Market Definition and the Analysis of Antitrust in Banking

• Author: Myron L. Kwast,John D. Wolken,Martha Starr-McCluer
• Published date: 01 December 1997
• Date: 01 December 1997
• DOI: http://doi.org/10.1177/0003603X9704200405
• Subject Matter: Economic

The Antitrust BulletinlWinter 1997

Market

definition

and the

analysis

of

antitrust

in

banking

BY

MYRON

L. KWAST,

MARTHA

STARR-McCLUER

and

JOHN

D.

WOLKEN*

I.

Introduction

973

The U.S. banking industry is currently experiencing the most sig-

nificant consolidation in its history. The years 1981-1995 have

averaged some 434 mergers among healthy banks per year, and

have cumulated astunning $1.6 trillion (1995 dollars in acquired

bank assets. ISeveral of these mergers, and especially some in the

*

Division

of

Research

and

Statistics,

Board

of

Governors

of

the

Federal

Reserve System, Washington, DC.

AUTHORS' NOTE: The views expressed are those

of

the authors and do not

necessarily reflect those

of

the Board

of

Governors or its staff. The

authors thank Dean Amel, Tim Hannan, Wayne Passmore, Robin Prager,

and Steve Rhoades

for

comments on an earlier draft. Any errors are the

responsibility

of

the authors.

See

STEPHEN

A.

RHOADES,

BANK

MERGERS

AND

INDUSTRYWIDE

STRUCTURE,

1980-94

(Staff

Study

No. 169,

Board

of

Governors

of

the

Federal Reserve System, Jan. 1996).

The

above

figures exclude mergers

of

failed

banks.

Beginning

in the

mid-1980s,

and

continuing

through

1992,

over

1300

bank

failures also contributed significantly to the con-

solidation

of

U.S. banking.

© 1998 by Federal Legal Publications. Inc.

974

The antitrust bulletin

1990s, have been the largest in U.S.

history-including

the merg-

ers of BankAmerica and Security Pacific, Chase Manhattan and

Chemical, and Wells Fargo and First Interstate. Passage of inter-

state banking and branching legislation at the national level, the

Riegle-Neal Act

of

1994, can be expected to further encourage

these

trends,

since

it

will

allow

the

development

of

a

truly

national banking structure.

While the on-going consolidation

of

the U.S. banking system

is in many ways long overdue, it also raises anumber of public

policy concerns. One of these concerns is the potential impact of

consolidation on the competitiveness of banking markets. Under

the Bank Holding Company Act, the Bank Merger Act, and other

statutes, the U.S. Department of Justice and the federal bank regu-

latory agencies are charged with enforcing the antitrust laws in

banking. Thus, over the years, each of these agencies has devel-

oped procedures for analyzing the potential competitive impact

of

aproposed merger.

Current

procedures

for

examining

the

potential

competi-

tive

effects

of

bank mergers,

while

varying

somewhat

across

agencies, are based on three fundamental concepts." In particular

the

(l)

"cluster"

of

bank products is the relevant product line for

competition

analysis; this

cluster

is normally viewed as being

consumed

in (2)

geographically

local

banking

markets;

and

(3) market structure is a key determinant of the degree of compe-

tition. The precise definition of the cluster is vague, but is meant

to encompass the set of products and services that are purchased

primarily from banks. Products and services for which markets

are viewed as being national or regional in scope are virtually

never

considered

to have

competitive

problems;

the focus is

almost entirely on "locally limited products." Thus, in practice,

competition analysis is almost exclusively centered on products

consumed by households and small businesses, since these are

the agents that are normally viewed as being the most likely to

These basic concepts were first confirmed by the U.S. Supreme

Court

in 1963 (the Philadelphia National Bank decision), and recon-

firmed by lower courts as recently as 1987.