Congressional critics of the agencies reviewing bank mergers have in recent months claimed that those agencies “rubber stamp” mergers and that merger review standards relating to antitrust are too lax.  We believe those critics are misinformed.

Bank mergers are among the most regulated in the economy.  The Federal Reserve Board (the “Fed”) has extraordinary, virtually carte-blanche power in approving or denying bank holding company mergers (as do the OCC and FDIC with respect to bank mergers), reviewable only by a federal appeals court and under a highly deferential standard of review.  Their determinations, especially with respect to facts related to competitive effects, are treated as conclusive in federal appeals court.  Merger applicants essentially have no recourse after an adverse decision by the Fed.

On top of this, the Department of Justice under the Bank Merger Act and the Bank Holding Company Act has an automatic stay to stop any bank holding company or bank merger that was approved by a bank regulator, unless the parties can show that the DOJ’s complaint is “frivolous.”  The procedural anomaly created by the automatic stay effectively switches the burden of proof in district court to the merger applicants before trial has begun—contrary to the judicial review of industrial mergers challenged by the DOJ.  For that reason, no bank merger applicant has attempted to litigate an adverse decision by the DOJ in over 35 years.  Almost no other private industry in the United States faces this two-level agency antitrust review where both agencies have heightened judicial deference.

Moreover, sweeping reforms enacted by Congress created statutory limits on the level of national and statewide deposit shares any single bank holding company may achieve through mergers.  See 12. U.S.C. § 1842(d)(2).  Other provisions in those reforms set a national liability cap in banking industry mergers.  No other industry faces such absolute statutory limits—and this is in an industry where the largest institution holds only 11.5% of the nation’s deposits.

Congressional critics who cite the lack of agency denials or court challenges to bank mergers in recent times as evidence of “rubber stamping” entirely misunderstand the robust antitrust review system in place.  As noted, applicants would almost never go to court against either agency given the unlevel playing field.  Rather, in our 35-plus years of experience, merger applicants have negotiated branch divestiture settlements with the DOJ and whichever bank regulator is reviewing the merger.  The result is that the applicants divest to the “highest common denominator,” satisfying concerns of two agencies.  On top of that, the DOJ has added requirements that post-merger the parties offer any subsequently closed branches to other financial institutions to facilitate entry and it imposes various requirements to protect assets pending divestiture.

If the parties’ proposed divestitures are insufficient and agencies thus oppose a bank merger, the banks typically withdraw their applications and either abandon the transaction or try again at a later time with a different remedy to alleviate the agencies’ concerns.  In 2020, fourteen bank merger applications were withdrawn from the review process, accounting for nearly 10% of applications submitted.  This figure is conveniently ignored by politicians seeking to score rhetorical points.

Furthermore, the DOJ and Fed have worked hard to establish clear bank merger guidelines that allow parties to quickly identify where a merger may present competitive harm and quickly address those concerns, or to determine that such a transaction is infeasible.  Over the decades we have counselled clients on transactions that the DOJ and banking regulators would likely not approve, or would require uneconomic remedies, and clients typically elect not to pursue such transactions.  And when we do file an application on behalf of a client, we are prepared to negotiate necessary remedies with the agencies quickly and effectively.  The lack of court challenges or quantifiable regulatory denials thus does not evidence regulatory failure, but rather the exact opposite—the DOJ and banking regulators provide clear guidelines and are able to work effectively with the merger applicants to ensure appropriate remedies addressing specific issues while allowing deals that are otherwise economically beneficial.  This has allowed for efficiencies from much-needed consolidation on a national level, but as studies by Federal Reserve economists have shown, local market concentration in banking did not appreciably increase as a result of such national consolidation.

The recent Executive Order calling on the DOJ and banking regulatory agencies to “update guidelines on banking mergers to provide more robust scrutiny of mergers” similarly fails to recognize the existing robust bank merger review framework.  The antitrust guidelines applied to bank mergers already have more restrictive concentration thresholds than the Horizontal Merger Guidelines that the FTC and DOJ have used since 2010 to review industrial mergers.  If anything, the antitrust review of bank mergers should be relaxed to reflect technological developments and non-bank competitors that are not reflected in the current concentration analysis used by the agencies.

While critics of bank mergers point to the consolidation of thousands of banks over the last thirty years, they fail to mention that there are thousands more still operating.  How many nationwide industries have over 5,000 fully regulated competitors?  And this ignores the countless other non-traditional financial institutions that offer bank-like services but fall outside the banking regulator’s purview.  Such diffusion is unsustainable in view of the economies of scale required to support technology investment and regulatory compliance by regional and midsized banks—scale economies that ultimately benefit consumers.

These smaller regional banks compete aggressively with the nation’s largest banks, which presumably have already achieved some scale economies.  What sense would it make to prevent the smaller institutions from achieving the efficiencies needed to compete on a national scale?

In view of the foregoing, we believe that public policy proposals to stall mergers among small and regional banks would be anticompetitive and economically inefficient.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Keep Politics Out of Bank Merger Antitrust Policy,” date August 9, 2021.