The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
For Release on Delivery Statement of Wm. McC. Martin, Jr. Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions, Committee on Banking and Currency, United States Senate, May 19, 1965, on S. 1698. I testify here today in support of the bill S. 1698. The bill would amend the Bank Merger Act of 1960 to exempt bank mergers from the Federal antitrust laws. It might be helpful, Mr. Chairman, first to summarize briefly the Bank Merger Act of May 13, 1960. The Act prohibits the merger, consolidation, acquisition of assets, or assumption of liabil¬ ities of one insured bank with or by another such bank without the prior approval of the Comptroller of the Currency, the Board of Governors, or the Federal Deposit Insurance Corporation, depending on whether the resulting, acquiring, or assuming bank is to be a national bank, a State member bank, or a nonmember insured bank. In determining whether to approve or to disapprove a merger application, the appropriate agency is required by the Act to consider, as to each of the banks involved, its financial history and condition, the adequacy of its capital structure, its future earnings prospects, the general character of its management, whether its corporate powers are consistent with the purposes of the Federal Deposit Insurance Act, the convenience and needs of the community to be served, and the effect of the transaction on competition, including any tendency toward monopoly. The agency may approve the transaction only if, after con¬ sidering all of the factors just mentioned, it finds the transaction to be in the public interest. Before acting on a merger application, the action agency is required by the Act to request from the other two Federal bank supervi¬ sory agencies and from the Attorney General advisory reports on the -2~ competitive factors involved in the case, Under the statute, the advisory reports are not recommendations as to what action should be taken by the appropriate agency on the merger application, but are limited to the competitive factors only. The advisory reports on the competitive factors must be supplied to the action agency normally within thirty days of the request. The Act also provides for public notice of the filing of merger applications and for special handling of any application involving a probable bank failure or other emergency requiring expedi¬ tious action. Of course, if a merger application of a State member bank or a nonmember insured bank is rejected by the State banking authority, that closes the matter and dispenses with any need for action on the case under the Federal bank merger statute. S. 1698 would make "exclusive and plenary" the authority of the Board of Governors, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to approve or to disapprove proposed mergers and other similar transactions covered by the Bank Merger Act. Banks participating in transactions approved under the Act would be relieved by the bill, as to such transactions, from the Sherman Antitrust Act and the Clayton Act. This would be true whether the particular transaction "has been or is hereafter consummated". Any bank merger or similar transaction consummated prior to the date of enactment of the Bank Merger Act (May 13, 1960) following approval of the transaction by the appropriate State or Federal bank -3- supervisory authority, also would be exempted from the Federal antitrust laws by the bill. In a very real sense, S. 1698 would merely restore to the bank merger situation the rules that were generally understood to apply at the time of enactment of the Bank Merger Act in 1960 and until the decision in June 1963 of the United States Supreme Court in the Philadelphia National Bank case that section 7 of the Clayton Act applied to bank mergers, even though approved under the 1960 statute. (374 U.S. 321) The best evidence of this is in the legislative history of the Bank Merger Act. I would like to review that history briefly. The report of your Committee in 1959 and that of the House Committee on Banking and Currency in 1960 leave no doubt that the competitive effects or possible antitrust implications of bank mergers were the major reasons prompting adoption of the Bank Merger Act. A main emphasis of the entire legislative history - and rightly so - is that competition is an indispensable element to a strong and progressive banking system. This and the important gaps that existed prior to 1960 in the Federal law governing bank mergers were stressed as the reasons why legislation was necessary. The special needs and characteristics of banking, however, is the central theme running throughout the legislative history. It was emphasized that banking is a licensed, strictly regulated, and closely supervised industry that offers problems acutely different from other types of business, whether regulated or not. Because of -4- this, the Congress in enacting the Bank Merger Act deliberately chose to place the authority to pass on bank mergers in the Federal bank supervisory agencies. The most troublesome issue was the standards by which the legality of bank mergers was to be tested. As the Committee reports explain, sections 1 and 2 of the Sherman Antitrust Act prohibit unreasonable restraints of trade in interstate commerce and monopolies and attempts to monopolize in any parts of such commerce, while corporate acquisitions in the circumstances described in section 7 of the Clayton Act are prohibited where the effect "xnay be substantially to lessen competition, or to tend to create a monopoly".However, it is abundantly clear from the legislative history that Congress felt that it would not be in the public interest for the legality of bank mergers to be tested by competitive factors alone to the exclusion of banking factors, including offsetting benefits to the public. Indeed, the Congress understood specifically that there would be situations in which ''approval of the merger would be in the public interest, even though this would result in a substantial lessening of competition.11 (S. Rpt.No. 186, April 17, 1959, pp. 19-24; H. Rpt. No. 1416, March 23, 1960, pp. 10-13) No exemption from the antitrust laws is contained in the Bank Merger Act. When the Act was passed in 1960, there seemed to be little reason for such an exemption. At that time, as the legislative history clearly shows, it was generally agreed that section 7 of the Clayton Act, as amended by the Celler-Kefauver Act in 1950, was -5- inapplicable to bank mergers, normally accomplished through asset acquisitions rather than stock acquisitions. For example, testimony for the Department of Justice was that section 7 "is little help" in stopping bank mergers because it "covers bank stock--not bank asset—acquisitions." (Hearings on S. 1062, House Committee on Banking and Currency (1960), p. 162) In addition, there was little or no experience by which to judge the usefulness of the Sherman Act in dealing with bank mergers. As you have emphasized on various occasions, Mr. Chairman, the Congress specifically rejected proposals that antitrust standards be adopted as criteria for approvals of bank mergers. Also rejected by the Congress was a proposal that the Attorney General be permitted to intervene and obtain court reviews in bank merger cases pending before the Federal bank supervisory agencies. Instead, the Congress decided that the proper role for the Department of Justice in bank merger cases would be fulfilled by submitting advisory reports on the competitive factors to the banking agencies for consideration by them in deciding whether to approve or to disapprove merger applications. In view of the attempts which certain banks are having to make, or may have to make, to unscramble their affairs as a result of antitrust litigation subsequent to agency approvals of mergers, a statement in your Committee's 1959 report is especially significant. In the words of your Committee: "The advance approval feature is important in halting bank acquisitions before they are consummated and in preserving the depositors1 confidence in an institution which might -6- otherwise be destroyed by an attempt to unscramble assets after an acquisition has been completed," (S. Report No. 196 on S. 1062, April 17, 1959, p. 22) My study of the situation makes it crystal clear to me that the test for the validity of bank mergers today is not what the Congress thought it was to be at the time it enacted the Bank Merger Act. The Philadelphia National Bank case, cited above, the decision in April 1964 of the Supreme Court in the First National Bank and Trust Company of Lexington case (376 U.S. 665), and the decision on March 10 of this year of the Federal District Court in New York in the Manufacturers Hanover Trust Company case, leave no doubt that bank mergers are now subject to both the Sherman Act and section 7 of the Clayton Act. This litigation--as well as other pending antitrust court cases to overturn bank mergers--makes it unmistakably clear that banks and their customers now face the uncertainty that, even though merger proposals receive the advance approval of the appropriate Federal banking agency, the transactions are subject to veto in the courts on the basis of competitive factors alone. The problems that have followed in the wake of these court cases are well known. A high degree of public confidence is peculiarly essential to a sound and vigorous banking structure. Indeed, the uncertainty regarding agency approvals and protracted antitrust litigation to unscramble mergers risk detrimental effects on the banks involved and the public. As previously indicated by the quotation -7from your Committee report, this risk was not one that the Congress thought would materialize when it enacted the Bank Merger Act. S. 1698 would remedy this situation. The merger of Manufacturers Trust Company and The Hanover Bank, which the Board approved under the Bank Merger Act in September 1961, was held to violate the Federal antitrust laws last March by the Federal District Court in New York, That merger is the only one approved by the Board under the Bank Merger Act that has been the subject of antitrust litigation. Since November 1961, the Board has had a rule under which mergers approved by it cannot be consummated, except in special situations, until seven days have elapsed after public release of the Board's action approving the transaction, (12 CFR 262.2(f)(5)) Although not required by any statute, this rule was adopted to reduce the prospects of having to unscramble a merger that, subsequent to its approval by the Board, was made the subject of litigation under the Federal antitrust laws. The Department of Justice, of course, is assured specifically of advance notice of pending bank merger cases under the requirement in the Bank Merger Act for advisory reports from the Attorney General. The Board gives careful consideration to the advisory reports of the Attorney General, as well as to those of the other two banking agencies, in determining whether to approve or disapprove a particular transaction. The Department's Antitrust Division occasionally asks for more information concerning a particular proposal pending before the Board, and this information is obtained and supplied by the Board. -8In some cases where the Board has received additional information regarding an application after transmittal of the statutory requests for competitive-factor advisory reports, the Board has requested a further expression of views from the other banking agencies and the Attorney General in the light of the additional information. Further¬ more, as experience has developed under the Bank Merger Act over the years, there has been informal discussion between the staff of the Board and the staff of the Justice Department where the Antitrust Division has had serious question under the antitrust laws regarding a particular proposal and the desirability of such discussion has been indicated. While the seven-day provision in the Board's rules and other procedures of the kinds that I have mentioned minimize the risk of having to unscramble a merger that has been previously approved by the Board, these administrative measures cannot eliminate that risk. The recent court decisions make it clear that bank mergers approved by the appropriate Federal bank supervisory agency under the Bank Merger Act are not immune from antitrust proceedings, and we do not know of any Federal statute of limitations on actions to enforce the antitrust laws. The recent court decisions involving bank mergers have underlined the fact that, in the antitrust field, such matters as banking factors and offsetting benefits to the public are virtually ignored. This, of course, marks the basic difference between the -9- responsibility of the Federal banking agencies under the Bank Merger Act and the antitrust functions of the Attorney General and the courts. In deciding a case under the Bank Merger Act, the appropriate Federal bank supervisory agency must arrive at a balanced decision of approval or disapproval based upon a consideration of all of the factors specified in the Act. Sound banking and the needs of the public, as well as effect on competition, must be taken into account. To process merger cases in a way which, essentially, would give consideration only to competitive or antitrust factors, to the exclusion of other proper considerations, would be contrary to the responsibility vested in the action agency by the Bank Merger Act. In the Board's judgment, therefore, no administrative steps can be taken appropriately under existing law that would effectively bar actions pursuant to the antitrust laws to upset bank mergers previously approved by one of the Federal bank supervisory agencies under the Bank Merger Act. For the reasons I have indicated, the Board supports S. 1698 and hopes that it will be favorably acted upon by the Congress. In its report to you on the bill, you will recall, Mr. Chairman, that the Board urged that the Congress examine the situation that has developed since 1963 with a view to prompt correction along the lines of your bill. The Board's report also mentioned the possibility of some other approach to the problem should the Congress be unable to agree on -10- the approach proposed in your bill. As the report pointed out, one such possibility would be to amend the Bank Merger Act to allow a specified time within which an antitrust action might be brought to prevent consummation of an approved merger and, if such an action were not filed during that time, the merger could be consummated and would be exempt from any proceeding under the antitrust laws. Because the Attorney General receives ample notice of pending mergers under the procedures of the Bank Merger Act for advisory reports, the specified period in any such alternative approach should be relatively short. Such an alternative, however, would be a less positive approach than S. 1698. Moreover, such an alternative unfortunately would incorporate specifically into the Bank Merger Act two different-and logically inconsistent--standards for bank mergers. Indeed, the Department of Justice would be obliged by the antitrust laws to intervene to block a bank merger in the very same circumstances in which a Federal banking agency would be required by another Act of Congress-the Bank Merger Act--to approve the transaction. Thus, two arms of the Government, carrying out their statutory duties, would work at cross purposes, with banks and the communities they serve caught in a legal cross fire. Clearly, this sort of conflict should be avoided, as it would be by enactment of S. 1698.
@FedFRASER