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Statement of
George W. Mitchell
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Domestic Finance
of the
Committee on Banking and Currency
of the
House of Representatives
S. 1698
and related bills

August 26, 1965

Mr. Chairman, I thought it might be helpful to your
deliberations if I offered a brief summary of my views on the
substantive issues involved in commercial bank mergers.

I will

do this by reference to the cases considered by the Federal Reserve
Board in the past 3-1/2 years--roughly the period of my service on
the Board.
As both this statement and my voting record will testify,
I regard the competitive impact of mergers the most difficult and
complex question posed in bank merger cases; but I also believe
that, when properly analyzed, competition turns out to be
significantly affected in only a minority of bank merger proposals.

competition is significantly reduced I favor denial unless

the bank to be acquired is an unsound operation or woefully inadéquat
to meet its community's needs.
Let me explain the reasoning that underlies this conclusion
The Bank Merger Act of 1960, under which the Board operates, requires
the supervisory authorities to consider a set of seven factors in
each merger case.

The first five are called "banking factors.”

They cover such considerations as the financial history and condition
the adequacy of capital, the quality of management, and the earning
prospects of the institutions involved.

The relevant supervisory

agency is to judge such questions as whether the status of the sur­
viving bank is strong enough to support a merger or if the position
of the bank to be m e r g ^ ^ ^ s ^ p ^weak as to impel one.

Since banks

involved in mergers X ^ u ^ r ^ ^reN operating institutions and have

their performance r è c ^ r ^ Æ > ^

& j ■:£

jform of statistical, examination

and field contact r e p o t s * supervisory authorities, with such

-2differences in judgment as reasonable men exhibit, have little
difficulty in sorting out and evaluating the banking factors.
During the past 3-1/2 years the Board of Governors has
considered 107 merger cases. It has approved 97 applications and
denied 1 0 . Banking factors were the major or a significant con­
sideration in 44 approvals and 4 denials.

The banking factor that

most frequently represented a basis for approval was a needed
improvement in management.

In every case of approval except three

where banking factors were of significance, the competitive factor
was judged to be neutral or, on occasion, slightly adverse.

In the

three approved mergers where there was significant competition
between the merging institutions, the acquired bank faced manage­
ment, capital or earnings problems that the Board felt were
sufficiently pressing to warrant their resolution by merger.


the other hand, in each of our 10 denials of merger applications
during this period, the banking factors, even though of concern
in four cases, were finally judged of lesser importance than the
competitive factors in every instance.
The record makes clear that there are very, very few
cases in which the competitive factor is significantly adverse
but in which banking factors are nonetheless judged to provide
an overriding reason for approval.

Such fortunately rare cases

typically involve a serious management breakdown, self-dealing
or evident incompetence.

I might add I have not seen eye to eye with the majority in all
of these cases. I would have turned down 11 applications that
were approved and approved one application that was denied.


As compared with the banking factors, the other two
factors that supervisors aie required to consider under the Bank
Merger Act pose much knottier problems, both of information and

The statute specifically refers to these factors as

(1) , the convenience and needs of the community to be served"
and (2) "the effects of the transaction upon competition,
including any tendency toward monopoly."
How does one go about judging whether the convenience
and needs of the community will be benefitted by a change in
banking ownership and management?

This involves determining the

actual breadth and intensity of community demands for various
banking services, as distinct from the quantity and quality of
services that the existing and proposed new combinations of banks
intend supplying.

To do this one needs to survey community

opinion on the status quo, to find out how both business and
household customers appraise the quantity and quality of the
banking services available to them.
But it is hard for bank customers to compare services
they are accustomed to with those they have never had the opportunity
to try out.

Such survey results, therefore, must be supplemented by

a more knowledgeable appraisal.

In this appraisal, the broad

experience of examiners in the qualitative and quantitative aspects
of banking services can usually be helpful.
Another aspect of the impact of bank mergers upon the
"convenience and needs of the community" concerns the contribution
that banks can make to economic growth and stability in their own



A bank that is itiv^sfcitig heavily in out-of-state

business loans, tax-exempt securities, or mortgages contributes
less to its community than one that is playing an active role in
satisfying the credit needs of local businessmen, farmers, con­
sumers and governments.

Clearly, so far as the community’

convenience and needs are concerned, a merger involving the first
bank would be far less objectionable from the public point of view
than would a merger involving the second.

Accordingly, a careful

inventory of the extent of local and non-local credits in the
bank’ loan and investment portfolio is called for in order to
clarify its role in community financing.
In these ways--through surveys of community views,
informed professional judgments, and a review of the record of
the bank’ participation in financing its community--reasonable
bases for judgment can be established as to what the "convenience
and needs1 of the community are and how well the existing
institutions have met them.

Against this must be weighed the

record and assurances of the merging bank as to what it can and
will supply.

The final balancing of these considerations remains

a matter of judgment but, with evidence before them of the type
I have outlined, supervisory authorities can judge with a fair
degree of assurance how well a proposed merger meets the "con­
venience and needs" test.

In the 97 approvals noted above, the

convenience and need factor was the major or a significant
consideration in 53 cases.
in any denials.

It was not a significant consideration

In my judgment, the "convenience and need"

factor should ordinarily be accorded more weight than the "banking



The hardest criterion of all to apply, however, is the
effect of the proposed merger on competition.

At the outset it

should be clear that the competitive factor cannot be disassociated
from consideration of "convenience and needs," inasmuch as the
over-all objective is to provide the banking services desired by
the customers on reasonable terms and at fair prices.


the most conclusive way of assuring that a community's convenience
and needs will be met is by the maintenance of so many alternative
banking choices that the resulting competition among them will give
customers all the opportunity they could wish to move from one bank
to another in order to obtain whatever mix of services they desire.
But this is rarely a practical criterion.

There is a limit to the

number of practicable banking alternatives that it is possible to
make available to any given community.
In dealing with a change in the status quo there is a
popular presumption that any decrease in the number of independent
banking units in a given market area xvill, of itself, decrease
competition and increase the tendency toward monopoly.

It is my

own feeling that this presumption is too harsh a standard to
apply without corroborating evidence.

Such evidence is to be

found in the extent of any unfilled needs of business and house­
hold customers in the market areas affected by the proposed merger.
And it is to be found in an analysis of the markets involved in
the merger--the alternative sources of banking services, the extent
of market power exercised by the banks in these markets, and the
role in these markets of the particular banks to be merged and
the merging bank.


In contrast to the concept adopted in the Philadelphia
National Bank case that "the cluster of products and services
denoted by the term ’
commercial bank* composes a distinct line
of commerce" I am of the view that the great variety of unrelated
services that banks offer are far more significant than their
related services,

The corollaries of this view are that banks

compete with other businesses fully as much as they do among
themselves and that for each service they offer there is
ordinarily a different market area and a different competitive
Thus, in order to evaluate the competitive factor, a
reasonably accurate delineation of the areas that the merger
candidates serve must be developed.

From the approximate

boundaries of the various service areas for each type of bank
activity it is possible to identify the markets that might be
affected by the merger, as they are revealed in the overlap
of respective service areas.
Among all the services that banks provide, only one
of major importance is truly unique and not vulnerable to non­
bank competiticn--the checking account.

In all other activities

commercial banks face varying degrees of competition from other
financial intermediaries or the money and capital markets.


lenders, bank compete with each other and other financial inter­
mediaries or with capital markets in extensions of credit to
business (large and small), to consumers, and to governments
(Federal, State, and local).



It is quite evident that in many of these markets the
merging of any but the very largest banks is unlikely to have
significant anti-competitive effects.

Non-bank and non-local-

bank competition are major factors ensuring competitive per­
formance in the Government securities market, in lending to
large businesses, and in the market for most tax-exempt State
and local bonds.

Nonbank competition is typically vigorous in

the consumer credit markets, where hard goods suppliers have
their own sources of credit independent of local banks.


same is true of mortgage markets, where other specialized
financial intermediaries are dominant.

In whatever markets

banks face substantial nonbank or non-local-bank competition,
it is a fair presumption that the impact on competition of any
bank merger will be negligible.
What, then, are the remaining markets in which competitive
considerations must be weighed particularly carefully?

The most

important single market in this category is the market for demand
deposit services to local business and individuals.

These are

services that can be provided only by a bank, and for most such
customers only by a local bank.

Another important local market

is that for savings accounts; in this instance, however, local
offices of other financial intermediaries usually offer a
similar service.

Lately some rate-conscious savers have escaped

the orbit of local alternatives altogether and exported their
savings from one end of the country to the other.

LÔ X -

The small business borrower in another bank customer
that may suffer from the removal of an alternative source of bank
credit by merger.

Even though such borrowers can often obtain

trade or supplier credit, the price of such financing may be high
and the attendant conditions can be confining.

Small businessmen

usually find their local banks to be their cheapest, most
accessible, and most flexible source of external financing.
In considering the definition of the service area of
the bank, then, particular attention should be paid to the
potential service areas for small business borrowers and individual
and small business depositors--these are the markets most likely to
be significantly affected one way or the other by merger.
When chief concern about the possible competitive impact
of bank mergers is narrowed down to these two or three market
sectors, a great many merger proposals can be said not to raise
the competitive issue at all.

This is because the banks involved

have little or no overlap in their service areas for small business
and personal customers.

Such is the case when the major objective

of the acquiring bank is to extend its activities into another
geographical market or into another service field.

For example,

in Virginia, a State where there has been a great deal of merger
activity in the past three years, the preponderance of cases
have involved the extension of service areas for banking institu­
tions that are, under a./recent State statute, becoming state-wide
in their operation.



that of the withdrawal of an alternative source of banking service,
but typically the substitution of a branch of a larger institution
for a community bank.
It is sometimes said or implied that branches of large
banks in small communities are unfair competition for local banks.
But there are too many instances in which local banks have held
their ground in growth and profitability to support a broad
generalization along that line.

As a practical matter, it may

well be that the communities that are most blessed with banking
facilities are those that possess a mixture of local banks and
branches of larger institutions.
This brings us down to what might be called the hard core
of merger proposals--those that turn out, upon examination, to
involve two or more banks with overlapping service areas for small
business and individual customers.

In such circumstances, con­

summation of the merger undeniably will eliminate one competing
bank from the relevant markets.

The loss of one alternative for

customers in choosing their banking connections in these market
areas is almost certain to lead to denial unless the number of
actively competing banks is already large, or the bank to be
acquired is so small or ineffective a competitor as not to
create any appreciable gap in bank alternatives by its dis­
appearance as an independent entity.

- 1 0 -

Let me turn to the record to give you some indication of
how these principles have worked out in practice.

The Board*s

10 denials in the past 3-1/2 years have, without exception, been
based primarily on the judgment that the proposed merger would
appreciably lessen competition in one form or another.


management factors have significantly weighed for the merger
in some of these cases, but in each instance they have been
relegated to a secondary consideration.
In the 97 Board approvals of mergers during this same
period, the effect on competition was, in the Board’ judgment,
negligible in 70 cases, favorable in 16, slightly adverse in 23
and in only 4 cases there was significant competition between
the merging banks.
You will note that I mentioned 16 cases in which it was
judged that the effect of the proposed merger would be to increase

The favorable effect that a merger can have on

competition, while not common, is, in my opinion, often overlooked
by critics of mergers.

This favorable effect may arise when the

consummated merger puts an end to the monopolistic policy of lhome
office protection.1 It usually accompanies the merging of small
banks in an area where a dominant competitor holding a very large
proportion of the local deposits can only be effectively challenged
by a larger institution.
Occasionally merger applications pose a confrontation of
an adverse effect on competition, on the one hand, and a favorable
effect on serving the community’ convenience and needs.

For example,


the bank proposed to be merged may have exhibited a very
limited interest in serving the credit needs of its community-~then
the only competition lost by merger would be the potential of a
new management with a different philosophy.

In these circumstances

the better alternative may well be a merger.
In an isolated community, to take another example, it is
possible that neither of two banks can meet the credit needs of
local businesses and farms in the surrounding area but that their
combined resources and higher lending limit would enable them to
do so.

In such cases, the proposed merger might eliminate sub­

stantial competition between the merging institutions for some
types of banking services but at the same time the resultant bank
could do a markedly better job at serving the areafs convenience
and needs.
My work and experience with the Bank Merger Act in the
past 3-1/2 years persuades me that even among the most sophisticated
experts in law and economics, the understanding of what it takes to
make a competitive market is still quite imperfect.

Progress in

deepening such understanding comes slowly, and it depends partly
upon improvements in analytical techniques designed to define
the markets affected by mergers and to appraise the possible
impact of mergers upon these markets.

I have tried to outline

some of the complexities of this task and to indicate my own


I believe that all concerned with the regulation of bank
mergers are sincerely concerned with promotion of the public welfare.
It seems to me that the differences in our conclusions rest not on
any lack of faith in the efficacy of competition but essentially on
differing views as to the relevant markets and evaluation of the
impacts of mergers on these markets.

The Board is devoting con­

siderable professional resources to solution of these problems in
hopes of improving the basis for its judgments.

As these efforts

progress, I hope they can lay the foundation for a more widespread
consensus among all authorities as to where the public interest in
bank mergers lies.
Turning now to S.1698, while I share many of Governor
Robertson's reservations concerning the immunity it would grant
to past mergers, I strongly support the prospective features of
the bill.

Even though I regard more seriously than many the

troublesome problems of divestiture that have arisen, or may arise,
in a few cases, I still do not conclude that the situation warrants
general immunity from the antitrust laws for all bank mergers that
took place before the enactment of this bill.

Clearly these difficult situations should be avoided in
the future.

Fortunately, cases in which a bank supervisory agency

approved a merger but the Attorney General brought suit to prevent
it have been infrequent.

In fact, none of the 97 mergers approved

by the Board in the past 3-1/2 years has been contested under the
antitrust laws and I understand the Attorney General has said he

-13has no intention of doing so•

Nevertheless, the difficulties of

undoing a merger are great enough that I believe a procedure
shuuld be established by statute to prevent such cases from arising.
One of my reasons for being concerned about the problems
of divestiture is that I see no practical device for spinning off
depositors in non-branching states.

A bank can spin off assets

in the form of securities and loans without difficulty; it is the
very essence of banking that it be in a position to do so.

A bank

can, neglecting the human problems of its staff and officials,
spin off personnel and operating know-hox*.

A bank can, with

considerable disruption to customer relationships and convenience,
sell or spin off branches and with them the propensity of local
residents and business to patronize that branch.

But how can a unit

bank sell or spin off its depositors,assigning them to a new bank
or existing institution?

And how can it organize a new institution

without owning it or controlling it indirectly?

While spinning off

assets, operating personnel and branches involves difficulties and
hardships, spinning off depositors in a non-branching state may
defy solution.
this problem.

S.1698 offers an effective preventive remedy for