Sixty years ago, the Supreme Court handed down its decision in United States v. Philadelphia National Bank.[1] Today, I would like to discuss the enduring impact of this landmark case.

Philadelphia National Bank is well known in banking circles for recognizing the essential role that the antitrust laws have in protecting competition in the banking sector. But the legacy of Philadelphia National Bank is much broader: it is a foundational decision that has paved the way for antitrust merger enforcement across all industries. As we revise our general Merger Guidelines, Philadelphia National Bank looms large, and its impact on antitrust merger law is enduring and undeniable for enforcement agencies and for courts.

As we reflect on the legacy of Philadelphia National Bank, I hope we can all agree that bank competition is critically important for all Americans. Bank competition affects the interest you earn on your savings account, the monthly payment on your mortgage or car loan, the fees you pay to withdraw cash from an ATM, the variety of financial products you can choose from, and whether your business can get an affordable loan. Simply put: bank competition affects people’s pocketbooks and their daily lives.

Recognizing the importance of competition in banking, President Biden has encouraged the Department of Justice and the federal banking agencies to revitalize bank merger oversight to “ensure Americans have choices among financial institutions and to guard against excessive market power.”[2]

The time is indeed ripe for us to re-examine how we assess bank mergers under the statutory framework that Congress has enacted. The Department of Justice and the banking agencies issued the current Bank Merger Guidelines in 1995.[3] Much has changed since then, as we can all see from our own personal experiences. The world today – including the banking system – is radically different than it was in 1995. With the popularization of interstate banking, financial conglomeration, online and mobile banking, and the digital transformation of our economy, the banking system of today bears little resemblance to the banking system of three decades ago.

Against this backdrop, it is appropriate for us to reassess whether the prevailing approach to bank merger enforcement is fit for purpose given current market realities. Asking whether the factual and economic assumptions underlying the 1995 Guidelines are adequate to measure and assess the many different dimensions of competition that exist today is the responsible course of action.

Of course, I would be remiss if I did not address the elephant in the room. We are examining bank merger policy against the backdrop of an industry that has experienced some recent turmoil. There are many considerations relevant to bank merger policy. I will limit my comments today to the narrow but important question of how best to apply the antitrust laws to competition in the banking space, with an eye toward preserving the benefits of competition. Broader considerations regarding bank merger regulation is better left to the expert bank regulators.

Today, I will discuss why bank competition is essential, how bank competition has evolved over time, and how the Antitrust Division will fulfill its statutory obligation to protect competition in the banking sector going forward. In keeping with our celebration of Philadelphia National Bank, I will also discuss the impact of this seminal case on antitrust enforcement more broadly.

In 1961, the Department of Justice sued to block the merger of the second- and third-largest banks in Philadelphia. On June 17, 1963, the Supreme Court sided with the DOJ, holding that the merger violated section 7 of the Clayton Act. In its decision, the Supreme Court held that certain changes in market structure alone can create a presumption that a merger may substantially lessen competition.[4] In doing so, the Court underscored that a fundamental purpose of the Clayton Act was, among other things, to arrest trends toward concentration in their incipiency.[5]

Philadelphia National Bank has made an indelible mark on merger enforcement generally. In its decision, the Court acknowledged that certain mergers are so clearly likely to lessen competition that they must be prohibited in the absence of clear evidence to the contrary.[6] Courts have closely followed this presumption, simplifying the test of presumptive illegality for certain mergers and allowing decisionmakers to cut to the heart of the merger inquiry.[7] Though Philadelphia National Bank is most cited for its articulation of this presumption, the Court also set forth numerous other key principles of antitrust merger enforcement that remain lodestars today.

Philadelphia National Bank’s holdings are still binding.[8] The Supreme 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 and is cited consistently and authoritatively by courts throughout the country.[9]

60 years on, Philadelphia National Bank has stood the test of time. Like its classmates from the 1963 term – Gideon v. Wainwright and Brady v. Maryland – Philadelphia National Bank is a seminal decision in its area of law.[10] That is true notwithstanding that much has changed in our understanding of economics and in the market realities we confront in our cases. When we evaluate precedent in antitrust, we distinguish the legal holdings from the analytical tools that we use to assess facts in any particular case or industry. As law enforcers, our job at the Antitrust Division is to apply those legal holdings in a manner consistent with modern tools and the realities of our markets as we find them today.

Of course, Philadelphia National Bank is uniquely relevant to banking. Although it may seem hard to believe today, for much of the 20th century it was widely assumed that banks were exempt from the antitrust laws. Philadelphia National Bank changed that assumption and firmly established that banking is within the purview of federal antitrust law.

Philadelphia National Bank emphasized the importance of competition in banking because of banking’s unique role in the economy. In reaching its decision, the Supreme Court recognized that bank competition is critically important for families who are trying to take out a mortgage or earn interest on their savings. Of course, bank competition also effects our commercial economy. As the Supreme Court wrote, if businesspeople are “denied credit because … banking alternatives have been eliminated by mergers, the whole edifice of an entrepreneurial system is threatened….”[11] The Court underscored that excessive consolidation in the banking sector could imperil the free and fair functioning of the broader economy. In the Court’s words, “[C]oncentration in banking accelerates concentration generally.”[12] It was true then and it remains true today: competition in banking and competition throughout our economy go hand in hand.

After Philadelphia National Bank, Congress codified the Department of Justice’s role in bank antitrust enforcement. Under the Bank Merger and Bank Holding Company Acts, the federal banking agencies are the primary authorities on bank merger review. The department has an important, but specific, role in the process.

As amended, the bank merger statutes prohibit the banking agencies from approving any merger that violates the antitrust laws unless the banking agency finds that the merger’s anticompetitive effects “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.”[13] This assessment of “convenience and needs” is a distinctive feature of the bank merger statutes, which empower the bank regulators – and not the DOJ – to conduct this assessment. Indeed, the Supreme Court cautioned in Philadelphia National Bank that an otherwise illegal merger under the antitrust laws “is not saved because, on some ultimate reckoning of social or economic debits and credits, it may be deemed beneficial.”[14]

Congress directed the department to serve in an advisory capacity to the banking agencies by providing the agencies “a report on the competitive factors” involved in a bank merger.[15] At the same time, Congress authorized the DOJ to serve in its law enforcement capacity by challenging in court any anticompetitive bank merger that violates antitrust law.[16]

On this milestone anniversary of Philadelphia National Bank, it is appropriate to take stock of how the department is fulfilling its statutory role in bank merger enforcement. As I have frequently said, we need to make sure our approach to investigating and analyzing mergers reflects current market realities and how competition presents itself today. The department’s review of bank mergers should follow this path.

The department and the federal banking agencies issued Bank Merger guidelines in 1995 to “identify proposed mergers that clearly do not have significant adverse effects on competition.”[17] The 1995 Guidelines reflect that era’s approach to bank antitrust enforcement based on the industry realities of that time. These Guidelines attach great significance to market shares based on local branch deposits as a proxy for concentration and competition. For transactions that exceed a specific deposit concentration threshold, the 1995 Guidelines invite the merging banks to “resolve the problem by agreeing to make an appropriate divestiture.” It has since become standard practice for the DOJ to address such mergers by negotiating branch divestitures and entering into a Letter of Agreement – or settlement of sorts – with the parties.

Much has changed, however, since 1995. When the agencies issued the current guidelines, Congress had only months earlier removed legal barriers that prevented many banks from expanding beyond their home state.[18] Congress was still years away from authorizing banks to affiliate with investment banks and insurance companies.[19] At the time the agencies issued the 1995 Guidelines, the largest bank holding company had $250 billion in assets, less than one-seventh the size of the largest bank holding company today after adjusting for inflation.

Fast forward almost 30 years, and the number of “community banks” – or smaller banks that focus on lending in their local neighborhoods – has dropped by more than half, according to the Federal Deposit Insurance Corporation (FDIC). At the same time, the six largest bank holding companies have amassed as many assets as all other bank holding companies combined. To put it plainly: policymakers in 1995 confronted a much different banking system than the one we have today.

Against this backdrop, there are good reasons aside from the passage of time to question whether the 1995 Guidelines sufficiently reflect current market realities. A few examples. First, financial conglomerates today may compete in many more geographic areas, across many more business lines, and on many different dimensions than they did three decades ago. The 1995 Guidelines’ narrow focus on local market deposit concentration may therefore be inadequate to assess the likely competitive effects of a modern bank merger. It may also disproportionally focus enforcement on transactions involving small local banks and understate network concerns relating to large national and multi-national banks. Second, as the global economy has evolved and become more diverse, so too have customers’ financial services needs. A multinational corporation demands a much different cluster of financial services than a local business owner. Likewise, the needs of high net worth C-suite executive differ from those of a local school teacher. Finally, the emergence of fintech and other nonbank financial companies has been notable. How these companies should be factored into the competition analysis is appropriately fact-specific.

In his executive order on promoting competition, President Biden recognized the need for bank antitrust policy to better reflect today’s market realities and support a more resilient banking system that serves all types of customers and communities.[20]

Consistent with the president’s executive order, the Antitrust Division invited public comment in late 2021 on whether and how to revise the 1995 Guidelines.[21] We received numerous thoughtful responses from public interest groups, banks, think tanks, and trade associations, among other stakeholders.[22] This public consultation followed an earlier comment period in 2020, which also elicited helpful feedback from a wide range of interested parties.[23] We are carefully considering the comments that we received during these two comprehensive rounds of public input.

Let me now describe what the Antitrust Division is doing to ensure that we fulfill our statutory obligation to protect the competitive process in the banking sector.

The Antitrust Division takes seriously its statutory responsibility to advise the relevant federal banking agencies about the competitive effects of a proposed merger, including our responsibility to analyze relevant competitive factors through the lens of current market realities.

To that end, the division is modernizing its approach to investigating and reporting on the full range of competitive factors involved in a bank merger to ensure that we are taking into account today’s market realities and the many dimensions of competition in the modern banking sector.

In preparing the competitive factors reports that we are required by law to submit to the banking agencies, the DOJ will assess the relevant competition in retail banking, small business banking, and large- and mid-size business banking in any given transaction. These analyses will include consideration of concentration levels across a wide range of appropriate metrics and not just local deposits and branch overlaps. Indeed, the division and the federal banking agencies are working together to augment the data sources we use when calculating market concentration to ensure we are relying on the best data possible and using state-of-the art tools to assess all relevant dimension of competition.

However, our competitive factors reports will not be limited to measuring concentration of bank deposits and branch overlaps. Rather, a competitive factors report should evaluate the many ways in which competition manifests itself in a particular banking market—including through fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service.[24] Our competitive factors reports will increasingly address these dimensions of competition that may not be observable simply by measuring market concentration based on deposits alone.

Let me highlight two areas that will be of particular interest to the division as it prepares competitive factors reports.

First, the division will closely scrutinize mergers that increase risks associated with coordinated effects and multi-market contacts. The division 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. Our competitive factors reports must take into account these potential threats to competition just as we do in mergers throughout other areas of the economy. While we will scrutinize any transaction that presents substantive legal concerns, we will not limit our analysis to small and local bank acquisitions—where appropriate, we will also scrutinize the largest and most powerful actors.

Second, the division will carefully consider how a proposed merger may affect competition for different customer segments. Though far from perfect, the modern banking system features a wide variety of different types of banks that serve different customer needs. For example, some banks specialize in relationship lending and personalized service, leveraging their unique knowledge of their local communities. Other banks operate extensive regional or nationwide branch networks and offer sophisticated mobile banking capabilities. This diversity creates choices for customers who may comparison shop and choose the type of bank that best meets their needs. To protect competition, antitrust enforcers must 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.[25]

A few words on remedies. Our job at the Antitrust Division is enforcing the law, not micromanaging or regulating the private sector. We owe it to the public to maintain a high bar for the divestitures we will accept as remedies and to evaluate fully the risks associated with carve-out divestitures, in particular. Branch divestitures are not always adequate to address the broader range of competitive concerns, including interoperability and network effects, among many other potential areas that may be relevant to a particular review. Nor are we able to consider how, if at all, an otherwise anticompetitive merger might impact the convenience and needs of a community, a role the bank merger statutes specifically reserve for the bank regulators.

These judgments, in our view, are best made by banking regulators, informed by their unique supervisory experience and powers. We are in the process of reorienting the Antitrust Division’s role to focus on providing our advisory opinion as required by the statute and not remedies agreements with parties (as has become custom over the last many years). The goal is for this revised procedure to faithfully effectuate the department’s limited – but essential – statutory role in bank antitrust enforcement and facilitate the banking agencies’ analysis of competition and other factors as part of their broader bank merger review framework and statutory approval authorities. This approach preserves our authority to challenge a bank merger under the antitrust laws, consistent with the statutory framework Congress established.

Of course, our work does not end there. Our Bank Merger Guidelines need updating. Guidelines are valuable tools that we use to identify harms to competition and the types of evidence we use to investigate a merger’s likelihood of resulting in those harms. Updated Bank Merger Guidelines will provide valuable guidance to the antitrust bar and the banking community more generally. However, guidelines are not law – the law and precedents like Philadelphia National Bank are our ultimate guides, and we plan to anchor any revisions to the guidelines in binding precedent and statutory text.

We look forward to continuing to collaborate with the talented leadership and staff of the Federal Reserve, FDIC and Office of the Comptroller of the Currency on new Bank Merger Guidelines. Our staffs have been engaged in productive discussions, and I am optimistic that we will develop new guidelines that reflect our responsibility to protect competition in the banking system, consistent with the Executive Order from our president. As we update the Bank Merger Guidelines, we must ensure that our enforcement decisions are attuned to current market realities and not based on an outdated conception of banking.

I have deep nostalgia for our banking system as it existed in 1995. Like many of you, I remember the excitement of being handed a free toaster when signing up for a new account. I recall the weekly ritual when members of the local community would wait in line on Friday to deposit a check and withdraw cash for the upcoming week. A lot has changed since then, but curiously our Bank Merger Guidelines have not. As we stare down the realities of our financial system in 2023, the time is ripe for us to revisit the Bank Merger Guidelines to make sure that we are applying the legal holdings and principles of Philadelphia National Bank and its progeny in a manner that is consistent with modern market realities.

ENDNOTES

[1] 374 U.S. 321 (1963).

[2] Executive Order on Promoting Competition in the American Economy, Exec. Order No. 14036, 86 Fed. Reg. 36,987 (July 9, 2021).