already taken into account nonbank competition, and thus no further changes to account for fintech are needed.
Financial Stability and Other “Non-Price” Factors
Context
According to DOJ, several commenters in response to the 2020 request for comment had “expressed support for broadening the factors considered by the Division when evaluating bank mergers.” The Antitrust Division’s 2021 request therefore asked commenters to opine on which other standards and factors its competitive effects analysis of bank mergers should consider.
Notable Comments
As an example of what other factors DOJ might consider, see this 2020 joint comment letter from now-CFPB Director Chopra and Professor Kress:
Among other approaches, the DOJ could: […] Take into account financial sector resilience, the “too big to fail” subsidy, potential conflicts of interest, product quality, and privacy and data protection as a routine part of its bank merger analysis. . . .
Professor Kress expanded on these recommendations in his response to the 2021 request for comment, categorizing the various ways he believes the current banking guidelines have ignored “non-price competitive harms.” For instance, Professor Kress argues that a competitive effects analysis should take into account systemic risk concerns:
In addition to impeding monetary policy, bank consolidation also threatens competition by intensifying risks to financial stability. […] In fact, numerous empirical studies have demonstrated that large bank mergers increase financial instability. The Bank Merger Guidelines unwisely ignore systemic risks despite the threat that financial crises pose to competition.
If the DOJ does go ahead and do this, lawsuits are likely to follow. At least that is the implication of a 2022 joint comment letter from the Bank Policy Institute and the Mid-Sized Bank Coalition. The groups warned the DOJ that this issue is beyond the Antitrust Division’s remit:
In its most recent call for comments, the DoJ asked whether it should consider additional factors in its competitive analysis beyond those that have been developed over decades. There has been a specific focus by some on systemic risk and financial stability. This section addresses the issue of whether DoJ may consider systemic risk when assessing the competitive effects of bank mergers under the antitrust laws. In short, because Congress has authorized the Federal Bank Regulators—not DoJ—to assess systemic risk, it would be arbitrary and capricious for DoJ to incorporate systemic risk into its competition analysis. DoJ review would also be inconsistent with congressional intent, because, even with the Federal Bank Regulators, Congress identified systemic risk as a prudential, rather than a competitive, consideration. […]
Congress knows how to instruct an agency to consider systemic risk, as it explicitly directed the Federal Bank Regulators to do. It declined to provide the same authority to DoJ. DoJ may not override Congress’s judgment by considering a factor that Congress authorized only the Federal Bank Regulators to review.
Opposition from trade groups is not universal, however. Community bankers think a DOJ focus on financial stability would be a fine idea:
To better ensure the Department’s antitrust reviews of large bank mergers are sufficiently rigorous, the Department should add a requirement to its Guidelines that for acquiring or acquired banks with $100 billion or more in assets, the Department will consult with the prudential regulators to determine whether the benefits of the merger outweigh the risks the combined institution will pose systemic risks to the financial system or be “too big to fail.”
Weakened Competitor Defenses
Context and Notable Comment
The current banking guidelines contemplate scenarios in which an institution’s market share may be overstated, for example if the institution is “not competitively viable or is operating under regulatory restrictions on its activities.”
In its 2020 comment letter, Wachtell included a discussion of a separate but related consideration that may be particularly salient in light of the events of Spring 2023. Wachtell explains:
Distinct from the “failing firm” defense, the “weakened competitor” doctrine is focused on the validity and predictive value of using snapshot market share statistics to evaluate the competitive significance of a firm that is clearly evidencing a dynamic trend toward decline. It has special relevance to banking in that deposit and loan data are collected once a year; time-lagged market shares attributed to impaired banks almost invariably overstate their competitive significance when they are being acquired in exigent circumstances. […]
In a pattern often replicated during the [2007-2008] financial crisis, banks experiencing significant losses, share price declines or credit rating downgrades would take actions and encounter customer reactions that quickly sapped their competitive vitality and that undercut the predictive value of the time-lagged deposit and loan data typically used to evaluate their competitive significance.
This argument in 2020 was framed around the “current pandemic-depressed economy with historically low interest rates” but as demonstrated recently higher interest rates are not always great for banks either. Wachtell asked DOJ to provide more guidance on what it “would find compelling” as part of a weakened competitor defense and suggested that the DOJ’s analysis of proposed acquisitions of such weakened firms should either provide for a relaxed screening threshold or explicitly discount the impaired bank’s deposit and loan shares.
I am not sure this is something AAG Kanter’s Antitrust Division is inclined to do, but others in the Biden Administration may be more receptive to at least the general idea.
Other Stuff
Finally, a brief word on other things in the comment letters or in other public comments I thought were provocative or otherwise interesting, even if in some cases they seem less likely to be a focus of DOJ’s review.
Common Ownership
A few of the comment letters sent to the DOJ warned about, or at least asked the DOJ to think more about, the dangers of common ownership. (This is a variant of the theory jokingly called by Matt Levine “should index funds be illegal.”)
In 2020 comments, a joint letter from the American Economic Liberties Project, the Washington Center for Equitable Growth, and the Open Markets Institute suggested that rather than focusing on more permissive bank merger guidelines, the Antitrust Division should prioritize a focus on other issues, including “[r]evisiting bank ownership limitations.”
The ownership of large publicly traded companies is heavily concentrated in the hands of a few large asset managers, and the same is true of the largest banks in particular. […] Researchers have examined the impacts of large ownership stakes in concentrated industries, including banking, and proposed common ownership limits well below those contained in the [Federal Reserve Board’s control rule]. Others have suggested that large shareholders could actually provide some benefits from a financial stability perspective.
In his 2022 comment letter, Professor Kress also talks about common ownership. And rather than framing it as something that DOJ should prioritize instead of the banking guidelines, Professor Kress calls to incorporate common ownership considerations into the banking guidelines. The example he gives:
The Federal Reserve calculated that the BB&T–SunTrust merger would increase the Atlanta, Georgia banking market’s HHI by 270 points to 1743—just below the 1800/200 threshold for enhanced scrutiny. However, the antitrust authorities overlooked that the four largest banks in Atlanta following the merger—controlling almost threequarters of the market’s deposits—would have a high degree of common ownership. Thus, while the traditional HHI analysis indicated that the Atlanta market would remain competitive, a more probing analysis of the competitors’ common ownership may have revealed the potential for anticompetitive conduct.
I think this theory is underproven at the moment, but to be fair progressives are not the only ones raising concerns. See for example this Senate Banking GOP report on the “Big Three” asset managers that called on Congress and the Federal Reserve Board to “assess whether any of the Big Three control any banking organizations for purposes of the Bank Holding Company Act or the other banking laws.”
Summary of Deposits
As noted above, the HHI analysis is bank merger reviews is first and foremost deposit-based, and the main data source for this is the FDIC’s Summary of Deposits, a survey conducted since 1934.
The Summary of Deposits, though useful, has certain limitations. For example, to which branch should you assign deposits gathered online or through a bank’s mobile app? Or what about a corporation that maintains an account at a bank but does business nationwide — does it make sense, as is often the current practice, to book all the deposits to a single location of the bank?
In a letter on behalf of one or more unnamed bank holding company clients, lawyers at a prominent law firm offered some suggestions for improvements to the FDIC’s Summary of Deposits Reporting Instructions.
Require all reporting institutions to use a single method of assigning deposits to each office;
Select a method for assigning deposits that results in a relatively stable deposit location across time;
Require all reporting institutions to assign online deposits to a location related to the customer’s location;
Ensure all FDIC-insured institutions, including FDIC-insured digital banks, are reporting institutions; and
Tag corporate deposits.
Management Interlocks
AAG Kanter has called going after interlocking corporate boards under Section 8 of the Clayton Act “probably the most effective way of deconcentrating the United States economy today.” There are, according to AAG Kanter, “many additional opportunities out there for investigation and enforcement” in addition to the actions the Antitrust Division has already taken.
This initiative on its own is unlikely to affect banking organizations, as Section 8 of the Clayton Act does not apply to “banks, banking associations, and trust companies.” Instead, board and management interlocks between banking organizations are addressed in the Depository Institutions Management Interlocks Act.
In 2019, the federal banking regulators amended their DIMIA regulations to adjust the threshold for the “major assets prohibition” - i.e., the provision of DIMIA that prevents two large depository organizations9 (for some periodically adjusted definition of large) from having overlapping management officials.10
Prior to adjustment, the DIMIA major assets prohibition precluded a management official of a depository organization with total assets exceeding $2.5 billion (or any affiliate of such an organization) from serving at the same time as a management official of an unaffiliated depository organization with total assets exceeding $1.5 billion (or any affiliate of such an organization). DIMIA provides that the agencies may adjust, by regulation, the major assets prohibition thresholds to allow for inflation or market changes. To account for changes in the U.S. market for banking services since the current thresholds were established in 1996, the agencies are increasing both thresholds to $10 billion.
This proposal was not particularly controversial,11 and I know of nothing to suggest that banking organization management interlocks are a focus for either AAG Kanter or the banking regulators. Still, I thought I would mention it here given AAG Kanter’s reported enthusiasm for the topic.12
Thanks for reading! Thoughts, challenges or criticisms are always welcome at bankregblog@gmail.com.
This DOJ effort is separate from, but of course related to, the ongoing efforts by the federal banking regulators to review their own frameworks for evaluating bank mergers not only with respect to competitive effects analysis but also other statutory factors. I’ve tried in this post to stick to discussing issues clearly within the scope of the Antitrust Division’s work, but as the discussion later in this post shows the distinction is not necessarily always clear.
The first request for comment, issued under AAG Delrahim in September 2020, focused on topics like whether there should continue to be bank-specific merger guidelines, whether any new bank merger guidelines should be jointly issued with the federal banking regulations, whether the 1800/200 HHI screen should be updated, and whether there should be a de minimis exception.
The second request for comment, this one issued under AAG Kanter in December 2021, asked the commenters to try again, this time focusing their comments on “whether bank merger review is currently sufficient to prevent harmful mergers and whether it accounts for the full range of competitive factors appropriate under the law.”
There are of course exceptions:
In some cases, the Department may further review transactions which do not exceed the 1800/200 threshold in Screen A. This is most likely when Screen A does not reflect fully the competitive effects of the transaction in all relevant markets, in particular lending to small and medium-sized businesses. For example, the Department is more likely to review a transaction involving two commercial banks if the postmerger HHI approaches 1800 and the HHI increase approaches 200, and screen A includes thrifts which are not actively engaged in commercial lending. In addition, the Department is more likely to review a transaction if the predefined market in which the applicants compete is significantly larger than the area in which small business lending competition may exist (e.g., the predefined market includes multiple counties, or is significantly larger than an RMA in which the applicants are located). In such a case, applicants should consider submitting the calculations set forth in Screen B. Often, the Department will review the information in Screen B and find no need for further review of the proposed merger.
But see the argument from Jeremy Kress a little later in this section taking issue with the idea that this is a like-for-like comparison.
From the letter:
The HHI measure may not be the most useful measure for gauging competition, especially in lending markets. The core question is whether the merged company will be able to raise prices or not. Pricing for loans or payment services aren’t necessarily correlated with deposits. The OCC supports the DoJ in evaluating whether the HHI measure and the focus on deposits as a basis to determine the competitive effects of a merger are still appropriate in light of the changes to the banking industry over the last twenty-five years, especially when considering the effects of mergers between large financial institutions and financial institutions whose core business does not involve taking deposits.
Acting Comptroller Hsu’s speech from this past February similarly signaled openness to other approaches.
HHI is a transparent, empirically proven, efficient, and easily understood measure of concentration. The index is objective, based on a consistent measure of market presence based on deposit share. Furthermore, the use of HHI is efficient, in that it is simple to compute and provides ex ante certainty for merger participants.
Nevertheless, in some ways HHI might have become less relevant since the bank merger guidelines were last updated in 1995. For example, the growth in online and mobile banking and rise of nonbank competitors may have made HHI—which is based only on deposits—a less effective predictor of competition across product lines. This is so because a bank’s deposit base may have become less probative of its offering of other banking products. In addition, the size of the relevant markets for these products may have expanded exponentially with the rise of online banking products and services, while nonbank competitors have grown to an extent unimagined in 1995
But see Q&A 29 to an older Federal Reserve Board/Antitrust Division FAQ on bank merger review: “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. … On a case-by-case basis, the Division also evaluates the competitive effects in other product markets, such as middle-market business banking.”
See also Governor Bowman’s speech: “Nonbank fintech firms have become viable competitors for nearly all types of loan products, but most prominently consumer loans, small business loans, and student loans. One challenge is that we don't have the same consistent set of data from nonbank entities that we do for banks. Nonbanks are generally not subject to the same types of reporting requirements as banks, and analysts have to get creative when trying to measure how these entities impact competition.”
For comments along similar lines, see Americans for Financial Reform’s 2022 comment letter.
Subject to certain exceptions, the DIMIA regs apply to depository institutions (banks, trust companies, savings banks, industrial banks, credit unions, etc.) and depository holding companies (BHCs and SLHCs), together, depository organizations.
Again subject to exceptions, a management official includes a director, most advisory or honorary directors, a senior executive officer, a branch manager, a trustee of a depository organization under the control of trustees, and any person who has a representative or nominee serving in the capacity of any of the above.
The only comments were from trade groups, all of which supported the proposal, although sometimes with recommendations to also do things like tie the thresholds to inflation, etc.
If you, too, are a management interlock enthusiast, and if you have made it all the way to footnote 12 of this very long post, you may be interested to read correspondence from February of this year between a bank and an activist investor that asserted the bank was operating in violation of DIMIA. See the letters attached to this 8-K.