WASHINGTON — There’s little consensus between industry and consumer advocates on the future of bank merger review, and a contentious struggle likely awaits the Biden administration as it seeks to reform the process.
For years, banks have argued that the framework used by both financial and antitrust regulators to evaluate the potential impact of their mergers — last updated in 1995 — is woefully out of date, limiting their ability to compete with nonbanks in the wider financial system.
Consumer advocates agree the rules are outdated, but that’s where their agreement ends. Progressives have increasingly identified bank consolidation as an
Now, under the Biden administration, regulators across government are
Comment letters submitted to the DOJ in February show sharp disagreements and little overlap between the financial services industry seeking regulatory relief and progressive advocates calling for a crackdown on bank consolidation.
After years of fintechs and credit unions chipping away at their market share for deposits and services, banks frame the need for easier merger thresholds as a matter of fairness and survival.
“Many rural counties have experienced serious population loss, and in many cases the bank(s) in those markets have faced severe pressure to meet fixed costs (regulation, technology investment, cybersecurity, and others) to continue servicing a shrinking customer base,” the American Bankers Association said in a Feb. 15 comment letter addressed to the Justice Department’s Antitrust Division.
“In such cases,” the ABA continued, “a merger with another institution is often the best way to preserve banking services to the remaining customers and avoid losing entirely the bank’s presence in the market.”
The Bank Policy Institute, a trade association representing the country’s largest banks, argued in its comment letter to the DOJ that the level of concentration in local banking markets has remained “essentially unchanged” for the past 25 years, a sign that “current policy is fundamentally sound.”
But critics of the existing merger review framework charge that widespread bank consolidation has harmed consumers in ways far beyond the cost of credit.
Bank merger review “has failed on its own terms, as bank mergers have increased the cost and reduced the availability of financial services,” wrote Jeremy Kress, co-faculty director of the University of Michigan’s Center on Finance, Law & Policy and a
Moreover, Kress wrote, with a “narrow focus on consumer prices, the prevailing standard has ignored numerous non-price harms stemming from bank consolidation, including diminished product quality, heightened entry barriers, and greater macroeconomic instability.”
Community development advocates, including the National Community Reinvestment Coalition, would also like to see regulators put a greater emphasis on the importance of bank branches in a given market or neighborhood in the wake of a potential merger.
“With the advent of the smartphone and the internet, the banking industry is undergoing profound change with more transactions occurring via mobile banking,” the NCRC said in its letter to the Justice Department. “Yet, the most complicated transactions such as account opening or an application for a loan will often involve in-person or phone conversations, particularly for low- and moderate-income people.”
Much of the looming reform effort will hinge on whether regulators will revisit the standards they use to determine economic concentration in a given market. If a proposed deal gives a bank a dominant presence in a market that exceeds those thresholds, the government can block it from proceeding.
The Justice Department currently uses a calculation known as the Herfindahl-Hirschman Index, or HHI, which is a point scale from 0 to 10,000. A higher score signals a more concentrated market and potential competitive concerns.
Since 2010, the Justice Department and the Federal Trade Commission have said mergers outside the banking industry are more likely to be challenged by regulators if that deal results in a market with a HHI score greater than 2,500 and a score increase of more than 200 points. For banks, however, the acceptable HHI threshold has remained set lower, at 1,800.
Advocates for the banking industry, including both the ABA and BPI, say that at a minimum, the HHI threshold banks abide by should be raised to 2,500, matching the scrutiny faced by other industries. “The banking industry is treated more stringently than any other industry,” the Bank Policy Institute said, “which is particularly inappropriate in view of the growing and substantial choices available to customers beyond those banks with branches in their local community.”
Some consumer advocates — though not all — are pushing for regulators to take the polar opposite approach, making the HHI threshold for banks less forgiving than it already is, given the
“The DOJ should reduce the HHI threshold for enhanced screening of bank mergers. 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,” Kress argued.
Other advocates, including the public interest group Better Markets, say the HHI thresholds used by the government are better left untouched. “The current thresholds recognize the unique risks posed by the banking industry to our economy and the special role of the industry within our economy,” the group wrote.
The Independent Community Bankers of America, an advocacy group representing community bankers, is lobbying for an approach that’s distinct from the ABA and BPI’s recommendations — a “small bank de minimis exception,” where institutions below a certain asset threshold would qualify for an exemption from the DOJ's “independent competition effects analysis,” according to the group’s letter.
The ICBA also echoed appeals from a growing number of progressive advocates concerned about bank consolidation's impact on financial stability, asking the Justice Department’s antitrust division to “consult with the prudential regulators to determine whether the benefits of the merger outweigh the risk the combined institution will pose systemic risk” for banks with $100 billion or more of assets.
But community banks find themselves in lockstep with their larger peers when it comes to the competition posed by nonbanks, arguing that merger review must do a better job of assessing the financial services offered by credit unions and fintech firms in a given market while conducting competition analysis.
“While the financial services landscape has evolved drastically in the past thirty years, the Department’s bank merger competitive analysis remains archaically tethered to the measurement of deposit gathering activities at physical bank locations,” the ICBA wrote. “The Department’s Guidelines should comprehensively account for all market participants that directly compete with community banks by evaluating lending activity in addition to deposit taking.”
