In mid-December of 2023, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released updated merger guidelines concerning the agencies’ antitrust analysis. The agencies developed several guidelines that help them determine when mergers substantially lessen competition, create monopolies and harm consumer welfare by raising prices and decreasing the quality of service. The Sherman and Clayton Acts prohibit mergers with significant anti-competitive impacts.
NCRC and our member organizations have submitted several comments to the DOJ and the federal bank agencies over the last few years urging updates to merger guidelines and merger application procedures. While DOJ and FTC just updated their guidelines, the federal bank agencies have yet to propose changes to their regulations governing bank mergers.
While NCRC members are concerned about anti-competitive impacts, we are also intent on improving the rigor of bank agency guidelines requiring banks to demonstrate that their mergers create public benefits. One aspect of the public benefit requirement is that any anti-competitive impacts be counterbalanced by improvements in banks’ abilities to serve community needs. Amending the Federal Deposit Insurance Act, the Bank Merger Act mandates that a federal agency shall not approve an anti-competitive merger, “unless it 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.”
NCRC and our members have advocated that Community Benefit Agreements (CBAs) are an effective means for satisfying the requirement that mergers improve a bank’s ability to meet community needs. The DOJ and FTC guidelines are solely focused on analyzing potential anti-competitive impacts and do not develop methods for assessing whether public benefit requirements are met by the merger banks. Nevertheless, the anti-competitive analysis is important.
If a merger poses significant anti-competitive concerns, the agencies can deny permission for the banks to merge. Alternatively, they can require remedial measures such as branch divestitures that mitigate anti-competitiveness impacts. Another remedial measure is promised improvements in satisfying the public benefit requirement.
Thus, if the guidelines help NCRC and its members identify mergers with anti-competitive impacts, we will have improved abilities to persuade the agencies to order remedial actions such as requiring the merging banks to sell or donate branches to community-based lending institutions such as CDFIs, low-income credit unions and minority- or women-owned banks. We can also advocate for CBAs or other improvements for meeting community needs.
The following is a summary of major provisions of the DOJ and FTC guidelines that will help community organizations monitor mergers and advocate for the interests of traditionally underserved communities:
Changes to the quantitative screen for identifying anti-competitive impacts
The federal agencies use a formula called the Herfindahl-Hirschman Index (“HHI”) to identify geographical areas in which markets are “concentrated” or anti-competitive. The HHI squares the market shares of companies in a locality and combines them for a total score. For example, if there is one monopolist, the HHI is 10,000 which is the product of a 100% market share squared (100×100).
The DOJ and FTC will consider a market to be highly concentrated if it has an HHI of 1,800. While this number may seem difficult to decipher as to why it identifies concentration, a concrete example makes it easier to understand. Suppose a county has only five banks that take deposits. Each bank therefore has a 20% market share. Squaring each bank’s share equals 400. Multiplying the per bank market share by five (the total number of banks) produces an HHI of 2,000. Thus, a locality with a HHI of just over 1,800 has just five competitor institutions.
If a highly concentrated market with an HHI of over 1,800 would experience an increase in the HHI of at least 100 points as a result of a merger, the DOJ and FTC will consider the result to substantially decrease competition and increase the chances of a monopoly. Merging banks have the opportunity to rebut this presumption in their merger application. However, the higher the increase above 100, “the greater the risk to competition suggested by this market structure analysis and the stronger the evidence needed to rebut or disprove it,” according to the DOJ and FTC.
This is a significant tightening of the HHI analysis and will likely result in the agencies identifying significantly more mergers as anti-competitive. To illustrate this, consider that a merger involving two banks, each of whom had a market share of 5%, would hit the 100 HHI increase. The newly merged bank would have a market share of 10%, and 10 squared would equal the 100-point increase specified in the new guidelines.
Before this change to the DOJ and FTC guidelines, the anti-competitive trigger was an increase of 200 points. That would mean that each of the merging banks would need to have double their market share, or a market share each of 10% instead of 5%. This new trigger-tightening increases the chances that public comments on the merger will have desirable influence in terms of either divestures of branches to community-oriented lenders or a bolstered public benefits commitment.
Another new trigger in the DOJ and FTC guidelines is that the merger will be presumed to be anti-competitive if the resulting market share of the merged banks is 30% and the HHI increases by 100 points. The 30% market share was previously used for a state level trigger. Applying this 30% threshold to smaller markets such as metropolitan statistical areas will also subject more proposed mergers to remediation measures.
The DOJ and FTC guidelines do not address which specific markets the DOJ and FTC will analyze for anti-competitive impacts. Traditionally, the DOJ and the federal banking agencies have used deposit markets to conduct HHI analysis. However, trends in home loan and small business loan markets in terms of concentration levels could be different than those in deposit markets. Accordingly, NCRC has urged the agencies to conduct HHI analyses separately for deposits, home loans and small business loans. For each of these three markets, data is publicly available — so community groups can also conduct their own HHI analyses.
Solutions for high concentration levels could also be different depending on which market would become highly concentrated. For example, high concentration in deposit markets could motivate the agencies to require branch divestitures while high concentration levels in home lending could result in the agencies requiring one of the merging banks to sell their mortgage company if they own one. Alternatively, a community benefits agreement (CBA) involving home lending could lessen the anti-competitive impact. A lack of separate HHI analyses for the different markets is unfinished business for the agencies. We hope the bank agencies propose changes to fix this soon.
Other Red Flags and Possible Research Opportunities for Community Organizations
The agencies describe eleven guidelines for evaluating mergers. This summary will not review each one but will highlight factors the DOJ and FTC will be investigating, with the aim of suggesting research approaches to inform the comment letters of community-based organizations.
The agencies state, “If evidence demonstrates substantial competition between the merging parties prior to the merger, that ordinarily suggests that the merger may substantially lessen competition.” One way community groups can gather evidence about this is if the banks name each other in ads before their proposed merger and specifically say that they offer a superior product at a lower price than their rival in the localities that the community groups serve.
The agencies state that they will examine whether a merged bank would prevent competitors from using products that they need in their ordinary business activities. The first example that comes to mind is from the digital age when certain search engines have been accused of limiting consumer access to competing applications. However, this could also apply to traditional banking if a merged bank would have a dominant ATM network in a county or metropolitan area that would result in higher fees for consumers of other banks should they need to use the ATM network of the merged banks.
A series of rapid mergers among large banks may also heighten the chances that the agencies will decide that additional mergers would increase the chances of concentration. In the wake of the financial crisis, the agencies arranged for several emergency sales of bankrupt companies to large banks. In this environment, additional mergers would likely raise concerns about lessening competition.
Occasionally during better economic conditions, a large bank merger can encourage copycat mergers when large banks do not want to be dwarfed by their new and larger competitors. If the agencies are not careful in these instances, industry-wide concentration in several markets can increase significantly in a short period of time. This happened in 1998 when in short order, Bank of America acquired NationsBank, Wells Fargo acquired Norwest, Bank One acquired First Chicago NBD, Citibank acquired Travelers Group, and SunTrust acquired Crestar.
Along the same lines, the agencies will become more concerned if one bank engages in a series of rapid mergers. Capital One engaged in such a strategy in 2011 when it acquired the credit card operations of HSBC and ING Direct in a three-month period.
The agencies in the final section of their guidelines outline several analytical tools used to check for anti-competitive impacts. For example, a history of fee increases and less favorable interest rates on loans and deposit for a particular bank or locality after previous mergers would be important documentation to provide to the agencies.
Finally, the DOJ and FTC will consider whether a particular merging bank had a dominant position in a locality such as a county or metropolitan area over a long period of time. NCRC member data analysis using deposit, HMDA or CRA small business data over a four- or five-year period can demonstrate a merging bank’s long-term dominant market share. In addition, the agencies will consider whether a particular locality had a high HHI for a long period of time. Again, data analysis can establish if the locality was highly concentrated for several years.
Josh Silver is a Senior Fellow at NCRC.
Photo of FTC Chair Lina Khan via E Gillet on Flickr.
 DOJ and FTC Merger Guidelines, Guideline 1, p. 5.
 DOJ and FTC Merger Guidelines, p. 6.
 DOJ and FTC merger guidelines, Guideline 2, p. 7.
 DOJ and FTC merger guidelines, Guideline 5, p. 13.
 DOJ and FTC merger guidelines, p. 23, The agencies state, “The Agencies sometimes see multiple mergers at once or in succession by different players in the same industry. In such cases, the Agencies may examine multiple deals in light of the combined trend toward concentration.”
 DOJ and FTC merger guidelines, Guideline8, p. 23.
 DOJ and FTC merger guidelines, p. 34.
 DOJ and FTC merger guidelines, Guideline 6, p. 18.
 DOJ and FTC merger guidelines, Guideline 7, p. 22.