Amidst the current economic crisis, there has been increased pressure on certain industries to consolidate. One such sector that has experienced increased consolidation is the financial sector, which has seen numerous mergers and acquisitions, especially with respect to larger financial institutions. As the larger financial institutions continue to grow, legislators have begun to urge leaders in the Department of Justice to take a closer look at this consolidation, especially if such consolidation involves government-funded bailout money. By statute, the Department of Justice is the federal antitrust enforcement agency responsible for the banking sector; it shares jurisdiction with banking regulators. During his campaign, President Obama promised stepped-up antitrust enforcement. Recently, Christine Varney, the President’s nominee to head the Antitrust Division of the Department of Justice, signaled more activity in the banking sector if she is confirmed. During her nomination hearing before the Senate Judiciary Committee, in response to a question asking her what her approach to mergers and acquisitions in the banking sector would be, Varney acknowledged possible gaps in current antitrust law relevant to scrutinizing potential mergers of larger financial institutions, saying: “. . . [I]t’s not clear to me that the standards that were established under the Philadelphia [National Bank] case [which sets forth the analytic framework that is used by the banking agencies to assess the competitive effect of a merger] are terribly relevant when we’re looking at incredibly large institutions and their potential mergers. I think it is time to take a fresh look at what standards we use to measure consolidation and concentration in the financial markets…I often wonder if antitrust is failed if we’ve allowed institutions to be created that are too big to fail.” In order to have a voice in discussions of such a fresh look, Varney plans to participate in the National Economic Council and other intra-government forums to facilitate change.
On the other hand, Deborah Garza, the Former Assistant Attorney General of the Antitrust Division of the Department of Justice under the Bush Administration, defended the antitrust merger enforcement of the Antitrust Division in the financial sector, explaining that there is no evidence that the current economic crisis resulted from a failure of the antitrust laws, and that there should be increased focus on the actions of financial institutions, rather than the size of the institutions. Ms. Garza emphasized that the main inquiry should be “whether a merger likely will enable the firm to exercise market power by reducing output and increasing the price of loans.”
The debate on the role of antitrust law in government-funded consolidation in the banking industry seems to be intensifying, especially in light of increased concern over the “too big to fail” dilemma. That dilemma was recently addressed by Federal Reserve Chairman Ben Bernanke during a speech at the Council on Foreign Relations: “Authorities have strong incentives to prevent the failure of a large, highly interconnected financial firm, because of the risks such a failure would pose to the financial system and broader economy…However, belief that a particular firm is considered too big to fail has many undesirable effects.” Chairman Bernanke noted that such a belief reduces market discipline and encourages excessive risk-taking by larger institutions, provides an artificial incentive for firms to grow, in order to be perceived as too big to fail, and creates an unlevel playing field with that of smaller firms, which may not be seen as having implicit government support.
During a recent hearing of the House Judiciary Committee’s Subcommittee on Courts and Competition Policy, an antitrust panel discussed whether to allow, or how to prevent, bank mergers that may create institutions that are “too big to fail.” A member of the panel, C.R. Cloutier, President and Chief Executive Officer of MidSouth Bank, NA and Past Chairman of the Independent Community Banks of America, expressed concerns about the continued concentration of banking assets in the United States, noting that four of the largest banking companies control more than 40% of the nation’s deposits and more than 50% of the assets held by United States banks. Mr. Cloutier called for amendments to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to immediately reduce and strengthen the current 10% nationwide deposit concentration cap. He also opined that antitrust laws are too narrow and have failed to address the systemic risk posed by excessive financial concentration. Mr. Cloutier argued that antitrust laws are designed to maintain competitive geographic and product markets, often preventing local banks from merging, but have failed to address the systemic risk caused by the creation of giant nationwide franchises competing with each other in various local markets. He proposed the creation of an interagency systemic risk task force which would be given the authority to break up systemic risk institutions over a five-year period, a suggestion he acknowledged would be highly controversial.
While it is impossible to predict how this debate on consolidation in the financial sector will play out, it is a discussion worth paying attention to. During a time of economic crisis, with a new Administration and new leadership in the Department of Justice, increased scrutiny of mergers and acquisitions in the financial sector is likely. While much of the discussion has focused on mergers and acquisitions of larger financial institutions, it is likely that increased scrutiny will occur across all sizes of financial institutions – from large to small. Moreover, if upon review the Department of Justice changes its standards, it will likely apply those standards across-the-board, so that even smaller financial institutions may see increased antitrust enforcement.