I. History of Bank Merger Review
Statutory Framework
The original Bank Holding Company Act of 1956 (the “BHC Act”) and Bank Merger Act of 1960 (the “Merger Act”) provided little guidance to the regulatory agencies on how to assess the potential competitive effects of a proposed transaction and did not provide the DOJ a clear role in the competitive analysis. In 1963, the Supreme Court held in United States v. Philadelphia National Bank that Section 7 of the Clayton Act—in addition to Section 2 of the Sherman Act—applied to bank mergers. In response to this decision, Congress amended the BHC and Merger Acts in 1966 (the “1966 Amendments”) to include antitrust standards for review of bank mergers that closely track the standards in Section 2 of the Sherman Act and Section 7 of the Clayton Act with one important caveat: Congress specifically authorized the banking agencies to approve a bank merger or acquisition that would otherwise violate the antitrust laws if the banking agencies found 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.” In addition to the competitive effects of the transaction, the BHC and Merger Acts require the reviewing bank agency to consider numerous other factors including banking and community factors, supervisory factors, managerial resources, the ability of the combined entity to “combat[] money laundering activities,” and financial stability. Subsequent amendments to the banking statutes also prohibit the banking agencies from approving any merger that would result in a bank’s holding (1) 10 percent or more of total deposits in the United States or (2) 30 percent or more of the total deposits in any one state, unless the respective state regulators have imposed a different statutory cap (in which case the state cap would apply).
The 1966 Amendments clarified the DOJ’s role in reviewing, and potentially challenging, bank mergers. The amendments require the responsible banking agency under the Merger Act to request a competitive factors report from the DOJ prior to approving a merger and the DOJ to provide such a report within 30 days of the request. The DOJ analyzes the transaction under the antitrust laws, but is not authorized in its report to approve or disapprove a bank merger. The DOJ’s role is thus largely consultative and its report intended to guide the responsible banking agency’s decision to approve or disapprove a merger application, not replace or overshadow the independent competitive analysis of the agency.
If the DOJ disagrees with an agency decision to approve a bank merger application, it may, pursuant to the 1966 Amendments, pursue a legal action in federal court to challenge the transaction under the antitrust laws within 30-days of banking agency approval. The commencement of any such challenge “stays the effectiveness of the agency’s approval” unless the parties can show that the DOJ’s complaint is “frivolous.” The court then reviews de novo the issues presented, applying the standards “identical with those that the banking agencies are directed to apply” including the “convenience and needs” exception provided by the statute.
If the DOJ fails to challenge a merger within 30 days of bank agency approval, the DOJ is prohibited by the statute from later challenging the consummated merger on antitrust grounds. This post-consummation immunity was intended to avoid the chaos that would result from unwinding bank assets. The DOJ has not litigated a bank merger challenge in federal court since 1980.
Cooperation Among the Agencies
In the decades that followed the 1966 Amendments, the DOJ and banking agencies made attempts to align their competitive analyses. For example, in 1985, the Assistant Attorney General for Antitrust issued a letter explaining to the Federal Reserve that the DOJ would generally not challenge bank mergers in which the post-merger concentration level, measured pursuant to the Herfindahl-Hirschman Index (“HHI”), was less than 1800 points or resulted in an increase in concentration of less than 200 points. But it was not until the 1990s—prompted by the Riegle-Neal Act of 1994, which permitted bank holding companies to operate in multiple states and resulted in a wave of bank mergers and acquisitions—that the banking agencies and DOJ collaborated to issue formal guidance.
The 1995 Bank Merger Guidelines, published by the DOJ, and the subsequent 2014 Frequently Asked Questions, published by the Federal Reserve and developed jointly with the DOJ, outlined the banking agencies’ and DOJ’s approaches to evaluating the potential competitive effects of bank mergers. These guidelines established initial deposit-based HHI concentration thresholds or “screens.” Under these screens, the banking agencies and DOJ would further investigate a relevant geographic market only if the transaction increased the relevant HHI by 200 points or more to a post-merger HHI level of 1800 points or more. The Federal Reserve also established a post-merger 35 percent market share threshold at which further inquiry was warranted. The guidelines also invited merger applicants to discuss competitive issues with the DOJ and the banking agencies before submitting an application, and endorsed the use of branch divestitures to “resolve the problem.”
The banking agencies and the DOJ, however, diverged in their methodologies for analyzing product and geographic markets. The banking agencies traditionally evaluated competition in defined Federal Reserve geographic markets for the cluster of banking products and services as articulated in Philadelphia National Bank, but would consider narrower product markets as warranted by the transaction. The DOJ, on the other hand, consistently considered the potential competitive effects “in all relevant [product] markets, in particular lending to small and medium-sized businesses,” and screened for concentration and shares based on commercial loan data in addition to deposit-based concentration. The DOJ would also look at narrower geographic markets (e.g., counties) and would consider branch distribution within a market, i.e., how many branches each competitors has in the relevant market. These differing methodologies often resulted in different conclusions and outcomes.
When the agencies identified competitive issues, they would collectively negotiate divestitures that resolved those concerns and transacting parties would often divest to the “highest common denominator” required to satisfy all reviewing agencies. Divestitures typically involved the sale of one or more branches, including the assets and deposits associated with those branches, to a third party. Before its recent withdrawal from the 1995 Guidelines, and its repudiation of divestiture remedies, the DOJ imposed qualitative requirements for divestiture branches that were often more burdensome than the banking agencies’ requirements. Notwithstanding these differences, since 1995, the banking agencies have incorporated the DOJ’s letter agreement setting forth its divestiture requirements as part of any order. Since then, the DOJ has not sought to enter into separate consent decrees with merger applicants.
The 1995 Bank Merger Guidelines fostered efficient merger review and remedy negotiation. Practitioners understood how bank mergers were likely to be reviewed, and thus avoided transactions that were unlikely to be approved. They could also anticipate, plan for, and more promptly offer remedies in areas most likely to raise competitive concerns, and prepare analyses for those areas that might warrant additional assessment. The agencies have also historically advised potential merger applicants of concerns before or in the early stages of filing. As a result of these consultations, some parties either elected not to file applications or withdrew them during the pendency of review for transactions where concerns would persist beyond levels of divestiture that the parties were prepared to offer. In light of this practice and the clarity of the reviewing agencies’ guidance, since 1995, the Federal Reserve has issued only two orders affirmatively denying acquisitions. And since adoption of the 1995 Guidelines, the DOJ has not sought to challenge an approved bank merger in court.
The lack of litigated cases and the rarity of formal denials (as opposed to withdrawn applications) of a merger by bank regulators and the DOJ demonstrate the success of the 1995 Guidelines—not, as some critics claim, their failure. As a previous Assistant Attorney General for the DOJ, Anne Bingaman, noted “[t]he legal standards have been articulated with sufficient clarity that most bank merger agreements do not pose significant risks to competition, and for those that do, a productive dialogue develops early in the process to address those issues.” This predictable framework has been highly efficient and effective from the perspective of both regulators and prospective merging parties, allowing numerous small and regional banks to engage in procompetitive mergers and acquisitions that afforded them greater economies of scale to support technology investment and regulatory compliance infrastructure to the benefit of American bank customers and the American banking sector as a whole. Thousands of bank transactions since 1995 notwithstanding, the American banking industry remains unconcentrated.
II. Recent Developments in Bank Merger Review Guidance
Beginning in 2020, bank merger review (and antitrust review generally) has become an increasingly politicized process, and, despite their historical effectiveness in maintaining competitive markets, the DOJ has largely repudiated divestiture remedies as a means of resolving competitive concerns. In that time, bank merger review has become (perhaps intentionally) less predictable and less transparent, seemingly so as to reduce or deter further M&A activity no matter how procompetitive.
On September 1, 2020, under then Assistant Attorney General for the DOJ Makan Delrahim, the DOJ announced that it was seeking public comments on whether and how to revise the 1995 Bank Merger Guidelines “to reflect emerging trends in the banking and financial services sector and modernize its approach to bank merger review under the antitrust laws.” The updated guidance was much anticipated and believed likely to offer clarity on, among other things, how to account for new sources of competition—e.g., proliferating Internet-based companies known as “fintechs,” alternative payment platforms, and Internet banks—when performing competitive analysis for bank mergers. After an extended comment period with numerous thoughtful responses, no changes were made to the 1995 Guidelines prior to the administration change in 2021.
In 2021 the Biden administration and Congressional Democrats began to advocate for stricter regulatory review of bank mergers. On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy that, among other things, encouraged the DOJ and federal banking agencies to review current practices and adopt a plan “for the revitalization of merger oversight under the [Merger Act] and [BHC Act]” to “ensure Americans have choices among financial institutions and to guard against excessive market power.” Just weeks later, in a hearing before the Senate Banking Committee, Senator Elizabeth Warren critiqued bank regulators for “rubber stamping” bank mergers. Senator Warren and other Democrats, including Senate Banking Chair Sherrod Brown (who just lost his bid for reelection), introduced legislation to modernize the Merger Act and prompted the federal agencies to update their respective bank merger review guidelines to scrutinize bank mergers more aggressively.
In 2021 and 2022, the FDIC and DOJ sought—or re-sought—comments on their respective regulatory frameworks for bank merger review. Unlike in the 2020 request for comments, these later requests prejudged the expected effect of the process by expressing concern about the “significant amount of consolidation” in the banking sector in the preamble and asking for input on, among other things, whether the existing regulatory framework was too lenient. The Federal Reserve notably did not request comments on its bank merger review policy and has largely stayed silent amidst the various calls for more aggressive competitive review of bank mergers. Indeed, representatives of the Federal Reserve, including Federal Reserve Board Governor Michelle Bowman, have expressed views that the 1995 Bank Merger Guidelines should be modernized to account for the increased—not decreased—competition arising in the banking sector.
In June 2023, Assistant Attorney General for the DOJ, Jonathan Kanter, gave a speech at the Brookings Institution calling for more stringent bank merger review:
Our Bank Merger Guidelines need updating. . . . Updated Bank Merger Guidelines will provide valuable guidance to the antitrust bar and the banking community more generally. . . . 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, . . . and I am optimistic that we will develop new guidelines that reflect our responsibility to protect competition in the banking system.
Kanter said the revised guidelines would likely examine “multi-market contacts” resulting from mergers, as well as how mergers might eliminate choice customers had for different types of banks. As noted below, neither of these issues was ultimately addressed in DOJ’s withdrawal from the 1995 Guidelines.
Perhaps of more significance were Kanter’s comments in the speech on process and remedies. He said the DOJ should move away from “micromanaging” transactions and reorient its role to “focus on providing our advisory opinion” rather than negotiating “remedies agreements with parties.” Under the new approach, DOJ apparently would minimize guidance to parties as to acceptable remedies, while “preserv[ing] . . . authority to challenge a bank merger under the antitrust laws.” That was interpreted by some to mean that DOJ may threaten to challenge a bank merger even after the parties had agreed to a settlement with the bank regulatory agencies. Such an outcome at the end of an already otherwise thorough review would be highly inefficient, and in direct contrast to the years of effective practice under the 1995 Guidelines.
While the timing of the September 17, 2024 FDIC, OCC, and DOJ releases, and the Federal Reserve’s notable silence, was no doubt coordinated, they paint a picture of agency divergence and disharmony, and highlight a growing discord between the banking agencies and the DOJ in their respective approaches to the competitive review of bank mergers.
III. What the Future Holds
FDIC
The FDIC’s policy statement included a high level overview of how it plans to approach competitive assessments of bank mergers. Aside from various references to reserving more authority to the FDIC Board—and elevating more transactions from the staff level to Board review—the agency indicated that it will continue to use shares of deposits as an initial measure of concentration in its merger review. It did not, however, commit to any screens or safe harbors similar to the 1995 Guidelines. The FDIC also indicated it “will consider concentrations beyond those based on deposits,” but failed to provide guidance regarding what those concentration measures might be. The FDIC further stated it would require divestitures before allowing a merger to be consummated, an element that was criticized by the FDIC’s Vice Chairman as potentially adding significant delays to the merger process. The FDIC also imposed additional burdens on its review of other factors, including, among other things, applying enhanced scrutiny to transactions resulting in a bank with over $100 billion in assets; making greater use of public meetings for large bank mergers; and requiring that the merging bank “better” meet the convenience and needs of the community “than would occur absent the merger.” The agency has yet to update the “Mergers” section in its Application Procedures Manual (last revised in 2019) to reflect its stated policy shift. The manual still refers to the 1800/200 HHI standard for deposit concentration.
Republicans will regain control of the FDIC Board, and likely the Chairmanship, after the presidential inauguration in January. Both republican directors on the FDIC Board sharply dissented against the FDIC’s proposed and final statement of policy, and the agency’s new leadership will have significant discretion over how to implement the FDIC’s policy statement going forward.
OCC
The OCC ultimately elected not to discuss its approach to competition issues in its newly issued policy statement. It simply noted that “[g]iven the complexities of the competition factor review and the involvement of the Department of Justice, the OCC does not believe that [the OCC’s Policy Statement] is the appropriate vehicle for discussing its current approach to competition issues.” The OCC’s Business Combination manual, like the FDIC’s manual, continues to embrace the 1800/200 HHI standard for deposit concentration.
The OCC did implement other policy changes that are likely to prolong its review of bank mergers including, among other things, eliminating its streamlined application process previously available for certain transactions, and noting that transactions where the resulting institution will have $50 billion or more in assets will be subject to closer scrutiny.
Federal Reserve
The Federal Reserve, by omission, appears to have made no changes to its approach to merger review suggesting that the 1995 Bank Merger Guidelines and 2014 FAQs are still applicable. The 2014 FAQs notably have not been changed on the Federal Reserve’s website.
DOJ
Despite AAG Kanter’s June 2023 promise of new bank-specific merger guidelines, the DOJ simply withdrew from the 1995 Bank Merger Guidelines and indicated instead that it plans to use the 2023 Merger Guidelines intended for general industrial mergers to guide its approach to bank merger review. It also released a brief 2024 Banking Addendum to those 2023 Guidelines. The addendum affected both the DOJ’s substantive antitrust analysis—which we think is less dramatic and notably does not address multi-market contacts and reduced “types” of banks mentioned by Kanter in his June 2023 speech—and its approach to resolving competitive problems through divestitures—which we believe could be very disruptive. The DOJ’s changed approach will also likely increase the burden for transacting parties.
Substantive Analysis
- Lower Concentration Thresholds: The most significant substantive difference between the 2023 Merger Guidelines and the 1995 Guidelines and 2014 FAQs is the adoption of lower concentration and market share safe harbor thresholds:
