The Origins of Antitrust in Banking: An Historical Perspective

• Author: Bernard Shull
• Published date: 01 June 1996
• Date: 01 June 1996
• DOI: http://doi.org/10.1177/0003603X9604100202
• Subject Matter: Article

The Antitrust Bulletin/Summer 1996 255

The origins

of

antitrust in banking:

an historical perspective

BY BERNARD SHULL*

I. Introduction

Current public policy relating to competition in banking is charac-

terized by an integration of antitrust enforcement with banking

law. It is a product of the last 50 years and has followed a succes-

sion of other policies that were initiated with the first banks in the

United States and subsequently altered.

Recent changes in banking law, structure, behavior, and tech-

nology, including the relaxation of geographic and activity con-

*Professor, Department of Economics, Hunter College of the City

University of New York and Special Consultant, National Economic

Research Associates.

AUTHOR'S NOTE: This article was prepared while 1served as a Visiting

Scholar in the Bank Research Division

of

the Office

of

the Comptroller

of

the Currency (OCC). 1wish to acknowledge the helpful comments

of

Larry

Mote

of

the acc, Stephen Rhoades

of

the Board

of

Governors, Federal

Reserve System, Michael Greenspan

of

Thompson &Mitchell,

and

Paul

Horvitz

of

the University

of

Houston; and also

of

Philip Bartholomew

of

the OCC on an earlier version.

© 1996 by Federal Legal Publications, Inc.

256

The antitrust bulletin

straints, an unprecedented bank merger movement, a sharp decline

in the number of banking institutions, emerging secondary mar-

kets and new payments systems, presage afundamental transfor-

mation in the industry. At such times, areassessment

of

public

policy in banking in general, and policies toward competition in

particular is warranted.

Any reassessment

of

competitive policy can reasonably begin

with a review of the historical record. The aims

of

such a review

are to illuminate the processes of change, and to identify any gen-

eral tendencies likely to persist.' Section II briefly reviews the

current structural changes underway. Section III discusses com-

petitive policy in banking prior to passage of the antitrust laws,

section IV, banking's long immunity from antitrust in the United

States, and section V, the emergence

of

antitrust enforcement in

the mid-1940s. Section VI reviews the Bank Holding Company

Act

of

1956 and Bank Merger Act of 1960, which were preludes

to the establishment

of

antitrust standards for bank mergers. Sec-

tion VII examines the systematic application of the antitrust laws

to mergers in the early 1960s. A discussion of policy issues sug-

gested by this review are considered in section VIII.

Competitive

policy

in banking

developed

long

before

the

antitrust laws were enacted. Over the years, the nature of the pol-

icy has fluctuated

widely

in response to a continuing tension

between the aim to achieve competition and the established need

to protect industry from the hazards

of

bank failure. The integra-

tion of antitrust and banking law after World War II helped satisfy

an historical bias in favor of competition in banking, and repre-

sented a shift away from protection following aperiod of govern-

ment-established

anticompetitive

restrictions.

Nevertheless,

competitive policy in banking remained distinctive because

of

continuing concerns about financial market stability. Since the

early 1980s, a key element of competitive policy, merger analysis

by the federal agencies, has evolved through improved analytic

techniques, and in response to new competition for banks and

changes in legal restrictions on branching. The current approach

See JOHN HICKS, ATHEORY OF ECONOMIC HISTORY ch. 1

(1969).

Historical perspective :257

facilitates

large

bank

mergers

and,

what

is

likely

to be, an

unprecedented and irreversible change in banking structure. Justi-

fiably or not, such changes incite historic concerns, and inevitably

raise questions about the efficacy of the current approach.

II. Structural and other changes-

The changes in banking structure provide the background for

any

reconsideration

of

competitive

policy

now

underway.

Between 1980 and 1994 there were over 6300 mergers of indepen-

dent banking organizations; mergers involving "large" banking

organizations,

of

over $1 billion in assets each, have increased

dramatically. Primarily due to mergers, and secondarily as the

result

of

almost 1500 failures over the period, the number of inde-

pendent banking organizations has declined more than one-third,

from about 12,200 in 1980 to 7900 in 1994. There has not been a

comparable structural reorganization in banking since the failures

of the 1920s and 1930s cut the number

of

banks in half.

Projections, based in part on merger activity not constrained

by current antitrust and banking law standards, indicate continued

declines in the number

of

organizations.> Concentration measures

for commercial banking, at

the

national and state levels, have

also increased sharply; and still higher banking concentration at

the national and state levels is to be expected. In contrast, con-

centration

measures at the

local

level (metropolitan areas and

nonmetropolitan area counties), which are normally viewed as rel-

evant for evaluating competition, have hardly changed at all since

the

mid-1970s.

However,

they

were

relatively

high then

and

remain so. Passage

of

the Riegle-Neal Interstate Banking and

2The data in this section are principally from

STEPHEN

RHOADES,

Bank Mergers and Industrywide Structure, 1980-1994 (Staff Study, Fed-

eral Reserve Board) (forthcoming 1995); and Donald Savage, Interstate

Banking: A Status Report, 79

FED.

RES.

BULL.

1075 (1993).

Timothy Hannan &Stephen Rhoades, Future U.S. Banking Struc-

ture:

1990-20/0,

37

ANTITRUST

BULL.

737 (1992); and Stephen Rhoades,

Consolidation

of

the Banking Industry

and

the

Merger

Guidelines, 37

ANTITRUST

BULL.

689 (1992).