Reviving Bank Antitrust

Antitrust is back. The Chicago School relegated antitrust policy to obscurity during the latter half of the 20th century, but a new cohort of antimonopoly scholars has recently rekindled concerns about industrial consolidation and corporate “bigness.” This antitrust revival has spurred an unlikely coalition of ideologically diverse policymakers to pursue aggressive merger enforcement and de-concentration strategies in technology, pharmaceuticals, transportation, and healthcare. Harnessing this momentum, President Joe Biden issued an executive order shortly after his inauguration, directing his administration to “combat the excessive concentration of industry” and “promote competition” throughout the economy.

To date, however, the new antitrust movement has largely overlooked a key cause of industrial concentration: the dramatic and sustained consolidation of the U.S. banking sector. More than 30,000 banks operated in the United States during the 1920s. Today, fewer than 5,000 remain. U.S. financial conglomerates are now bigger than ever, with the six largest bank holding companies (BHCs) controlling more assets than all other BHCs combined. Widespread bank consolidation, in turn, has fueled conglomeration throughout the U.S. economy. Empirical studies consistently demonstrate that more concentrated banking markets favor incumbent firms and deter new entrants, as bigger banks lend to larger, more established businesses. As the United States Supreme Court put it in 1963, “[C]oncentration in banking accelerates concentration generally.” To enhance competition in the U.S. economy, therefore, policymakers must prevent harmful consolidation in the banking sector.

My new article, “Reviving Bank Antitrust,” contends that scholars and policymakers have traditionally neglected bank antitrust law and thereby encouraged excessive concentration in the banking sector and the broader economy. I aim to correct this error by properly situating antitrust law within the broader U.S. bank regulatory framework. I argue that policymakers’ current approach to bank antitrust law fails to adequately address numerous societal harms from bank consolidation, and a new enforcement paradigm is therefore necessary to better protect consumers, businesses, and the wider financial system from anticompetitive banking practices.

Debates over bank competition have pervaded economic policymaking since the founding of the republic. Early battles pitted Alexander Hamilton’s vision for a single national bank against Thomas Jefferson’s preference for smaller, decentralized banks rooted in local communities. Later conflicts over the Second Bank of the United States, the establishment of the dual banking system, and the creation of the Federal Reserve System echoed themes from these debates, as policymakers weighed trade-offs between centralization and competition in the financial sector.

Jefferson’s pro-competitive vision prevailed for much of the 20th century. After a massive merger movement sparked populist backlash against bank consolidation following World War II, Congress adopted the Bank Holding Company Act of 1956 (BHC Act) and the Bank Merger Act of 1960 to limit further concentration. This statutory framework created a two-tiered enforcement regime under which both the Department of Justice (DOJ) and a banking organization’s primary federal regulator review a merger proposal. In the ensuing decades, the federal banking agencies rejected dozens of bank merger applications, and the DOJ regularly sued to block bank mergers it viewed as anticompetitive. Led by the United States Supreme Court, the judiciary almost always sided with the government in opposition to further consolidation, favoring a Jeffersonian vision of vigorous competition among small, local banks.

However, the pro-competition trend came to an abrupt halt in the late 1970s with the emergence of the Chicago School. Rejecting expansive theories of antitrust, Robert Bork, Richard Posner, and other University of Chicago scholars popularized a new, technocratic approach based on economic efficiency and “consumer welfare.” Under this paradigm, Chicagoans believed that corporate conduct impairs competition only if it results in higher prices or lower output. Chicagoans further assumed that “markets are inherently self-correcting” and thus, “government intervention in the form of antitrust enforcement is not needed to deliver competitive markets.” Paralleling developments in other industries, the Chicago School’s consumer welfare approach came to dominate bank merger oversight, and it has remained the governing framework for the past 40 years. Influenced by the Chicago School’s laissez faire outlook, the DOJ and the federal banking agencies have effectively stopped challenging bank mergers, even as bank consolidation reaches an historic peak.

I contend that the prevailing, consumer welfare-oriented approach to bank antitrust enforcement has failed in two critical respects. First, the consumer welfare standard has failed on its own terms. Under the Chicago School framework, bank mergers have increased the cost and reduced the availability of credit, inflated the fees that banks charge for basic financial services, and depressed the interest rates that banks pay to their account holders. These negative outcomes have been especially severe for low- and moderate-income communities. Moreover, large bank mergers generally have not delivered promised efficiency gains. Thus, despite its promises to reduce prices and increase economic efficiency, the consumer welfare approach to bank antitrust has done neither.

Second, because of its narrow focus on prices and efficiency, the consumer welfare standard has ignored numerous non-price harms from bank consolidation. The U.S. antitrust laws were originally designed to protect not only a broad range of consumer interests – such as product quality and privacy – but also far-reaching societal goals, including the preservation of open markets and system stability. Over the past 40 years, however, bank consolidation has undermined these objectives. For example, bank mergers have led to widespread branch closures, inconveniencing customers who previously benefited from proximity to bank offices. Megamergers have created “too big to fail” banks that enjoy unfair funding advantages over smaller firms, thereby distorting competition and deterring new entrants. Bank consolidation has also threatened macroeconomic stability, as larger banks exacerbate systemic risk and impair monetary policy transmission. Under the consumer welfare approach, though, bank antitrust enforcers and courts have overlooked these harmful consequences.

I contend, therefore, that policymakers should discard the consumer welfare standard in favor of a more expansive approach to bank antitrust. President Biden has supported bank antitrust reform: His July 2021 executive order on competition encouraged the DOJ and the federal banking agencies to “adopt a plan … for the revitalization of merger oversight under the Bank Merger Act and Bank Holding Company Act….” Several months later, the DOJ and the Federal Deposit Insurance Corporation requested public comment on potential revisions to the bank merger framework. Answering these calls for reform, my article proposes a roadmap for reviving bank antitrust. It recommends strengthening and expanding the analytical tools antitrust enforcers use to detect anticompetitive conduct in the banking sector. In addition, it urges authorities to reject a narrow focus on consumer prices in favor of a more comprehensive analysis of the numerous non-price harms that bank consolidation threatens to impose on society.

This issue is of urgent importance. The Trump Administration encouraged bank consolidation by relaxing financial regulations and expediting merger approvals. Economic pressures from the Covid-19 pandemic spurred bank mergers to their highest levels since the 2008 financial crisis,  and commentators expect the bank consolidation trend to continue. If left unchecked, escalating bank concentration is likely to spur further industrial consolidation and counteract policymakers’ efforts to enhance competition throughout the economy. Reviving bank antitrust is therefore an essential cornerstone of a comprehensive de-concentration strategy for the financial sector and the broader U.S. economy.

This post comes to us from Jeremy C. Kress, assistant professor of business law at the University of Michigan’s Stephen M. Ross School of Business. It is based on his recent article, “Reviving Bank Antitrust,” forthcoming in the Duke Law Journal and available here.