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For Release on Delivery
Tuesday, October 1 , 1968
3:00 p.m. , E.D.T.




MARKET STRUCTURE, PUBLIC CONVENIENCE, A N D THE
REGULATION OF BANK MERGERS

A Paper Presented by
Andrew F . Brimmer
Member
Board of Governors of the
Federal Reserve System

Before the

Ninety-Fourth Annual Convention
of the
American Bankers Association

Pick-Congress Hotel
Chicago, Illinois

October 1, 1968

MARKET STRUCTURE, PUBLIC CONVENIENCE, AND THE
REGULATION OF BANK MERGERS
by
Andrew F. Brimmer*

The debate over the changes required in our banking structure to
meet the expanding credit needs of the American public is always a lively
one, and the role of bank mergers is usually close to the center of the
discussion.

Today, despite the focus on the question as to whether

banks should be allowed to conduct their businesses through operational
subsidiaries, loan production offices or under the direction of a holding
company, the policies followed by Federal bank supervisory agencies in the
regulation of mergers and acquisitions continue to be of vital interest to
the banking community.

Thus, an annual convention of the American Bankers

Association is an ideal setting for an examination and assessment of the
way in which the bank supervisory agencies have carried out their statutory
responsibilities in recent years.
The Bank Merger A c t , originally enacted in 1960, and the Bank
Holding Company A c t , enacted in May 1956, were both amended in 1966.
Principal among the amendments to each of the statutes was a change in
the statement of circumstancial factors the Board is required to consider
under the Bank Holding Company A c t , and which the appropriate Federal
supervisory authority (Board, Comptroller of the Currency, or Federal
^Member, Board of Governors of the Federal Reserve System. I am
grateful to Messrs. 1 Thomas J. O'Connell, Bernard Shull, and William W .
Wiles, of the Board s staff for assistance in the preparation of this
paper. Miss Mary Ann Graves helped in the classification of some of
the competitive factor reports submitted to other bank supervisory
agencies.




-2Deposit Insurance Corporation "

depending on the charter status of the

continuing institution), must consider under the Bank Merger A c t ,

The

amended "statutory factor" provisions were made virtually identical in
the Bank Merger and Bank Holding Company Acts a n d , with respect to the
competitive aspects of a merger or holding company proposal, the more
precise guidelines found in the Sherman and Clayton Acts were made
applicable.
T h u s , with respect to either a proposed bank merger where the
resulting bank is to be a State member b a n k , or a bank holding company
acquisition, the Board may not approve any proposal that would result in
a monopoly or that would be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize the business of banking in any
part of the United States.

Nor may the Board approve any proposed merger

or holding company acquisition the effect of w h i c h , in any section of
the country, may be substantially to lessen competition unless the Board
finds 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.
Pursuant to the amended provisions of both the Merger Act and
the Bank Holding Company A c t , a court before which an action is commenced
under the antitrust laws, following agency approval of a Merger Act or
Bank Holding Company Act proposal, is required to review de novo the
issues presented, and the standards to be applied by the court are those




-3required to be considered by the agencies under paragraph 5 of the Merger
A c t , and by the Board under section 3 of the Bank Holding Company A c t .
It is in this legal framework that the assessment of bank
mergers and bank holding company proposals must be made.

In approaching

this task, I have attempted to answer the following questions:
- To what extent, if a n y , can one observe significant
differences in the pattern of merger decisions by the
Federal Reserve Board, the Comptroller of the
Currency and the Federal Deposit Insurance Corporation?
- In deciding proposed bank mergers or bank holding
company acquisitions, what weight, if any, should be
given to possibilities of future, or potential,
competition.

- Should the rate of economic growth in an area influence
the policies of the regulatory agencies?
In answering these questions, I have reached the following conclusions:




- The Comptroller of the Currency and the FDIC apparently
approve a much higher proportion of merger applications
than does the Federal Reserve Board. These divergencies
in denial rates seem to reflect differences in policies
among the agencies rather than differences in the
seriousness of anticompetitive effects involved in the
kinds of cases handled.
- Potential competition should ^e assigned considerable
weight in merger cases. However, the Federal Reserve
Board seems to follow this practice to a far greater
extent than does either of the other two agencies.
- A more permissive approach toward mergers in growth areas
is not warranted as a general proposition. However,
there may be some cases in which the effect of mergers on
competition in such areas is offset by the advantage to
the community in convenience and needs.

-4Before proceeding farther, let me stress that the present
assessment of bank mergers is entirely my own.

To anyone familiar with

the record of Federal Reserve Board merger and holding company decisions,
it should be obvious that in this area —

as in others -- each Board

member speaks for himself.
The Pattern of Decisions in Bank Mergers
and Acquisitions» 1966-1968
From the beginning of 1966, through July of 1968, there were
over 460 merger and holding company applications received by the three
Federal banking agencies.

(See Table I , attached.)

The vast majority

of these applications (391) have proposed mergers, while only 71 have been
for holding company acquisitions and f o r m a t i o n s A p p l i c a t i o n s

to the

Comptroller of the Currency account for a little less than half of those
received, those to the FDIC about 30 per cent and those to the Board close
2/

to 25 per cent.—

7

As one would expect, in view of wide differences in State laws
governing multiple-office banking, merger and holding company activity
is not evenly distributed throughout the United States.

(Table II).

Over the period, more than 80 per cent of the applications received came from
seven Federal Reserve Districts:

New Y o r k , Philadelphia, Cleveland, Richmond,

T/ Nevertheless, since 1964, there appears to have been an upward
trend in holding company activity. The following data are for Board
decisions in holding company cases, rather than applications:
1964, 11; 1965, 17; 1966, 26; 1967, 31. There may be at least 33
decisions in 1968.
2/ • A little more than 1/3 (37 per cent) of the Board applications
have been for mergers; the remaining applications have involved
holding companies.




-5Chicago, and Minneapolis.

The Richmond district alone accounted for

close to 20 per cent of the applications.

By and large, each of these

Districts includes one or more states in which multiple-office banking
is prevalent.

On the other h a n d , there has been less activity in the

St. Louis, Kansas City and Dallas Districts, principally because of
State restrictions on multiple-office banking.
Over this period, there were 427 decisions by the
three banking agencies.
(Table III.)

There were 409 approvals and 18 denials.

While the Board accounted for about one-quarter of the

decisions, it also accounted for two-thirds of the denials.
the Comptroller each had three denials; the Board had 12.

The FDIC and
The denial

rate at the Board has been close to 11 per cent (with about the same rate
for mergers, holding company formations and acquisitions).

The denial

rate at the FDIC has been less than 3 per cent and at the Comptroller of
the Currency, less than 2 per cent.

These data strongly suggest that

there are significant differences among the agencies with respect to the
way each handles its cases, and these differences in approach may have a
strong bearing on whether the cases are likely to be approved or denied
Either the policies of the Board differ from those of the
other banking agencies, or the kinds of cases handled by the Board involve
1/ For the technicians who may be interested, the relationships
appearing in the pattern of merger decisions were tested statistically.
11
Cross classifying Board and "other agency decisions by "approvals"
11
and "denials permitted a nonparamatric contingency test which
yielded a chi square value of 13.7. This value is significant at
better than the 1 per cent level and supports the hypothesis indicated
above.




-6more serious anticompetitive effects.

While the latter possibility may

account in part for the difference between the denial rate at the Board
and the F D I C , it hardly seems likely to account for the difference between
the Board and the Comptroller.
I f , in fact, the denial rates at the Board and at other agencies
reflect a difference in policy, this might be reflected in the way the
Board's advisory opinions on competitive effects on merger cases are
Over the period covered, the Board issued 121 advisory opinions

received.

to the FDIC and 204 to the Comptroller of the Currency -- 325 in all.
(Table IV.)

In 9 4 , or close to 30 per cent of these reports, the Board

indicated that the competitive effects of the proposed merger would be
serious,

(As might be expected, given the small size of the typical in-

sured nonmember b a n k , the proportion submitted to the FDIC deemed serious
was lower -- about 22 per cent -- than the proportion submitted to the
Comptroller —

about 33 per cent.)

A n indication to another agency that the anticompetitive effect
of a merger is serious does not necessarily mean that the Board itself would
have denied the application.
or "clearly outweighed

11

Serious anticompetitive effects could be offset,

by the convenience and needs of the community.

This

w o u l d , h o w e v e r , have had to be the situation in a little less than two-thirds
of the 94 cases in which a serious effect was indicated in order to bring the
denial rate down to the Board's own 11 per cent.
In fact, however, the other two banking agencies issued denials
in only three of the 94 cases in which the Board found a serious




-7anticompetitive effect.

The three other denials issued by the FDIC and

the Comptroller were in cases in which the Board did not find a serious
anticompetitive effect.

There does not appear to be a significant

relationship between the finding of a serious anticompetitive effect by
the Board and the decisions by the other banking agencies. 1/
In my opinion, the pattern of merger decisions examined here
is strong documentation of differences in the approach taken by the
three supervisory agencies in carrying out their responsibilities under
the bank merger statute.

Since each agency must determine for itself

how well it is meeting the requirements of the Bank Merger A c t , I
clearly cannot -- and would not want to —
other agencies.

judge the performance of the

With respect to the Federal Reserve Board, I obviously

believe that we are performing reasonably well.

The Role of Potential Competition
While one can describe statistically the differences in the
pattern of merger decisions by the Federal bank supervisory agencies,
it is far more difficult to explain those differences.

Whatever the

basis for the differences among the supervisory agencies, it appears to
be reflected in their attitudes toward potential competition -- that i s ,
the extent to which weight is given to possibilities of future competition
1/ Cross classifying Board findings of serious and nonserious anti- 1 1
11
competitive effects, in advisory opinions by "approvals and "denials
by other agencies permitted a nonparametric contingency test which
yielded a chi square value of .48, which cannot be taken as significant.




-8in a proposed bank merger or holding company acquisition.
Although it is not clear just how much importance the Comptroller
and the FDIC assign to potential competition in deciding cases before them,
one does get the impression that the weight they accord this factor is
quite small.

In contrast, the Federal Reserve Board places considerable

emphasis on potential competition in the determination of both bank merger
and bank holding company applications.
I believe it to be clearly established that the effect of the 1966
amendments to the Bank Merger and Bank Holding Company Acts was to impose
on the responsible supervisory agencies a scheme for appraising and determining competitive consequences that, in major respects, is utilized generally
in the Government's enforcement of section 7 of the Clayton Act as amended in
1950.

M o s t relevant to this discussion is the question:

Does a determination

of whether the effect of a proposed merger or holding company acquisition
"may be substantially to lessen competition

11

encompass situations involving

"potential competition"?
The concept of "potential competition", treated herein, does not
automatically encompass —

nor absolutely exclude —

the related con-

cepts of "potential injury to competitors" and "ease of market entry".
Both of these concepts are properly the subject of inquiry in competitive analysis, but are not necessarily related to a determination of




-9the likelihood that parties to a merger or holding company proposal will
become active competitors.
Effective, workable competition in a given market exists when
buyers of products or services are offered purchasing alternatives
sufficiently real to provide these buyers with the opportunity to change
from one seller to another, with the possibility of such change influencing
sellers to seek improvements in the quality and price of the products and
services which they offer.

However, particularly in a market in which

actual competition is in some manner deficient, sellers may be influenced
as much by the realization that a low level of quality or a high price
level may attract more competent or efficient entrants from the periphery
of the market as they are by the threat posed by existing competitors.
Effective competition in such markets, therefore, requires the preservation of the threat of potential competition.-l/

Admittedly, to deal with

"the preservation of the threat of potential competition" is, on its
face, conjectural.

But Congressional concern over probabilities, not

certainties, was the precise reason for the Celler-Kefauver Amendment
(1950) to section 7 of the Clayton k c t . &
It seems fair to say that "potential competition" as a determinative factor in merger and acquisition cases, bank and nonbank alike,
T j Wilcox» Competition and Monopoly in American Industry, Temporary
National Economic Committee Monograph N o . 21 (1940), p.7.
2/ Unitd States v . Philadelphia National B a n k . 374 U.S. 321 (1963);
Brown Shoe Co. v . United States, 370 U.S. 294 (1962).




-10while recognized for many years past, has become a crucial and, in some
cases, a decisive factor only within the last five years or so.

In 1964,

the United States Supreme Court decided three cases under section 7 of
the Clayton Act in which substantial weight was accorded potential
competition.-^

Of these decisions, Penn-Olin provides the most direct

statement of law and of criteria for applying the law -- both of which
the Board finds applicable, and has applied, to bank merger and bank
holding company proposals.

Penn-Olin involved a joint venture agreement

to produce and sell sodium chlorate in the southeastern United States
between Pennsalt Chemicals Corporation, a producer and nationwide
distributor of chemicals and chemical products, and Olin Mathieson
Chemical Corporation, a producer of chemicals and chemical products with
division plants in 15 States. However, at the time of the joint agreement the two corporations did not compete. The relevant market was then
dominated by two other corporations, together controlling over 90 per
cent of the sodium chlorate market.

Pennsalt, pursuant to a sales

agreement with Olin, was a minor third competitor in the relevant market.
The joint venture agreement was a successor to the above-mentioned sales
agreement.
The Supreme Court rejected the finding of the District Court
that potential competition between the two joint venturers could be
found to have been foreclosed only if, as a matter of reasonable
1/ United States v. Continental Can Co., 378 U.S. 441; United States
v. Penn-Olin Chemical Co., 378 U.S. 158; United States v. El Paso
Natural Gas Co., 376 U.S. 651.




-11probability, it could be shown that both Pennsalt and Olin would separately
have entered the southeast market by means of plant establishments.

Suf-

ficient for a finding of substantial lessening of competition through
foreclosure of potential competition, the Supreme Court said, was a finding
of a "reasonable probability that either one of the corporations would
have entered the market by building a plant, while the other would have
remained a significant potential competitor".
Quoting in part from the aforementioned TNEC Monograph N o . 2 1 ,
the Court concluded:
"Potential competition, insofar as the threat survives . . .
may compensate in part for the imperfection characteristic
of actual competition in the great majority of competitive
markets • . . • The existence of an aggressive, well equipped
and w e l l financed corporation engaged in the same or related
lines of commerce waiting anxiously to enter an oligopolistic
market would be a substantial incentive to competition which
cannot be underestimated." 378 U.S # 174.
^ '
Nor is the absence of a proven intent or attempt to enter a market a bar
to a finding that a given concern is a potential competitor.

It is

sufficient to establish that such concern is the most likely entrant.—^
The doctrine of potential competition, while not relied upon by
the courts as a decisive consideration in a court contest involving
alleged anticompetitive consequences of a proposed bank merger or holding
company acquisition, has been considered and rejected, not as being p e r se
2/

inapplicable, but as being inapplicable in view of the facts of record.-'
Preclusion of entry into a defined banking market by a substantial
T7 Federal Trade Commission v . Procter & Gamble Co.» 386 U.S. 5 6 8 ,
580 (1967).
2/ United States v . Crocker-Anglo National B a n k , 223 F . Supp. 849,
856-7 (N.D. Cal. 1963).




-12potential competitor through consummation of a merger involving the potential,
entrant, and the question of whether such result violates section 7 of the
Clayton A c t , and should have been denied under the Bank Merger A c t , are issues
recently

(9/10/68)

placed before a Federal District Court by the

U.S.

Depart-

ment of Justice, following the Board's approval of merger proposals involving
Girard Trust Bank and Doylestown National Bank (Doylestown, Pa.) and The
Fidelity Bank 6c Doylestown Trust Co. (Doylestown, Pa.).

The Board, in its 6-1

decision in those cases which were considered together, took into account the
possible impact of potential competition. While five members of the majority
ruled that the net effect of the proposed mergers on competition would not be
adverse, I felt that the over-all competitive effect would be no more than
slightly adverse.

Nevertheless, I, too, felt the applications should be approved.

The complaints filed by the Department of Justice in each case assert
numerous violations of section 7 of the Clayton A c t , the majority of which
relate to asserted elimination of potential competition in commercial banking
between and among the banks involved in the two mergers, and a general
allegation of violation premised on the contributory effect of the two mergers
on the continuing trend toward reduction in potential bank competitors in the
Philadelphia area.

We can safely assume, I believe, that the Department of Justice

currently takes the position that potential competition is a major factor for
consideration in determining the legality of a proposed bank merger; and that
proven miscalculation or disregard of a merger's effect on potential competition
can require remand to an agency or reversal of agency action.
No less import is attributed by the Board to the factor of potential
competition in its consideration of Bank Holding Company Act applications.

In

the Board's denial action (April 1967, Fed. Res. Bull. 763) on the application
of Allied Bankshares Corp., Norfolk, Virginia, to form a bank holding company
through ownership of the Virginia




-13National B a n k , Norfolk, and The Central National Bank of Richmond,
existing competition between the banks was found to be insignificant,
and the effect of its elimination of minimal consequence.

However,

the likelihood that substantial potential competition between the banks
would be precluded by their affiliation was stated to weigh heavily in
!

the B o a r d s decision.

In May 1967, one month following the Allied

denial, the Board, by unanimous v o t e , denied a proposal by BT New York
Corporation to acquire Liberty National Bank and Trust Company, Buffalo
(50 Fed. Res« Bull. 769).

As in the Allied case, the Board concluded

that existing competition between and among the banks involved in the
proposal was sufficiently negligible that it posed no bar to approval.
1

However, the proposal s probable effect on potential competition was
found to present a severely adverse consideration.

Rejecting Applicant's

assertion that consummation of the proposal would promote deconcentration
in the heavily concentrated Buffalo area -- through Liberty National's
anticipated greater ability to compete with its two larger rivals -the Board concluded that Liberty Bank was presently capable of offering
to customers in its market area, both large and small, an alternative
source of essential banking services.

Noting that legal and economic

barriers to new entry into the Buffalo market area were already h i g h , the
Board expressed its concern that there be preserved whatever incentive
might exist for entry by potential competitors having the resources and
capacity to surmount existing barriers.




Based on the financial and

-14management resources of BT New York Corporation, the Board found that
the Applicant was a potential competitor in the Buffalo m a r k e t , whose
greater participation in that market was not dependent on consummation
of the proposed acquisition, and that the entry of such a sizable organization by that means would simply raise the entry barriers for others
without increasing the banking alternatives already available to the
public.

Further, it was concluded that Liberty B a n k , through a less

anticompetitive affiliation, could offer meaningful competition to
Applicant and other banking organizations in the upstate banking markets.
Lest the impression be given that there is no limit to the
Board's application of the potential competition concept, I can and
do speak with knowledge of the Board's efforts to delineate those
cases w h e r e , because of the facts presented, potential competition has
no reasonable role in the Board's determination.

Assessing the compet-

itive potential of a given institution is oftentimes difficult.

Such

assessment requires a definition of the relevant product and geographic
markets, and a finding of the ability of a party to a proposal to
compete in the market in which the other party or parties are engaged.
A determination as to the ability of a bank to compete in given product
and geographic markets involves analysis of the cost factor related to
such entry.

A n accurate measure of probable profit, or lack thereof,

can often mandate a conclusion as to whether a given bank can reasonably
be designated a potential competitor.




Similarly, the size of the b a n k ,

-15history of innovation, management ability, and related operational motives
all must be taken into consideration in a determination of the presence
or not of a potential competitor.
Whatever may be the desirability of taking account of
potential competition, the United States Supreme Court has now ruled that
it must be done.—'' As reflected in a Statement in which I joined, dissenting
from the 4-3 action of the Board approving the merger of two banks in North
Carolina (The State B a n k , Laurinburg - Wachovia Bank and Trust Company,
7/11/68), I believe that Federal bank supervisory authorities are required
by law in acting upon merger and bank holding company applications to
guard against the continuing trend toward concentration of banking resources,
a trend that the Bank Merger A c t , the Bank Holding Company A c t , and the
antitrust laws were designed to prevent.

The job cannot be done by

ignoring the potential competitor, and will be done only if barriers to
market entry are removed or substantially reduced.

1/ The Supreme Court Review, 1964, The Law School, The University of
Chicago, p . 188.




-16Merger Policy and Economic Growth
Should the rate of economic growth in an area influence the
policies of the regulatory agencies toward proposed acquisitions?

It

apparently has been argued that competition tends to be more intense
in a rapidly growing area than in a non-growing area; therefore, the
regulatory agencies can afford to pursue a more permissive approach
toward

acquisitions.
There is nothing in current law or in recent court decisions

that would suggest that rapid economic growth is taken by the Supreme
Court as a relevant competitive consideration offsetting, let us say,
the effect of a merger on concentration in an area.

Nor has the Court

suggested that the growth of an area, past or prospective, constitutes
a justification for a merger that would otherwise be illegal -- as might
be the case if it were found that mergers in growing areas contributed
substantially to the convenience and needs of the community.

However,

the bank regulatory agencies deal with large numbers of proposals that
merit a full scale economic review, many of which are, in all likelihood,
not violations of the antitrust laws as currently interpreted.

In such

cases, there is no necessary reason to adopt exactly the same presumptions as have been applied in antitrust cases by the courts.

Moreover,

the substantive question w o u l d , in any event, remain and it does warrant
consideration.
The view that the regulatory agencies need not be as restrictive
in preventing mergers in a rapidly growing area as in a slow-growing or
stagnant area is presumably based on the belief that economic growth




-17would, in and of itself, intensify competition and would tend to offset
high levels of concentration.

There are several intuitively appealing

reasons why this might be the case.

If the economy of an area is growing,

there may be a stimulus toward more intensive competition as the aggressive
competitors in the area attempt to obtain new customers and also to secure
the old ones whose accounts become more valuable.

Moreover, marginal banks

that might otherwise offer little in the way of effective competition, either
because of their small size or limited management, would have an opportunity
to grow with their area and to become more vigorous competitors.

Finally,

in a growing area, there is likely to be room for new entry, either by
branching or new charter.

Banks in other areas and other entrepreneurs

will see an opportunity for profit.

Bank supervisors should see a "need"

for new facilities.
The above arguments may seem persuasive to many in the banking
community.
easily.

However, the regulatory agencies should not accept them

It is by no means obvious that the prospects of obtaining new

business will stimulate banks to more effective competition.

This would

seem to depend on the extent to which banks find it profitable to compete.
In a highly concentrated market, it may still be more profitable to follow
customary rather than competitive patterns of behavior.

Indeed, evidence

from the experience of other industries suggest that competition frequently
becomes intense, not when conditions are prosperous, but when they are
depressed and there is pressure on earnings.

I would suggest that we

simply do not have enough evidence to state with assurance the effect of




-18the rate of economic growth and changes in the rate of growth on the
competitive behavior of banks.
On the other h a n d , there probably is enough evidence to
state that economic growth c a n , at times, convert a marginal competitor
to a larger and more effective competitor.
attitude of management.

Much would depend on the

B u t , at the same time, such banks may also be

very attractive merger partners for larger banks.

If a permissive policy

is adopted, it is difficult to see how this source of increased competition
would be realized.
There should, nevertheless, be room for new banking facilities
in a rapidly growing area whereas there might not be room in a slowly
growing area.

But whether or not the new growth is accommodated by

"inside" banks on the one h a n d , or "outside" banks and new charters on
the other, depends in part on the attitude of bank supervisors who regulate branching and new charters, and also in part on the aggressiveness
of the larger banks already in the area.

If the large and aggressive

"inside" banks are permitted to acquire the most favorable office sites
through de novo branching or merger, particularly with financially marginal
institutions -- and they have some real advantages in finding them -- the
entry of new organizations may be quite limited.

The establishment of

new branches, and mergers with marginal institutions may make it more
difficult for new entrants to become established in the fringe areas.
In the long-run, the effect would be to maintain the same or even higher
levels of concentration.
There appears to b e , however, an inverse relationship between
concentration and growth.




Slow growing areas often have higher concentration

-19ratios than rapidly growing areas.

This is understandable.

Regulatory

policy, which in part is aimed at protecting existing banks from excessive competition, tends to be restrictive toward new entry in stagnant
areas and perhaps somewhat more permissive towards mergers.

The observed

inverse relationship between economic growth and banking concentration
h a s , it should be noted, taken place within a framework of bank supervision that has not been permissive toward mergers in rapidly growing
areas.
There is no way of knowing with certainty what kind of
relationship between concentration and economic growth would be observed
over the next decade if merger policy were to become less restrictive in
growth areas.

However, as indicated, it seems the competitive benefits

deriving from the growth of marginal banks would disappear through acquisition.

While there would still remain the possibility for new entry by

branching and new charter, the extent to which competition would be
benefited from these sources would depend on the extent to which existing
banks could strengthen their positions in marginal areas and also on
regulatory policies which differ from state to state a n d , sometimes, from
one Comptroller of the Currency to his successor.

In any event, it seems

doubtful that the regulation of mergers, in the present institutional
environment, should be based on assumptions about regulatory policies
toward branching and new charters.

Finally, as noted, the apparent

stimulation of competition among existing competitors when new business
is at stake seems dubious, depending, as it does, on hypotheses that have
n o t , to my knowledge, been adequately tested.




-20If it is not reasonable, in evaluating the competitive effects
of m e r g e r s , to rely on economic growth in banking as an offset to higher
concentration, it does seem reasonable to conclude that merger policy
should be viewed as a compliment to economic growth in highly concentrated
markets.

In an unregulated industry, economic growth and the prospect of

high return would tend to attract new capital; and if entry barriers are
not too h i g h , this should result in an intensification of competition.

In

a regulated industry like banking, where barriers to entry and concentration
are high in part because of regulation, economic growth should be given the
opportunity to produce the degree of competition more prosperous conditions
make possible.

This m e a n s , by and large, permitting new entry to meet

rising demands for banking services and also permitting marginal banks to
emerge as effective competitors.

It is in the slow growth areas that

marginal banks are not likely to emerge as effective competitors, and new
entry may also be unlikely whatever regulatory policy.
While a more lenient policy toward mergers in growth areas on
competitive grounds seems unwarranted as a general proposition, there
m a y , nevertheless, be some justification for such a policy on grounds
of convenience and needs.
credit.

A growing area develops large demands for bank

Small local banks may not be able to meet such demands, because

of the volume of their resources, their loan limit or simply their customary
ways of doing business.

It is quite conceivable that, in some cases,

mergers in growing areas would involve benefits to the community that
offset any anticompetitive impact.

This would be particularly true in

the absence of banks suitable in size and approach to meet the demands




-21for banking services generated by growth.

But just as in the analysis of

competition, generalization is difficult, and a careful study of the likely
benefits in each case would be required.
It may be concluded that an easier policy toward mergers in
growth areas is not warranted as a general proposition.

There m a y , however,

be some cases in which the effect of mergers on competition in such areas
is offset by the advantage to the community in convenience and neeebs.
Concluding Remarks
From the above discussion of several key issues relating to bank
merger and bank holding company acquisitions, I am personally convinced
that important differences exist among the supervisory agencies in the way
they carry out their statutory responsibilities.

However, I see no ready

means of resolving these differences in the near future, although interagency consultations may be helpful.

Beyond that, from the pattern of

court decisions in the several cases challenged by the U . S. Department of
Justice there may come a set of guidelines further sharpening the antitrust
standards of the Bank Merger A c t .
In the meantime, to meet the growing demand for banking services,
the nation's banking structure must also grow and adapt.

Innovations in

banking services in particular markets must be allowed to come forth.
However, although acquisitions under some circumstances may have a beneficial
effect on competition —

and often on the convenience and needs of the public

we must carefully guard against the anticompetitive possibilities implicit
in widespread acquisitions among banks.




—

Table I
Merger & Holding Company Applications
Received By Banking Agencies
1966 - 1968*

1966

1967

1968 (Jan. 1-July 31)

Total
for period

22

15

5

42

9

11

6

26

18

17

10

45

49

43

21

113

Federal Deposit
Insurance Corporation

42

47

45

134

Comptroller of
Currency

99

76

40

215

141

123

85

349

190

166

106

462

Agency
Federal Reserve
Mergers
Holding Company
Formations
Holding Company
Acquisitions
Total

Total
Total

*January 1, 1966 to July 31, 1968.




Table II
District Distribution of Applications Received
By Banking Agencies
1966-1968 *
San
Francisco

Tots

-

4
1
1

42
26
45

6

113

Boston

New
York

6
1
2

7
5
3

-

5
2
2

9

15.

2

9

22

16

23

-

6

5

-

Federal Deposit Insurance Corporation

11

19

17

16

21

1

10

8

4

3

4

20

134

Comptroller of the Currency

12

29

35

20

47

8

11

3

6

-

4

40

215

Total

32

63

54

45

90

25

44

11

16

8

8

66

462

13.6

11.7

1.7

1.7

14.3

100,

Richmond

Philadelphia

Cleveland

2

6
2
14

6
10

10
4
o

Atlanta

Chicago

Minneapolis

Kansas
City

-

2
1
3

4
i

St.
Louis

Dallas

Agency
Federal Reserve Board
Mergers
Holding Company Formations
Holding Company Acquisitions
Sub Total

Proportion of Total

*

January 1, 1966 to July 3 1 , 1968




6.9

-

9.7

19.5

-

5.4

9.5

-

-

2.4

4.5

-

-

Table III
Merger and Holding Company
Approvals and Denials
1966 - 1968*
1966

1967

1968 (Jan. 1-July 31)

21
2

13
2

4
1

6
2

10
1

5
0

15
2

16
2

10
0

Federal Deposit Insurance Corporation
Approval
Denial

36
0

38
2

31
1

Comptroller of Currency
Approval
Denial

85
2

76
1

43
0

163
8

153
8

93
2

Agency
Federal Reserve
Mergers
Approval
Denials
Holding Company Formations
Approval
Denial
Holding Company Acquisitions
Approval
Denial

Total
Approval
Denial

* January 1, 1966 to July 31, 1968.




Table IV
Advisory Opinions of Board of Governors,
Federal Reserve, to Other Banking Agencies
1966-1968*
To Federal Deposit
Insurance Corporation

To Comptroller
of the Currency

Total

Anti-Competitive Effects
Serious

27

67

94

Not Serious

94

137

231

121

204

325

TOTAL

*

January 1, 1966 to July 31, 1968

Note:

Between May 29, 1967 and July 31, 1968, the Board's opinions have indicated one
of five terms describing anti-competitive effects. These, in order of the
seriousness of the effect are: (1) monopoly; (2) substantially adverse;
(3) adverse; (4) slightly adverse and (5) no adverse. The first three
categories are considered f to involve serious anti-competitive effects. Prior
to this period, the Board s opinions did not use standardized terminology;
however, the reports themselves were reviewed and classified on the two-way
basis indicated in the table.