The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK OF RICHM OND MONTHLY REVIEW Antitrust and the New Bank Holding Company Act: Part II The Bank Holding Company Act of 1956 was ing as a vehicle. The result was two lengthy, often intended to accomplish three principal objectives: bitter, legislative struggles to amend the Act. (1 ) first culminated in 1966 with amendments subject to prevent bank holding companies from ac quiring banks across state lines; (2 ) to control The ing all regulated bank holding companies to stringent their expansion within the states in which they were new antitrust standards. permitted to acquire banks; and (3 ) to preserve the historical separation of power between the suppliers 1970 amendments broadening the scope of the law to include one-bank holding companies. of money amendments also imposed rigorous new antitrust (the banks) and the users of money The second resulted in The latter prohibitions upon extensions of credit by banks. (commerce and industry). The 1956 legislation achieved the first of these objectives in the following ways: All holding com The events that led to the 1966 legislation and the effects of those changes are discussed in the panies controlling 25 percent or more of the stock of each of two or more banks, or controlling in any present installment. manner the election of a majority of the directors article to appear next month. of such banks, were required to register with the Board of Governors of the Federal Reserve System. Prior approval by the Board was required for the acquisition by a registered holding company of more The 1970 legislation and its impact will be reviewed in the final portion of this Bank Acquisitions Under the 1956 Standards A s discussed last month, five “ banking factors” were written into the 1956 Bank Holding Company A ct to guide the Board of Governors in acting upon than 5 percent of the stock of any additional bank. proposed bank acquisitions by holding companies The Board was prohibited from permitting bank and upon proposals to form new holding companies. acquisitions by a registered company across state These were lines, thus confining future expansion by individual holding companies to the geographic borders of a of the applicant company and the banks concerned; (2 ) their prospects; (3 ) the character of their single state. A s time passed, however, it became increasingly management; (4 ) the convenience, needs, and wel evident that the 1956 law was not adequate to achieve The provisions gov (5 ) whether the proposed transaction would expand the size or extent of the holding company system erning bank acquisitions within permissible geo beyond limits consistent with adequate and sound its other two principal goals. (1 ) the financial history and condition fare of the communities and the area concerned; and graphic areas caused continual difficulties for the banking, the public interest, and the preservation of Board of Governors; and the exclusion of one-bank competition in the field of banking. holding companies from coverage was to become a Table I, between 1957 and the end of 1966, the A s shown in massive loophole in the statute permitting bank ex Board approved a total of 94 bank acquisitions and pansion into nonbanking areas. denied 17, a denial rate of 15.3 percent of all ac These deficiencies were aggravated by growing concern over concentration in banking by means of bank mergers and consolidations throughout the 1950’s and 1960’s, and by a sudden, massive rush by major banks in 1968 to expand into new non banking areas using the unregulated one-bank hold quisition proposals presented. these years the form new bank a denial rate of A s shown by company banks In addition, during Board approved 21 applications to holding companies and denied 10, 32.2 percent. Table II, total deposits of holding increased from almost $16 billion 3 at the end of 1958, representing 7.4 percent of total United States bank deposits, to just over $41 billion at the end of 1966, or 11.6 percent of total deposits. TABLE I BA N K HO LDING C O M P A N Y APPRO VALS A N D DENIALS BY BO ARD OF GO VERNO RS, 1957-1969 During these years, as discussed last month, the B a n k H o ld in g C o m p a n y F o r m a tio n s Board repeatedly advised Congress of its difficulties in attempting to balance “ convenience and needs” in B a n k A c q u is it io n s A p p ro v e d D is a p p r o v e d A p p rove d D is a p p r o v e d 0 1 1 0 0 5 2 4 2 6* 10 9 21 0 3 0 0 0 2 1 1 1 2 1 0 0 7 4 7 13 9 16 5 6 12 15 16 33 66 2 1 0 1 3 3 3 0 2 2 2 2 3 11 209 24 the fourth statutory test with the “ size or extent” test of the fifth factor. The Board’s 1958 Report to the Senate Banking and Currency Committee stated, in p art: A more precise statement of the purposes of the statute . . . would materially facilitate adminis tration of the act. It is recognized that this might be difficult to accomplish. The Board believes, however, that the Congress should be aware of [this problem] . . . in order that it may, if it wishes to do so, provide more specific guidance for the exercise of the Board’s discretion under the act.1 Congress took no direct action in response to the Board’s request at this time. However, during this period a train of rapidly evolving events in the re lated area of bank mergers brought about a major change in the regulatory environment of the com mercial banking industry. This change led directly to the incorporation of antitrust principles into bank holding company regulation and transformed the entire basis for approval of all forms of concentra tion among commercial banks. By 1966, when this 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 Totals 61 Percent of Disapprovals 15.2% 10.3% * ln a d d it io n to the six n e w r e g u la t e d h o ld in g c o m p a n ie s cre ate d in 1966, f iv e e x is t in g c o m p a n ie s p r e v io u s ly e x e m p t f r o m r e g u l a tio n d u e to sp e c ia l p r o v is io n s in the o r ig in a l 1956 A c t b e c a m e r e g u la t e d c o m p a n ie s in 1966 a s a resu lt o f C o n g r e s s io n a l re m o v a l o f the sp e c ia l e x e m p tio n s. So u rc e : A n n u a l Re p o rts, B o a r d R eserve S y ste m . o f G o v e r n o r s o f the F e d e ra l change was made, a remarkable evolution of anti trust doctrine applicable to corporate concentration generally furnished the more objective guidelines sought by the Board. In these years, there were few regulatory con straints on concentration in the banking industry. The Bank Merger Acts of 1960 and 1966 C om thorities had no clear authority to consider com mencing about 1950 large numbers of mergers and petitive aspects of proposed bank mergers and con Prior to 1960 the Federal bank supervisory au consolidations among banks began to attract in solidations. Existing requirements for prior Federal creasing attention from Congress and the Federal approval were a legal patchwork, and could be bank supervisory agencies. avoided entirely. A total of 440 bank mergers, con A total of 1,601 inde pendent banks disappeared between 1950 and 1960. solidations, and assumptions of liabilities occured Fully 1,503 of these banks with total resources ex during the years 1955-1958. O f these, 153 involving ceeding $25 billion vanished as a result of mergers2 banks with total resources in excess of $8.0 billion Notwithstanding the substantial increase in the na were com pleted w ithout prior approval b y any tion’s deposits and credit needs and the chartering Federal agency.3 The courts also refused to permit of 887 new banks during the decade, the total num the bank supervisory authorities to deny approval of ber of banks declined from 14,174 to 13,460, a net a bank merger because competition between some reduction of 714. of the branches of the merging banks would be lessened.4 1 Report of the Board o f Governors o f the Federal Reserve System to the Committee on Banking and Currency, United States Senate, 85th Cong., 2d Sess. (M ay 7, 1 9 5 8 ), pp. 5-6. 2 “ Regulation o f Bank M ergers,” Report o f the Committee on Bank ing and Currency, House o f Representatives, 86th Cong., 2d Sess. on S. 1062, March 23, 1960, pp. 4-5; see also, U. S. v. Philadelphia National Bank, 374 U. S. 321, 326 (1 9 6 3 ). 3 “ Regulation of Bank M ergers,” Report o f the Committee on Bank ing and Currency to accompany S. 1062, U nited States Senate, 86th Cong., 1st Sess., A p ril 17, 1959, pp . 14-15. * Old K en t Bank and Trust Co. v. M artin, 281 F.2d 61 1960 ). (D . C. Cir T A B L E II REGISTERED BANK H O LDIN G C O M P A N Y GROWTH 1958-1970* B a n k in g O ffic e s C o m p a n ie s 1958 1960 1962 1964 1966 1968 1969 1970** 49 47 49 54 65 80 97 109 Banks B ra n c h e s 418 426 442 460 561 629 723 884 848 1,037 1,215 1,379 1,802 2,262 2,674 NA Percent o f T o ta l U. S. D e p o sits T o ta l D e p o s it s M illio n s o f D o lla r s 15,998 18,274 21,203 24,959 41,081 57,634 62,574 69,275 7.4 8.0 8.1 8.1 1 1.6 13.2 14.3 16.0 * D a t a a s o f D e c e m b e r 31. * * D e p o s it d a t a a s o f J u n e 30; o ffic e d a t a a s o f O c to b e r 31. So u rc e : B o ard o f G overn o rs o f the F e d e ra l Reserve S y ste m . Similarly, antitrust enforcement was no deterrent led to enactment of the Bank Merger A ct of I960.8 to bank concentration throughout the 1950’s. A s dis Taking the form of an amendment to Section 1 8 (c) cussed in Part I of this article, the Transamerica of the Federal Deposit Insurance Act, the Bank case in 1953 established that acquisitions of bank Merger Act required prior written consent for any stock by other banks were subject to Section 7 of insured bank to merge or consolidate with any other the Clayton A c t ; by implication, this made all forms insured bank or to acquire the assets or assume the of bank acquisitions, consolidations, and mergers subject to the broader antitrust prohibitions of the liabilities of any other insured bank. Unlike the Bank Holding Company Act, however, which placed Sherman A ct.5 all administrative control with the Board of Gov Yet for a variety of reasons, the antitrust laws were ineffectual in halting concentration in banking before 1961. ernors, the Bank Merger Act created a three-headed authority. Prior approval was required (1 ) by the It was generally believed that Section Comptroller of the Currency if the acquiring, assum 7 of the Clayton Act did not apply to most types of ing, or resulting bank was to be a national bank; bank mergers. The Senate Report on the bill that became the 1960 Bank Merger Act expressly stated that “ Since bank mergers are customarily, if not in variably, carried out by asset acquisitions, they are exempt from Section 7 of the Clayton A ct.” 0 The House Report was equally positive on this question: Although the Sherman Act applies to asset ac quisitions as well as to stock acquisitions, it has been of little use in controlling bank mergers. It has been used only once in court (in a proceeding initiated in March 1959) against a bank merger.7 The combination of 1,503 bank mergers in 10 years and the lack of statutory power for regulatory and antitrust authorities to control the merger trend (2 ) by the Board of Governors if it was to be a State member bank; and (3 ) by the Federal De posit Insurance Corporation if it was an insured nonmember bank. Common standards to be used in passing upon proposed acquisitions were provided for all three agencies. These included the financial history and condition of each of the banks involved, the adequacy of its capital structure, its future earnings prospects, the general character of its management, the con venience and needs of the community to be served, and whether or not its corporate powers are con sistent with the purposes of [the] Act.9 The responsible agency also was required to take 3 In A p ril, 1959, a Report of the Senate Committee on Banking and Currency stated: “ It is now generally accepted that these sections (Sections 1 and 2 of the Sherman A c t) apply to bank mergers and consolidations by either stock or asset acquisitions (see Trans america Corp. v. Board o f G overnors, 206 F.2d 163, pp . 165-166 (3rd Cir. 1953) ) . 6 Supra, note 3, p . 1. 7 Supra, note 2, p. 9. into consideration the effect of the transaction on 8 74 Stat. 129 (M ay 13, 1960 ). a Compare the substantially sim ilar Holding Company A c t, p. 3. standards of the 1956 Bank 5 competition, and was prohibited from approving any transaction unless it was found to be in the public interest. The statute required each agency, “ in the interests of uniform standards,” to request a report on the competitive factors involved from the A t torney General and the other two banking agencies before acting on an application. Nevertheless, the merger trend continued. In 1961, 133 banks with total resources of almost $6 billion were absorbed following approvals by the banking agencies under the new law.10 A number of these approvals were granted despite reports of the Attorney General and one or more of the other banking agencies advising of substantial anticom petitive effects.11 Tw o of these approvals led to ex tended litigation and because leading antitrust bench marks with enduring influence not only upon merger law but upon bank holding company acquisitions of commercial banks as well. The Philadelphia Bank Case On February 24, 1961, the Comptroller of the Currency approved the proposed merger of The Philadelphia National Bank (P N B ) and Girard Trust Corn Exchange Bank would be far better able to serve the convenience and needs of its community by being of material assistance to its city and state in their efforts to attract new industry and to retain existing in dustry.12 One day later the Department of Justice sued in Federal court, challenging the proposal amended Section 7 of the Clayton Act. under This statute had been amended in 1950 to read as indicated below, with the italicized phrases added in 1950 and the bracketed portions deleted. Both the added and the deleted portions were relevant to the issues pre sented in Philadelphia B an k: No corporation engaged in commerce shall ac quire, directly or indirectly, the whole or any part of the stock or other share capital and no c o r poration su b ject to the jurisd iction o f the F ed era l Trade Com mission shall acquire the w hole or any part o f the assets of another corporation engaged also in commerce, where in any line o f com m erce in any section o f the cou n try the effect of such acquisition may be substantially to lessen com petition [between the corporation whose stock is so acquired and the corporation making the ac quisition, or to restrain such commerce in any section or community,] or to tend to create a monopoly [of any line of commerce].13 (G irard), the second and third largest, respectively, of 42 commercial banks with head offices in the The Trial Court held that approval of the pro Philadelphia metropolitan area. The two banks were posal by the Comptroller under the Bank Merger direct competitors, and within the relevant four- Act of 1960 did not prevent the Government from county metropolitan area accounted for a combined challenging it under the antitrust laws, but that amended Section 7 was not applicable to bank mer total of approximately 36 percent of total bank assets, 36 percent of deposits, and 34 percent of loans. The Attorney General advised that the pro posed merger gers because banks are not corporations “ subject to the jurisdiction of the Federal Trade Commission.” petitive effects in the Philadelphia metropolitan area. Nevertheless, realizing that the case was destined to go to the Supreme Court, and in order to present Nevertheless, the Comptroller approved the merger a decision on the merits for review, the Trial Court stating that assumed Section 7 was applicable for purposes of would have substantial anticom deciding the case. . . . since there will remain an adequate number of alternative sources of banking service in Phila delphia, and in view of the beneficial effects of this consolidation upon international and national competition it was concluded that the overall ef fect upon competition would not be unfavorable. The Comptroller also found that the consolidated bank It reasoned that if the proposal did not violate the narrower test of Section 7, de signed to prevent incipient violations of the Sherman Act, it could not possibly constitute an unreasonable “ restraint of trade” under the latter statute. On this assumption, the court concluded that there was no reasonable probability that competition would be substantially lessened in the relevant four-county metropolitan area, although it agreed with the Gov ernment’s contention that commercial banking was 10 Annual R eport 1961, p. 11. of the Federal Deposit Insurance Corporation, 11 Annual R eport o f the Comptroller o f the Currency, 1961, pp. 41-42, 61-62; see also U. S. v. Philadelphia National Bank, 374 U. S. 334 (1 9 6 3 ), pp. 332-333. Indeed, in the case o f the consolidation of Security Trust Company, Lexington, Ky. with the First National Bank and Trust Company o f Lexington, K y., the Attorney General’s report to the Comptroller advised that an investigation had been initiated to determine whether the consolidation would violate the Sherman A ct. 12 U. S. v. Philadelphia National Bank, 374 p. 333. U. S. 321 (1963) at ia 38 Stat. 730 (1914) as amended 64 Stat. 1125 ( 1 9 5 0 ). The Gov ernm ent’s complaint in the Philadelphia Bank case also alleged an unlawful restraint o f trade in violation o f Section 1 o f the Sherman A ct. This issue was never reached in the decision o f either the D istrict or Supreme Court. a “ line of commerce” for purposes of Section 7. Finally, since it concluded that the proposed merger would not violate Section 7, it concluded that the transaction could not be a “ restraint of trade” pro hibited by Section 1 of the Sherman A ct.14 On appeal, the Supreme Court reversed. It found that the proposed merger was neither an acquisition of stock nor an asset acquisition and concluded that “ the specific exception for acquiring corporations not subject to the F T C ’s jurisdiction excludes from the coverage of Section 7 only asset acquisitions by such corporation when not accomplished by merger.” In net effect, this construction subjected all bank mergers, consolidations, assumptions of liabilities, and acquisitions of assets (if substantially all the assets are acquired) to Section 7. The tremendous impact of the decision was de scribed by dissenting Justices FTarlan and Stewart in these w ord s: The result is, of course, that the Bank Merger Act is almost completely nullified; its enactment turns out to have been an exorbitant waste of con gressional time and energy. As the present case illustrates, the Attorney General’s report to the designated banking agency is no longer truly ad visory, for if the agency’s decision is not satis factory, a Section 7 suit may be commenced im mediately. The bank merger’s legality will then be judged solely from its competitive aspects, un encumbered by any considerations peculiar to bank ing. And if such a suit were deemed to lie after a bank merger has been consummated, there would then be introduced into this field, for the first time to any significant extent, the threat of divestiture of assets and all the complexities and disruption attendant upon the use of that sanction. The only vestige of the Bank Merger Act which remains is that the banking agencies will have an initial veto.15 This was only the threshold effect of Philadelphia Bank. In addition to taking away the shelter of the Bank Merger Act, the case announced sweeping new antitrust principles governing corporate mergers generally. The majority opinion said: Specifically, we think that a merger which pro duces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects . . . . Such a test lightens the burden of proving il legality only with respect to mergers whose size makes them inherently suspect in light of Con gress’ design in Section 7 to prevent undue con centration . . . . The merger of [PNB and Girard] will result in a single bank’s controlling at least 30% of the commercial banking business in the four-county Philadelphia metropolitan area. Without attempt ing to specify the smallest market share which would still be considered to threaten undue con centration, we are clear that 30% presents the threat. Further, whereas presently the two largest banks in the area (First Pennsylvania and PNB) control between them approximately 44% of the area’s commercial banking business, the two largest after the merger (PNB-Girard and First Pennsylvania) will control 50% . Plainly, we think, this increase of more than 33% in concen tration must be regarded as significant.10 Philadelphia Bank was an antitrust bombshell that first demolished the shelter— the Bank Merger Act — and then destroyed the challenged bank combina tion using new antitrust rules formulated in the Court’s opinion. Moreover, it was only the opening salvo. A year later the follow-up Lexington Bank17 opinion sent shock waves throughout the banking industry and the Congress. The Lexington Bank Case O ne week after beginning its antitrust proceeding against the PN B Girard merger in late February, 1961, the Depart ment of Justice sued under Sections 1 and 2 of the Sherman Act to dissolve the consolidation of the first and fourth largest banks in Fayette County, Kentucky, approved by the Comptroller of the Cur rency only three days after sanctioning the PN B Girard merger. The two institutions accounted for a combined total of 52 percent of total deposits, 54 percent of total loans, and 53 percent of total assets of the six commercial banks in Fayette County. They also held 95 percent of all trust assets and ac counted for 92 percent of all trust department earn ings in the county. The lower court and the Supreme Court agreed that commercial banking was the relevant product market in this Sherman Act proceeding, just as it was for Clayton Act purposes in Philadelphia Bank.18 They also agreed that Fayette County was the relevant geographical area. They parted com pany, however, over the legality of the merger. 18 374 U. S. at pp. 364-365. 17 U. S. v. F irst National Bank and Trust Com pany o f L exington, 376 U. S. 665 (1 9 6 4 ). 11 U. S. v. Philadelphia National Bank and Girard Trust Corn E x change Bank, 201 F . Sup p. 348 (D .D .C . 1962 ), reversed, 374 U. S. 321 (1 9 6 3 ). >■"*374 U. S. at p. 385. 18 In a footnote the Court said: “ In view o f our disposition o f the case we find it unnecessary to determine whether trust department services alone are another relevant m arket.” 376 U. S. at p. 667, fn . 3. 7 W hile the lower court found no unreasonable re straint under Sherman Act standards, the Supreme Court concluded in a brief opinion : There was here no “ predatory” purpose. But we think it clear that significant competition will be eliminated by the consolidation . . . . We think it clear that the elimination of significant competition between First National and Security Trust constitutes an unreasonable restraint of trade . . . . * ❖ * Where, as here, the merging companies are major competitive factors in a relevant market, the elimination of significant competition between them constitutes a violation of Section 1 of the Sherman Act.19 There was no reference in the Court’s opinion to the particular conditions of the banking industry which caused Congress to write the five specific nonantitrust banking factors into the 1960 Bank Merger Act discussed earlier. These were simply ignored. The failure of the Court in Philadelphia Bank and Lexington Bank to give weight to the banking factors of the Bank Merger Act, coupled with the vigorous enforcement campaign mounted by the De Finally, the adversaries agreed to a compromise. The new statute provides that a Federal banking agency may not approve a bank merger “ which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States.” It further provides that an agency may not approve any merger that may substantially lessen competi tion, tend to create a monopoly, or be in restraint of trade unless it finds that the anticompetitive effects of the transaction are clearly outweighed in the public interest by the probable effect of the transac tion in meeting the convenience and needs of the community to be served. The “ public interest” factors that must be considered are the financial and managerial resources and future prospects of the existing and proposed institutions and the con venience and needs of the community to be served.22 Prior approval by one of the banking agencies is required before any merger, consolidation, acquisi tion of assets, or assumption of liabilities involving an insured bank may occur. partment of Justice against banking concentration, Bank generated a movement in Congress to revise the Throughout the fierce controversy over amending Holding Company A ct Am endm ents Bank Merger Act to give complete antitrust exemp the Bank Merger Act, the Bank Holding Company tion to any bank merger approved by one of the Act was almost entirely ignored. three banking agencies, as well as any bank merger antitrust problems had arisen in connection with predating the 1960 Bank Merger Act. The atmosphere in which this momentous legis N o significant regulated holding company acquisitions. Only one holding company approval by the Board between lative battle was waged— against the backdrop of 1956 and 1966 was challenged by the Department of pending major bank merger antitrust cases brought Justice,23 and this was settled prior to trial. Never theless, as previously indicated, the Board had on by the Department of Justice in Illinois, Arizona, New York, California, Tennessee, and Missouri20— was summed up in this paragraph from a con several occasions advised Congress of difficulties in accommodating the “ convenience and needs” test to temporary newspaper account: “ size and extent” and preservation of competition factors. For a complex measure directly affecting so few people, the heat of battle seemed worthy of the Missouri Compromise, League of Nations member ship and Prohibition repeal rolled into one. Secret letters circulated in the pockets of those involved. Conspiratorial Congressmen huddled “ in the dark” to write legislation without telling their committee chairman. Liberals fought liberals, while the A t torney General wrestled inconclusively with himself.21 Proposed amendments to the Bank Holding Com pany Act, however, were pending before the same committees of Congress with jurisdiction over the bank merger question. None of these proposals in volved possible modification of the five banking factors in the Bank Holding Company Act of 1956. But when the 1966 amendments to the Bank H old ing Company A ct emerged from the Senate Bank 18 376 U. S. at pp. 672-673. 20 U. S. v. Continental Illinois National Bank and Trust Com pany o f Chicago, filed A ugust 29, 1961; U. S. v. The Valley National Bank o f Arizona, filed December 28, 1962; U. S. v. M anufacturers H anover Trust Com pany, filed September 8, 1961; U. S. v. CrockerA n glo National Bank, filed September 8, 1963; U. S. v. Third N a tional Bank in Nashville, filed September 10, 1964; U. S. v. M er cantile Trust Com pany National A ssn ., filed July 7, 1965. 21The Wall S treet Journal, February 8, 1966, p. 16. 8 FRASER Digitized for ing and Currency Committee shortly after the Bank Merger Act was amended, the five banking factors 22 80 Stat. 7, February 21, 1966. 2:1 17. S. v. Marshall and Ilsley Bank Stock Corporation, March 7, 1961, settled by consent decree in 1969. filed had been replaced with the identical test imposed upon bank mergers. Therefore, the novel statutory criteria for approving bank mergers were extended to include holding company organizations. This change, though far-reaching, drew only one comment in the Senate Report on the 1966 Bank Holding Company Act amendments, as follow s: 11. C onform ing standards in holding com pany cases w ith those in m ergers.— In the interests of uniform standards, the bill would amend section 3(c) of the Bank Holding Company Act to require the Board, in acting on applications for the forma tion or expansion of holding company systems, to take into account the same factors as are specified in the recently amended Bank Merger Act (Public Law 89-356) for consideration in passing on bank mergers. sgs * the approval date to commence a court proceeding under the antitrust laws. If it does not act within that time, the merger or acquisition is thereafter permanently immunized from antitrust attack except * under the monopolization provisions of Section 2 of the Sherman A ct.29 TABLE T o tal N u m b e r, A ll D e fe n d a n t s T he ink was barely The Department I II DEPARTMENT OF JUSTICE CASES FILED UNDER SECTION 7 OF THE CLAYTON ACT, 1966-1970 of Justice took the position that paramount considera tion must be given to competitive aspects of pro posed transactions.25 “ clearly outweighed in the public interest” by its probable effect “ in meeting the convenience and If the Department of Justice disagrees with an Company legislation when a new round of litigation its meaning. will, it may not be approved unless the responsible agency finds that its anticompetitive aspects are agency’s approval, it has 30 calendar days from dry on the 1966 Bank Merger and Bank Holding erupted over lessen competition, tend toward monopoly, or re strain trade “ in any section of the country.” If it needs of the community to be served.” 19. A pplication to holding com pany cases o f same antitru st procedu res as apply in m erger cases.— The Congress recently amended the Bank Merger Act to eliminate conflicts between that act and the antitrust laws that might otherwise require the unscrambling of a merger, under the antitrust laws, that had been approved under the Bank Merger Act. The bill would apply to bank holding company cases the same procedures as are now provided for this purpose in bank merger cases, in addition to establishing uniform standards.24 Present Status of the Law adverse consequences, the agencies must determine whether the proposed transaction would substantially This interpretation was soon N u m b e r A g a in s t Bank M e rge rs and H o ld in g C o m p a n y A c q u isit io n s Ban k M erge r a n d H o ld in g C o m p a n y C a se s a s a Percent o f T o ta l 1966 1967 1968 1969 1970 * 13 10 24 20 8 4 3 10 9 3 30.7% 30.0% 41.6% 45.0% 37.5% Entire Period: 75 29 38.6% confirmed by a series of Supreme Court decisions commencing with the First City Bank of H ouston20 case in 1967, and culminating with the Phillipsburg27 * T h r o u g h J u n e 30, 1970. So u rc e : D e p a r tm e n t o f Justice. opinion in m id-1970. A t present, therefore, the banking agencies must follow a two-step process in acting upon merger and If an antitrust proceeding is filed within the pre The first determina scribed time, the Federal court must use identically the same standards as the agency used in its ap tion is whether the proposal will result in a monopoli proval, unless monopolization or attempt to monopo holding company applications. zation or contribute to monopolization of the banking lize is charged. However, even though it must apply business in “ any part” of the United States. the same standards as the agency, the court is not If so, the application must be denied.28 Assuming no such bound by the agency’s findings of fact. The case is tried as if there had been no prior administrative proceedings, although the court may take note of the 24 Senate Report N o. 1179, 89th Cong., 2d Sess. (1 9 6 6 ), p. 2393. agency’s findings. 25 Congressional Record, March 8, 1966, p. A1310. 20 U . S. v. F irst C ity National Bank o f H ouston, 386 (1 9 6 7 ). U. S. 361 2717. S. v. Phillipsburg National Bank & Trust Co., 90 Sup. Ct. 2035 (1 9 7 0 ). Sandwiched between H ouston and Phillipsburg was the im portant ruling in U. S. v. Third National Bank in Nashville, 390 U. S. 171 (1 9 6 8 ). 28 Presumably the courts will read an exception into this absolute prohibition where a bank is failing and the only available purchaser is the sole competitor o f the failing institution. 29 Section 2 provides, in pertinent part, th a t: Every person who shall monopolize or attem pt to monopolize, or combine or conspire with any other person or persons, to monopolize any part o f the trade or commerce am ong the several states or with foreign nations, shall be deemed guilty o f a misdemeanor . . . . 26 Stat. 209 (1 8 9 0 ). 9 Antitrust trials against bank merger and bolding company acquisitions have accounted for a sub stantial proportion of the entire enforcement effort with approximately the same rate for mergers, hold ing company formations, and holding company ac quisitions. In contrast, less than 3 percent of bank by the Department of Justice under Section 7 of merger applications were denied by the Federal De the Clayton Act since the 1966 legislation, as in dicated by Table III. posit Insurance Corporation, and less than 2 percent A s indicated, 38.6 percent of all antitrust cases brought by the Department of Justice since 1966 against corporate acquisitions by all types of com panies— industrial, commercial, and financial— have been directed against mergers and acquisitions of commercial banks. In part, this vigorous enforce by the Comptroller of the Currency.30 antitrust proceedings against bank O f the 29 mergers and holding company acquisitions during this period, only five were against transactions approved by the Board of Governors. (N ext month, the concluding installment will dis cuss the one-bank holding company question, the ment record reflects the fact that the three banking 1970 amendments to the Bank Holding Company agencies apparently have not applied the uniform bank merger standards in a uniform manner. For Act, and the current issues regarding permissible example, during the period from the beginning of banking areas.) 1966 through July of 1968, the denial rate of the expansion by bank holding companies into non William F. Upshaw Board of Governors was almost 11 percent of total merger and holding company applications received. 10 30 Andrew F . Brim m er, “ Market Structure, Public Convenience, and the Regulation o f Bank M ergers,” Speech, October 1, 1968. A 1970 Review o f . . . FARM FINANCIAL AND CREDIT CONDITIONS This study was made in December 1970 at the request of USDA’s Agricultural Finance Branch and has since been updated. It is based on a sample survey of Fifth District bank agricultural specialists and on data from the U. S. Department of Agriculture, the Farm Credit Administration, and the Federal Deposit Insurance Corporation. Results of a sample survey of bankers’ opinions, Despite the slight increase in gross cash income combined with the most recent statistical data, pro from farming in the District as a whole in 1970, vide the basis for this review of the financial and some communities doubtless experienced declines. credit conditions of Fifth District farmers in 1970. Localities suffering from prolonged drought con Briefly, here are the highlights: ditions and/or from the ravages of Southern corn Gross farm in come was slightly larger than the improved level of leaf blight were especially hard hit. 1969. in the Carolinas and soybean producers in Maryland Off-farm income rose further. Farm and family living costs also continued to climb. Spend ing for family living items showed a slight advance, but in general expenditures for capital items were down. Market values of farmland continued to rise, although slower. and Virginia were hurt badly. Corn farmers But, in the aggre gate, gains from other farm enterprises offset the declines. Livestock production, a growing money-maker for was District farmers for many years, provided the basis Demand for farm credit remained strong, for further improvement in farm income again in farm real estate market activity but not as strong as in 1969. Interest rates were higher. Bank loan funds generally were tight, al though some slight improvement in the availability of loan funds seemed evident. Bankers’ farm loan 1970. Supplies of poultry and eggs, the leading source of livestock income, were larger: broilers, around 5 % ; eggs, 4 % ; and turkeys, some 4 % . Milk production was about 1% above that in 1969. repayment experience was generally as good as, or H og marketings were up around better than, a year earlier. supplies of cattle and calves, however, were down Farm Income and Costs D istrict farm incom e in 1970 showed some further slight gain over that in 1969, a year in which realized gross farm income hit an all-time high and realized net farm income reached its highest point since 1953. Most of 1970’s improvement in gross farm income resulted from a 7 % upturn in cash receipts from farm marketings. In view of the continued rise in farm production expenses, realized net farm income seems likely to have turned up only slightly, if at all. Farmers’ earnings from nonfarm employment also continued to rise, however, providing some additional improve ment to their income positions in 1970. Bankers’ opinions regarding farm income in 1970 varied widely. Three-fifths of those reporting looked for a further upturn in gross farm income from that in 1969. Half felt the increase would be small, and one-tenth anticipated that it would be considerable. In contrast, one-fourth foresaw a slight decline, and the remaining 15% expected little change. 10%. Market by roughly the same percentage even though the beef cattle inventory at the beginning of 1970 was 6 % over that of the previous year. Livestock and livestock product price indexes were above year-earlier levels in all District states except North Carolina, where a decline of roughly 2 % occurred. Although the gains recorded in the other states were not nearly as sharp as those in 1969, all the increases were larger than the national average and ranged from 2 % in South Carolina and Maryland to 4 % in Virginia. Farmers’ cash receipts from sales of livestock and livestock products during 1970 were 3 % above those in 1969. Gains were registered in all states and ranged from 1% in Maryland to 5% in South Carolina. Many crop farmers will remember 1970 as a drought year or as the year of the corn blight. Obviously, the adverse growing conditions hurt many — some seriously. The dry weather and leaf blight dealt the corn crop a double blow and, as a result, production was 16% below 1969 and the smallest 11 Output of soybeans, the other major resulted from the need to buy additional inputs. money crop damaged by drought, was down some But survey data suggest that the volume of pur chased inputs increased less in 1970 than in 1969. since 1966. 13%. Although of less importance as income pro ducers, the following crops were also significantly smaller: pecans, 3 4 % ; peaches, 1 2 % ; and sweet potatoes, 7% . A 10% cut in acreage was primarily Earnings from off-farm work, both by farm operators and by other farm family members, con tinued to trend upward in 1970. Respondents at responsible for the smaller crop of sweet potatoes, tribute this trend to some further industrial ex however. But whether farmers remember 1970 as a poor pansion in rural areas. The pace of this trend, which has done much to improve both the living standards Those grow and the creditworthiness of farmers, apparently tapered off in some localities as bankers in some ing either flue-cured tobacco, peanuts, or cotton, or areas reported a slight decline in off-farm income. a combination of these major money crops, will al This decline, noted by 10% of those replying, was year or as a good one will depend primarily on what combination of crops they produced. most surely count it a good year. Production of flue-cured tobacco, the chief income earner, was up 10% (with a 14% increase in North Carolina), and prices averaged only fractionally below the all-time high established in 1969. A record-breaking, good quality peanut crop, 30% larger than a year earlier, said to have resulted both from unemployment and from work stoppages caused by strikes. Farmers’ Savings and Spending D istrict farmers appear to have maintained their financial savings and reserves at about the same level as a year earlier. This situation can probably be attributed to was harvested under generally ideal weather con a slight improvement in income and to a cutback ditions. in spending on capital goods. Prices throughout most of the marketing season averaged at the support level, roughly 3% higher than that in 1969. Cotton production was Farmers, like their urban cousins, were again faced with a general increase in the cost of living 23% greater than the small 1969 crop, with most in 1970. of the increase in North Carolina. 4% The Tar Heel The farm family living index rose some during the year, and farmers’ total spending crop was the largest since 1965 and reportedly one of the highest quality cotton crops in the Southeast. for family living items seems likely to have increased Cotton prices during the fall harvesting season wyere this was generally the case, a good many farmers well above average support prices. Added to these were considerably more resistant to the higher con pluses were the sharply higher prices received for sumer prices in 1970 than in 1969. Thirty per cent of the respondents felt that farmers had reduced soybeans, corn, and peaches which offset much of their reduced production. Prices of most District crops, in fact, held up well in 1970. W ith the ex ception of West Virginia, w^here prices averaged slightly. Our banker survey indicated that while their spending for family living purposes slightly. This contrasts with only 15% who held this view in 1969. lower, average crop prices were up 2 % in Virginia, Farmers generally held the line or cut back on 3% in Maryland, 4 % in North Carolina, and 6 % capital expenditures in 1970. Reductions in capital outlays for machinery and equipment appear to have in South Carolina. District farmers’ cash receipts from crop market ings during 1970 were 11% larger than those in 1969. Increases among the District states varied been significantly larger than those for facilities and other capital goods. Farmers’ efforts to reduce this type spending were attributed not only to the high substantially, however, ranging from about 1% in cost of capital items but also to the high cost and Maryland to 14% in South Carolina. limited availability of credit. Farmers’ costs continued to increase under per sisting inflationary pressures in the general economy. Cost increases, however, were probably not as large as in the previous year. Compared with the better than 5% advance in 1969, average prices paid by farmers, including interest, taxes, and w^age rates, rose slightly less than 5% during 1970. Some fur ther rise in farm production costs also seems to have 12 Farmland values continued to increase, but the rate of advance among District states varied con siderably. Farm real estate prices in the District as a whole rose nearly 10% during the year ended November 1, 1970, with most of the increase oc curring during the eight months from March 1 to November 1. Market values recorded the slowest rate of gain in the Carolinas, South Carolina registering a 7% increase and North Carolina 9 % . Sharp advances of 12% occurred in both Virginia and Maryland, states where nonfarm factors con as strong as in 1969. The survey indicated that some farmers showed reluctance to borrow at the higher tinue to exert a strong influence on the price of farmland. Market prices in West Virginia, also rowed from commercial banks fell slightly, but the under the influence of fairly strong nonfarm factors, rose 10%. The decline in prices of flue-cured to rates of interest. The number of farmers who bor average amount loaned per farm borrower again in creased moderately. Bankers’ farm loan repayment experience was about the same as, or somewhat bacco land, first reported by North Carolina bankers better than, in 1969. in 1969, has continued. was lower, and loan renewals were down slightly. Where flue-cured tobacco allotments then sold for $3,000 to $4,000 per acre, The number of delinquencies Bankers’ lending policies in general were tight. This decline Basically the same restrictive policies adopted by in land values continues to reflect the growing labor many in 1969 were reported by 65% of the 1970 they sold for $2,500 to $3,000 in 1970. shortage in flue-cured tobacco areas. Activity in the farm real estate market in 1970 respondents. The remaining 35% indicated that they adopted tighter policies during 1970. Bankers appears to have been considerably slower than in adhered to generally tight loan policies by charging other recent years. The number of farms on the higher rates of interest, confining their lending to market was said to be small, and some respondents long-established customers, and making mostly, or noted that fewer people were looking for farmland. only, short- and intermediate-term farm loans. W ith the supply of farms on the market down and Some 55% of the bankers surveyed noted that with money tight, declines in the purchase of farm interest rates charged farmers in 1970 were higher land for farm enlargement were reported by 65% than a year earlier. of the bankers surveyed. little change. Farm rental and leasing The remaining 45% indicated The most common rate in 1970, as arrangements, some running for three to five years, in 1969, was 8 % . increased further. Use of available funds to purchase 7^4% to 9% for short-term loans, from 7 ^ % machinery and equipment rather than farmland was 10% for intermediate-term loans, and from 7 ^ % also noted. to 9 y2% for long-term loans. Where demand for land for farm en largement was strong and land was available, some Rates ranged, however, from to By comparison, rates on all types of farm loans in 1969 ran as low as bankers indicated they were continuing to refer 7 % , and the highest rate charged on farm-mortgage farmers to the Federal land banks for long-term loans was 8 % . Bank funds available for loans to farmers may financing. The demand for farmland for nonfarm purposes have been fractionally larger in 1970 than in 1969. remained fairly strong, although market activity was One-fifth of the reporting bankers stated that their apparently slower than during the previous year. supplies of loan funds were greater. Only 40% of the responding bankers reported slight gains in such purchases, compared with 55% in 1969. In contrast, 30% of the respondents in 1970 noted a slight decrease from a year earlier, compared with 10% in 1969. Some of the decline in the purchase of farmland by nonfarm buyers was attributed to a slowdown in industrial expansion, but in a number of areas industrial development continued to be one of the prime reasons for increased activity. Other reasons for increased nonfarm purchases were: de velopment of housing subdivisions, construction of interstate highways, purchase of lots for retirement homes, and expansion of airport facilities. As has been the case for many years, increased buying of farmland for nonfarm uses was associated with a significant increase in the price of farmland. increase was partially offset by the 10% who indi cated smaller supplies, the remaining 70% noted that Farm Credit Situation Dem and for farm credit remained strong in 1970, although apparently not Though this the availability of funds for farm loans had been about the same as a year earlier. W here the latter situation was reported, these bankers often qualified their answers by saying funds were sufficient for their long-established customers. Ninety-five per cent of the reporting bankers said, however, that they had not turned down farm loan applications in 1970 because of lack of funds. Comparison of the change in the volume of out standing farm debt held by three of the principal institutional farm lenders during the year ended June 30, 1970 with that during the year ended June 30, 1969 indicates that overall demand for farm credit did remain strong in 1970 but not as strong as in 1969. For exam ple: Farm real estate loans held by all insured commercial banks in m id-1970 13 Farm Financial and Credit Outlook for 1971 totaled $290.8 million, roughly 1% or $1.7 million below a year earlier. This contrasts with a gain of 5% or $14.4 million in bank held long-term farm debt during the year ended in mid-1969. By com Bankers indicated that some further slight improve ment in farm income was probable in 1971. Under parison, outstanding loans held by the Federal land harvesting season would be average or better, 35% banks on June 30, 1970 amounted to $480.1 million, anticipated that farm income would increase slightly, the assumption that weather during the growing and up around 12% or $49.5 million during the 12-month 40% foresaw little or no change, while the remaining period. 25% looked for a slight decline. This increase, however, was less than the One reason given gain of 16% or $60.3 million recorded by the Fed for a prospective decline in 1971 farm income was eral land banks during the 12 months ending in that a good many flue-cured tobacco growers had m id-1969. marketed 110% of their farm’s poundage quota in The volume of non-real-estate farm debt held by 1970. Under the acreage-poundage program, any District banks during the year ending at midyear marketings in excess of the farm’s quota in any one 1970 had increased faster, both in percentage and year will be deducted from the farm’s poundage dollar terms, than during the previous quota and acreage allotment the following year. 12-month period. The opposite was true in the case of the P C A ’s, although both the percentage and dollar in cording to 95% of our respondents. creases in their volume of outstanding non-real-estate however, believed that the rate of increase would loans were far greater than those for banks during be somewhat slower than in 1970. both 12-month periods. Non-real-estate farm debt outstanding at banks in m id-1970 amounted to $339.1 Farm costs may well rise further in 1971, ac Many of these, On balance, it appears that the general debt and This gain of 3.8% or $12.5 million com financial position of District farmers may be some what better in 1971 than in 1970. Favorable returns pared with an increase of 3.6% or $11.5 million from farming in 1970 should enable farmers in many million. during the year ended in m id-1969. On the other sections to pay off old debts and enter the new year hand, the amount of non-real-estate debt held by with improved equity positions. P C A ’s at midyear 1970 totaled $383.0 million, some 15 % or $48.8 million above that outstanding at mid corn blight no doubt adversely affected the overall financial position of farmers in some areas, how year 1969. ever. During the preceding 12 months, the gain in P C A loans amounted to 19% or $52.6 million. Drought and the Forty-five per cent of the replying bankers expressed the belief that the debt and financial position of farmers in general would be better in HS§ FARM DEBT: A M O U N T O U TSTA N D IN G HELD BY SPECIFIED LENDERS, BY TYPE United States and Fifth District by States, June 30, 1970 compared with June 30, 1969 ____________________ F a r m - M o r t g a g e A ll In su r e d C o m m e r c ia l B a n k s S ta te D e b t______________ A ll In su r e d C o m m e r c ia l B a n k s F e d e ra l L a n d B a n k s or Am ount Change Am ount Change A rea O u t s t a n d in g 19 70 fr o m 19 69 O u t s t a n d in g 19 70 from 1969 $ M illio n Per C e n t $ M illio n Per C e n t M a r y la n d * 68.7 + 1.8 V ir g in ia 83.6 -1 .9 _______________ N o n -R e a l- E s t a t e F a rm Am ount Change O u t s t a n d in g 1970 $ M illio n fro m 1969 Per C e n t D e b t____________ P ro d u c tio n C r e d it A s s o c ia t io n s Am ount Change O u ts ta n d in g 19 70 fr o m 1969 $ M illio n Per C e n t 60.6 + 11.4 37.9 + 8.3 38.1 + 112.6 + 11.7 108.5 + 6.6 5 5 .7 + 10.2 6.7 W e s t V ir g in ia 33.0 + 6.7 12.4 1.1 19.4 N o rth C a r o lin a 7 7 .4 -2 .4 185.6 + 10.4 128.5 - 1.2 186.4 + 18.8 So u th C a r o lin a 28.2 + 4.0 108.9 + 14.6 4 4 .9 + 5.1 94 .5 + 13.9 290.8 -0 .6 480.1 + 11.5 339.1 + 3.8 38 3.0 + 14.6 4,016.3 -1 .1 6,993.9 11,214.6 + 6.3 5 ,35 8.7 + 17.3 F ifth D istric t U n ite d State s** * In c lu d e s D istric t o f C o lu m b ia . N o te : ** + + 6.7 S t a t e s a n d o th e r a r e a s . D a t a m a y n ot a d d to to ta ls b e c a u se o f r o u n d in g . o u rc e s: F e d e ra l D e p o s it Digitized for SFRASER In su r a n c e C o r p o r a t io n a n d F a rm C r e d it A d m in is t r a t io n . + 13.6 8.4 + 2.2 1 1971 than in 1970. Two-fifths felt the situation would be about the same as in 1970, and the re that they made no long-term loans to farmers in maining 15% believed it would be worse. said that they were continuing to refer farm bor Demand for farm credit in 1971 is expected to match or to exceed that of 1970. Two-fifths of the 1970 or that they made very few such loans. They rowers to the Federal land banks for this type fi responding bankers felt that farm loan demand will nancing. Developments in the general economy, competition for loan funds, and the level of the prime remain at about the same level as in 1970. and discount rates will, of course, have a strong in Fifty- five per cent, however, looked for a slight increase, fluence on the availability of loan funds for agri while only 5% expected a slight decline. cultural purposes. General inflationary trends and an anticipated increase in day-to-day operating expenses were the prime Little change in bankers’ present policies on farm loans, generally reported as already fairly restrictive, reasons behind the expectations that credit demands is indicated for 1971. will be strong. The expected levels of farmers’ spending and in 85% of the bankers expected to adhere to about the vestment in 1971 varied considerably. Survey results showed that same loan policies as in 1970. One-fifth of Interest rates banks charge on farm loans in 1971 the participating bankers looked for farmers to in can be expected to remain high, although a little crease their spending and investment slightly. Sixty- softening, mostly in short-term rates, is indicated by five per cent felt that spending and investment a tally of our survey. would remain roughly the same as in 1970, while cited for all three types of farm loans was an 8 % only 15% looked for a decline. Larger expenditures simple rate of interest. But quoted interest rates for The most prevalent charge by some farmers were expected because of the 1971 varied substantially, ranging from 7% to 9 % necessity of having to replace worn-out machinery for short-term loans, from 7% to 10% for inter and equipment. mediate-term loans, and from 7% to 9^2% for long Spending for livestock feed is also expected to be greater because the drought- and term loans. blight-reduced corn crop will necessitate larger pur tion “ What trends in interest rates on farm loans chases of feed grain, probably at higher prices. do you foresee ?” brought these results: Three-fifths Bank funds available for loans to farmers in 1971 Tabulation of the answers to the ques expected little change, 35% looked for a possible will likely be moderately larger than in 1970, ac slight decline, and the remaining 5% anticipated a cording to survey responses. Funds for short- and intermediate-term farm loans will probably be more moderate increase. plentiful than funds for long-term loans. Onefourth of the responding bankers indicated that the availability of loan funds for all three major types of farm loans in the year ahead would likely be slightly above that in 1970. Three-fourths, or all of the remaining bankers, expected that funds available for short-term loans would be roughly the same as in 1970. By comparison, 70% felt that the availa bility of funds for both intermediate- and long-term farm loans would be about the same. Am ong the bankers reporting that funds available for farmmortgage loans would remain at about the same level as in 1970, roughly one-fifth indicated either apply to The upward adjustment would farm-mortgage loans probably amount to % of 1%. only and would W here a downward trend in interest rates was foreseen, the majority felt that the decline would range from to ]/2 per centage points and that the downward adjustment would be slightly greater in the shorter-term ma turities. Generally, bankers who stated that interest rates on farm loans in 1971 might drop slightly held the view that any downward adjustment would be dependent upon the possibility of a further cut, or cuts, in the prime rate below the 7V2% level in effect at the time of the survey. Sada L. Clarke 15
@FedFRASER