A person may well wonder why bank mergers need to be regulated in the first place. There is a great concern among state and federal governments that too many bank mergers could lead to a decrease in competition and the domination of the market by one bank, or too few banks. These dominant banks could fix prices and rates and decide who gets what loans and which services.
The concentration of economic power in too few companies, or in one alone, is the concern of federal and state antitrust laws. These statutes or regulations are designed to promote free and open markets with numerous competitors. Antitrust laws are sometimes referred to as “competition laws.”
Their goal is to eliminate unfair competition, including such tactics as market division among competitors, price fixing, or agreements not to compete. A monopoly is essentially one company that has developed the sustained ability to raise prices or exclude competitors.
The three main federal antitrust statutes are the Sherman Act, the Clayton Act, and the Federal Trade Commission Act, and they serve the three most important functions of antitrust law. Price fixing and the operation of cartels are prohibited by the Sherman Act. It also bans other collusion among businesses that unreasonably restrain trade. Secondly, the Clayton Act restricts the mergers and acquisitions of businesses that would tend to substantially lessen competition or create a monopoly. Thirdly, the Sherman Act prohibits monopolization.
Among the practices that are outlawed are price fixing, market division, and organizing a cartel. Price fixing is an agreement among competitors to intentionally set prices so they do not compete, but rather keep prices higher than they would be if there was free competition.
Competitors agreeing to divide up sales territories or markets and not compete freely for customers, it is called “market division.” An agreement among competing employers not to attempt to hire each other’s employees is a form of market division in the labor market. The goal is to reduce the amount employers must pay for workers by not competing against each other.
What are Some Other Considerations Regarding Bank Mergers?
A cartel is an arrangement among suppliers or manufacturers of goods not to compete but to maintain prices at a higher level by reducing the supply and restricting competition. So the Organization of Petroleum Exporting Countries, known as “OPEC” meets periodically and agrees on how much oil to deliver to the international market depending on what price they want to achieve. American antitrust law cannot be used to halt their practices, because the members of OPEC are sovereign, foreign nations.
Other federal and state laws work to promote the same goal. For example, the federal Bank Merger Act (BMA) prohibits any merger of banks that would have the effect of lessening competition among banks to a degree that there could be price and rate fixing for banking services. This is especially true if there were to be a total monopoly of one bank in any part of the United States.
In the case of certain merger transactions, the banks proposing to merge must request the approval of the Federal Deposit Insurance Corporation (FDIC). The Bank Merger Act prohibits the FDIC from approving a proposed merger transaction if it would lessen competition in any section of the country or to tend to create a monopoly. Also, the FDIC cannot approve a merger if it would in any other manner restrain trade.
There could be an exception in the case of a merger whose effect would be to substantially lessen competition, tend to create a monopoly, or otherwise restrain trade; if the FDIC finds that the anticompetitive effect of the proposed transaction would be clearly outweighed by the public’s interest in gaining the convenience and service that the merger would offer.
For example, the FDIC might approve a merger transaction if one of the banks involved is probably going to fail. This would be a public benefit that would counter any possible loss of competition. If one of the two banks were to fail anyways, the failed bank’s competitive power would be lost.
In every proposed merger, the FDIC must also consider the financial and managerial resources and future prospects of the existing and proposed institutions, the needs of the community that is served by the banks and the effectiveness of each bank in combating money-laundering activities.
There are different agencies that regulate banks and bank mergers based on the effect on competition that any given merger would have. Which regulatory agency monitors the bank depends upon what kind of bank it is as follows:
- Mergers of national banks are monitored by the Office of the Comptroller of Currency (OCC);
- The Federal Reserve Board regulates state member banks and holding company transactions;
- The Federal Deposit Insurance Corporation (FDIC) regulates nonmember insured banks.
After the appropriate federal regulatory agency has reviewed a proposed merger, the Department of Justice also does its own antitrust evaluation of the transaction.
Why Should I Care about Bank Mergers?
It is the customer who is primarily affected when banks merge. When two banks merge into one, the customers of one or both banks may have to deal with getting new ATM cards, account numbers, new branch locations and new personnel with whom they will do business. If the banks that merge are not well prepared to make the merger a smooth one for consumers, chaos in providing services to consumers can result.
Those are only the minor hassles. The major worry is that reduced competition may result in higher fees for various bank services. When two banks merge in an area, small business owners, who depend on personalized service from the personnel of their bank, fear that it will result in a reduction in the quality of services they receive from their bank.
They fear higher costs as well as possibly reduced services. These changes can affect all customers of the merging banks. So, customers of all sizes and character from average individual consumers to businesses should be aware of potential mergers and their consequences.
Bank mergers can affect not only consumers but others who are in the banking business. Consolidation of banks into larger banks can make it more difficult for smaller players to break into the banking business. This denies entrepreneurs opportunities as well as denying the benefits of competition to consumers. It can also make the nation’s economy as a whole less resilient and subject to shocks.
Reportedly, personnel at the Consumer Financial Protection Bureau have witnessed how some mergers and acquisitions can bring banking chaos to consumers. Financial companies that rapidly expand through buyouts are often not prepared to integrate systems and make sure account information remains accurate.
In terms of consequences for our national economy, we saw in the mortgage lending crisis of 2008 and 2009 what can happen when banks become too big. At that time, the phrase “too big to fail” was repeated incessantly as the government had to justify using taxpayer dollars to bail out the banks. Economists assured the taxpaying public that allowing these banks to fail would be catastrophic for the national economy.
In addition, while prosecutors and regulators are often quick to sanction small financial institutions, they are more reluctant to do so for bigger institutions, out of fear of unintended consequences. We must always be careful that mergers and acquisitions do not amplify these risks.
Where Can I Go to Learn More about Antitrust Laws and My Rights as a Bank Customer?
There is plenty of literature available from online sources and in books about antitrust law and how it can affect you, your business and the economy in general. The Federal Trade Commission has copious information online about federal antitrust law. States have antitrust laws also and there is information on that topic available online as well.
If you wish to find out more about your rights as a business owner under antitrust law as well as your rights as a bank customer, you may want to consult a business attorney with experience in banking and finance matters. Or a consumer lawyer who specializes in consumer finance law can advise you of your rights and let you know what protections you have under the law as a bank customer.
If you own a business and think competitors have engaged in unfair trade practices that are harming your business, you want to consult an antitrust lawyer.
