BANK MERGERS AND THE ANTITRUST LAWS
William A. Mogel*
INTRODUCTION
Antitrust is as deeply imbedded in the American scene as baseball, bourbon
whiskey, and aspirin.
A. Fortas1
USING the antitrust laws as a standard to judge the validity of commercial bank mergers has caused difficulty and dissatisfaction. It has
been argued that it is inappropriate to apply the antitrust laws to banks
because banking is much like a public utility, and should be immune from
antitrust prosecution. Yet banks differ from public utilities, since they
need not serve everyone and they can discriminate as to their prices.
Banking, however, is unlike other industries, since its operations are
almost entirely regulated by state and federal law.
Recognizing that banking does not fall neatly into either category,
Congress' solution has been to judge bank mergers under standards appropriate for a utility (banking factors) and under the antitrust laws.
This has not solved the problem because Congress has not determined
the standard which is to be given the greater weight.
The recommendation offered here, that section 7 of the Clayton Act2
should be inapplicable to bank mergers, is based upon economic policy
and political reality.
BACKGROUND
The Bank Merger Act of 1966,1 which amended section 18(c) of the
Federal Deposit Insurance Act, 4 represents Congress' latest attempt to
solve problems created by the relation between commercial banking and
the antitrust laws.
Origins of congressional wrestling can be traced to the 1950 amendment to section 7 of the Clayton Act.5 This Celler-Kefauver Amendment
should not have spawned sixteen years of confusion and uncertainty in
the banking industry.' Its draftsmen did not consider the specialized
* Member of the District of Columbia Bar.
1. Fortas, Portents for New Anti-trust Policy, 10 Antitrust Bull. 41 (1965).
2. 15 U.S.C. § 18 (1964).
3. 80 Stat. 7 (1966), 12 U.S.C. § 1828(c) (Supp. II 1965-66).
4. 12 U.S.C. § 1828(c) (1964), as amended, (Supp. II 1965-66).
5. 15 U.S.C. § 18 (1964) The section was amended to prohibit a corporation, subject to
the jurisdiction of the Federal Trade Commission, from acquiring "the whole or any part
of the assets of another corporation when the effect of the acquisition may substantially
lessen competition or tend to create a monopoly."
6. For discussion of confusion which arose see Comment, Government Regulation of Bank
Mergers, 62 Mich. L. Rev. 990 (1964).
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[Vol. 17
area of commercial banking but were concerned with industrial concentration in the areas of manufacturing and merchandizing. In addition,
it was generally believed that amended section 7 was inapplicable to
commercial banking since banks were not subject to the jurisdiction of
the Federal Trade Commission" and bank mergers usually were accomplished through asset acquisitions rather than stock acquisitions.,
However, in 1956, the Eighty-fourth Congress manifested sufficient
interest, as to the applicability of section 7 to commercial bank mergers,
that seven bills were introduced. 10 These statutory proposals were of two
kinds. Four bills" were introduced to amend section 7 to bring asset
acquisitions of businesses not subject to the Federal Trade Commission's
jurisdiction within its scope. Two others'" were introduced to insure that
asset acquisitions, in the form of bank consolidations, mergers or purchases, would not reduce competition substantially or tend to create
monopolies in banking. None passed in either the House or the Senate.
The seventh bill, 13 which was the most comprehensive attempt at proposing standards for the regulation of bank mergers, also failed. This
bill, S. 3911, which might be regarded as the father of the 1960 Bank
Merger Act and the grandfather of the present act, provided:
In granting or withholding consent (for a bank merger or consolidation)
under this subsection, the Comptroller, the Board or the Corporation, as
the case may be, shall consider the factors enumerated in section 6 of this
act. In the case of a merger, consolidation, asquisition of assets, or assumption of liabilities, the appropriate agency shall also take into consideration
whether the effect thereof may be to lessen competition unduly or to tend
unduly to create a monopoly....
The section 6 factors are: (1) the financial history and condition of
the bank, (2) the adequacy of its capital structure, (3) its future earnings prospects, (4) the general character of its management and (5) the
convenience and needs of the community to be served by the bank.
This bill represents the first legislative awareness that factors, other
than the competitive standard, should be applied to bank mergers. Indeed,
7. S. Rep. No. 1775, 81st Cong., 2d Sess. (1950). See also Note, 13 ])e Paul L. Rev. 137,
139 n.10 (1963).
8. 15 U.S.C. § 45(a)(6) (1964).
9. See United States v. Philadelphia National Bank, 374 U.S. 321, 378 (1963) (dissenting
opinion), citing S. Rep. No. 196, 86th Cong., 1st Sess. (1959).
10. "The pace of merger activity reached a peak in the mid 1950's . . . . Between 1946
and 1962, 2000 banks disappeared as a result of consolidations and absorptions." C. Whittlesey, A. Freedman & E. Herman, Money and Banking: Analysis and Policy 536 (1963).
11. S. 3341 and S. 3424, 84th Cong., 2d Sess. (1956), H. R. 5948, 84th Cong., 1st Sess.
(1955), and H.R. 9424, 84th Cong., 2d Sess. (1956).
12. H.R. 2115 and H.R. 6405, 84th Cong., 1st Sess. (1955).
13. S.3911, 84th Cong., 2d Sess. (1956).
1967]
BANK MERGERS
the draftsmen sanctioned certain mergers even where "a sizable reduction
in competition [was] to be involved .... "14 Criticism 5 of the amendment
prevented favorable congressional action.36
Senator A. Willis Robertson, who sponsored the 1956 bill, included
its provisions in the proposed Financial Institutions Act of 1957,17 which
was passed by the Senate but failed to reach the floor of the House.
For the next three years, bank merger legislation did not reach the
Congress. However, in 1960 congressional interest was stimulated by the
increasing number of bank mergers, the decline in the number of commercial banks, the increase in the number of branches, 8 the apparent
inadequacy of the Sherman Act" and the believed inapplicability of
section 7 of the Clayton Act.
In response to these factors, Congress passed the Bank Merger Act
of 196020 which provided (in part):
In granting or withholding consent under this subsection, the Comptroller, the Board, or the Corporation, as the case may be, shall consider the
financial history and condition of each of the banks involved, the adequacy
of its capital structure, its future earnings prospects, the general character
of its management, the convenience and needs of the community to be
served, and whether or not its corporate powers are consistent with the
purposes of this chapter. In the case of a merger, consolidation, acquisition
of assets, or assumption of liabilities, the appropriate agency shall also take
into consideration the effect of the transaction on competition (including
any tendency toward monopoly), and shall not approve the transaction
unless, after considering all of such factors, it finds the transaction to be
in the public interest.
The scheme of the amendment resembled the Senate Bill of 1956,
since banking factors, as well as the competitive standard, were to be
14. Hearings on S. 3911 Before the Subcomm. on Financial Institutions of the Senate
Comm. on Banking and Currency, 84th Cong., 2d Sess. 19 (1956).
15. Opposing political ideologies would not compromise to allow passage. One faction
wished to give the Justice Department veto power, while their opponents wanted the three
bank regulatory agencies (Comptroller of The Currency, Federal Reserve, and F.D.I.C.)
to make the final decision. Ellis, Anti-Trust Bank Mergers and the PN.B. Decision, 81 Banking L.J. 303, 305 (1964).
16. However, in 1956, Congress passed the Bank Holding Companies Act, 70 Stat. 134,
12 U.S.C. § 1842 (1964), which included factors, similar to those proposed by S. 3911, to
be used in approving "any acquisition or merger or consolidation." The Bank Merger Act of
1960 followed the approach of the Bank Holding Companies Act. See G. Hall & C. Phillips,
Bank Mergers and the Regulating Agencies-Application of the Bank Merger Act of 1960
(1964).
17. S. 3911. See Hearings on S.3911 Before the Subcomm. on FinancialInstitutions of the
Senate Comm. on Banking and Currency, 85th Cong., 1st Sess. (1957).
18. See H.R. 1416, 86th Cong., 1st Sess. (1959).
19. 15 U.S.C. § 1-7 (1964). United States v. Philadelphia National Bank, 374 U.S. 321,
377 (1963), citing United States v. Firstamerica, Civil No. 38139 (N.D. Cal., March 30,
1959).
20. 74 Stat. 129 (1960), 12 U.S.C. § 1828(c) (1964), as amended, (Supp. II 1967).
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[Vol. 17
considered by the appropriate agency in approving or disapproving a
proposed bank merger. Though the purpose of the Act was "to provide
safeguards against mergers and consolidations of banks which might
lessen competition unduly or tend unduly to create a monopoly.
.. 1
the draftsmen intended to sanction some bank mergers which were in
the public interest, even though they lessened competition.22 The legislative history enumerated examples of mergers that could be approved,
under the amendment, even though there would be a lessening of competition.23
The Bank Merger Act of 1960 was enacted against a background (the
period between 1950 and 1960), which the Supreme Court described as
having "witnessed a definite trend toward concentration" in commercial
banking.'
Though the Act provided that some bank mergers were "inthe public
interest" even though competition was reduced, problems arose when
the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board each attempted to ascertain whether
a merger was in the public interest.25 Disparity appeared in administra21. Id. S. 196, 86th Cong., 1st Sess. (1959).
22. Id.
23. The examples: (1) where there is a reasonable probability of the ultimate failure of
the bank to be acquired, (2) where because of the inadequate or incompetent management
the acquired bank's future prospects are unfavorable and (3) where the acquired bank is
a problem bank with inadequate capital or unsound assets and the merger is the only practicable means of solving the problem, (4) where several banks in a small town are compelled
by an overbank situation to resort to unsound competitive practices, which may eventually
have an adverse effect on the condition of such banks, and the merger would correct this
situation.
24. United States v. Philadelphia National Bank, 374 U.S. 321, 325 (1963).
During this period, the number of banks declined by 714 despite the chartering of 887.
Of the 1,601 independent banks which disappeared, 1,503 disappeared as the result of
mergers. In 1960, there were 13,460 commercial banks with 10,000 branches, which is approximately the same as the number at present.
During the period between passage of the Bank Merger Act on May 13, 1960 and January
1, 1963, 370 commercial banks with assets of 69 billion dollars absorbed 425 banks with total
assets of 10 billion dollars. The average acquiring bank had assets of 187 million dollars, while
the average acquired bank had 23 million dollars in assets. The acquired banks represented
3.2% of all commercial banks and they held 2.91 of total reserves. Of the 420 mergers approved, the Comptroller of the Currency approved 232 out of 239 applications, (52% of the
mergers approved raised competitive issues in the opinion of the Justice Department) and
the Federal Deposit Insurance Corporation approved 98 (597 of the mergers approved raised
no adverse effects on competition in the opinion of the Justice Department) and the Federal
Reserve Board approved 90 mergers.
Despite the trend toward concentration noted by the Supreme Court, it has been suggested
that the Bank Merger Act did not accelerate the volume of merger activity. See G. Hall &
C. Phillips, supra note 16, at 7, 21.
25. Section (c)
(2) of the 1966 Act provides that: No insured bank shall merge or consolidate with any other insured bank or, either directly or indirectly, acquire the assets of,
or assume liability to pay any deposits made in, any other insured bank except with the
prior written approval of the responsible agency which shall be(A) the Comptroller of the currency, if the acquiring, assuming, or resulting bank
is to be a national bank or a District bank;
1967)
BANK MERGERS
tion because the three agencies evolved different criteria in attempts to
define the Act's standard. The Comptroller pursued a policy, designated
as the "balanced banking structure," which emphasized increasing the
range of bank size. 6 A combination of small, medium and large sized
banks serving a region was considered to be the most desirable.2 7 The
FDIC's "strengthening of competition" doctrine contrasted with the
Comptroller's policy, because it stressed that a decrease in the size disparity among banks improves competition." The Board's policy, the
"variety of banking services" doctrine, was concerned with obtaining a
broad range of bank services for present customers. 9 More attention was
0
given to the types of services offered and less attention to bank size3
The banking agencies were fulfilling their congressional mandate, yet
dissatisfaction appeared, 31 and cases found ready acceptance in the
Supreme Court.
In United States v. Philadelphia National Bank,3 2 the first case to
consider the application of section 7 to commercial banking, the Supreme
Court held that section 7 of the Clayton Act was applicable to bank
mergers, notwithstanding prior approval by the appropriate banking
agency under the Bank Merger Act. The Court rejected the contention
that the Comptroller's approval, which was based upon a consideration
of competitive factors, immunized bank mergers from scrutiny under
the Clayton Act. It was found that the effect of merger between Girard
Trust and PNB would be to substantially lessen competition in commercial banking in the four county area composed of Philadelphia and
its three contiguous counties. After the proposed merger, the resulting
bank would have controlled 30% of the relevant market,3 3 would have
been the largest in the four county area and would have been the twenty(B) the Board of Governors if the Federal Reserve System of the acquiring, assuming,
or resulting bank is to be a state member bank (except a District bank) ;
(C) the Corporation if the acquiring, assuming, or resulting bank is to be a nonmember
insured bank (except a District bank).
12 U.S.C. § 1828(c) (2) (Supp. H 1966).
26. See, G. Hall & C. Phillips, supra note 16,.at 37.
27. Id. at 40.
28. Id. at 51.
29. Id. at 63.
30. Id.
31. The president of the Independent Bankers Association of Missouri said: "In the years
since the Bank Merger Act of 1960 became operative, the bank supervisory agencies, especially
the comptroller of the currency, have demonstrated they are merger happy. They almost
never see a bad merger." Philadelphia Bulletin, Sept. 23, 1965, at 28, col. 1.
32. 374 U.S. 321 (1963).
33. Id. at 364. It has been suggested that the Philadelphia decision enunciates the proposition that there is a prima facie presumption of unlawfulness where a merger produces a
firm controlling 30% or more of the market. Supra note 6, at 1008.
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[Vol. 17
first largest bank in the United States. The proposed merger was permanently dnjoined.
The Court, speaking through Mr. Justice Brennan, rejected the bank's
argument that the Bank Merger Act was the exclusive mechanism to be
used in determining the competitive consequences resulting from bank
mergers. The banks argued that the legislative history of the Bank
Merger Act evidenced a congressional intent that section 7 of the Clayton
Act was inapplicable to banks, and based on this believed inapplicability,
Congress, in the Bank Merger Act of 1960, delegated regulatory responsibility to the banking agencies.
The decision rested on "the basic congressional design"8 4 embodied
in the 1950 amendment to section 7:
Congress contemplated that the 1950 amendment would give § 7 a
reach which would bring the entire range of corporate amalgamations, from
pure stock acquisitions to pure assets acquisitions, within the scope of § 7.
Thus, the stock-acquisition and assets-acquisition provisions, read together,
reach mergers, which fit neither category perfectly but lie somewhere between the two ends of the spectrum. 3 5
The Court was aware of the legislative history, which indicated the
general belief that after the amendment, section 7 was inapplicable to
banks, and that the Bank Merger Act was enacted based upon this belief.
However, the Court answered:
When Congress enacted the Bank Merger Act, the applicability of
§ 7 to bank mergers was still to be . ..determined; it was a subject of
speculation .... The design fashioned in the Bank Merger Act was predicated upon uncertainty as to the scope of § 7, and we do no violence to
that design by dispelling the uncertainty.3 6
The Court found that "no express immunity is conferred by the [Bank
Merger] Act,"' 37 and "repeals of the antitrust laws by implication from a
regulatory statute are strongly disfavored. . . .,88 Controlling precedent
was found in Californiav. FederalPower Commission,39 which held that
the FPC's approval of a merger did not confer immunity from section 7,
even though the agency had taken the competitive factor into account in
passing upon the merger application.
The Court believed that holding section 7 applicable to bank mergers
was consistent with the purpose and policy of the Bank Merger Act:
34.
35.
36.
37.
38.
39.
374 U.S. at 341.
Id. at 342.
Id. at 349.
Id. at 350.
Id.
369 U.S. 482 (1961).
1967]
BANK MERGERS
It would be anomolous to conclude that Congress, while intending the
Sherman Act to remain fully applicable to bank mergers, and § 7 of the
Clayton Act to remain fully applicable to pure stock acquisitions by banks,
nevertheless intended § 7 to be completely inapplicable to bank mergers.40
The Philadelphia decision caused suprise 1 and criticism4 2 because of
the Court's refusal to ratify the congressional belief existing when the
Bank Merger Act was passed. Congress' intent appeared subverted since
on previous occasions, it had rejected proposals for extension of section 7
to bank mergers.
The questions raised by the decision were: (1) should competition be
the controlling factor in determining whether to approve a bank merger
and, (2) could a bank merger be in the public interest even though it
would produce a lessening of competition? The majority assumed the
answer to the first to be yes and the second to be no.
Contemporaneously with Philadelphia, the Justice Department instituted proceedings under section 1 of the Sherman Act4 against the First
National Bank and Trust Company of Lexington. 4 The defendant had
resulted from a merger consummated between the largest (39.83 % of the
assets, 40.06% of the deposits, 40.22% of the loans) and the fourth
largest (12.87% of the assets, 11..88% of the deposits, 13.98% of the
loans) of the six commercial banks in Fayette County, Kentucky.4 5 The
resultant bank was larger than all the remaining banks combined. It had
52.70% of the assets, 51.95% of the deposits, 54.20% of the loans, 94.82% of the trust assets, 92.20% of trust earnings and 79.62% of all
trust accounts.4 6 Prior to the merger, First National and Security Trust
were competitors. The Comptroller had approved the merger after receiving adverse reports on the competitive factor from the Justice Department, the Federal Deposit Insurance Corporation and the Board.
The Supreme Court, reversing the District Court, held that the merger
which eliminated significant competition between the banks constituted
40. 374 U.S. at 355.
41. "[N]o one will be more surprised than the Government to find that the Clayton Act
has carried the day... ." Id. at 373 (dissenting opinion).
42. See Pollak, The Supreme Court: 1952 Term, 77 Harv. L. Rev. 62, 163 (1963); Note,
13 De Paul L. Rev. 137, 138 (1963).
43. Justice Harlan suggested that a reason for Sherman Act suit rather than a Clayton
Act suit was "because the decision last term [Philadelphiacase] that bank mergers could be
reached under the Clayton Act was indeed a surprise to the Government." United States v.
First National Bank and Trust Co. of Lexington, 376 U.S. 665, 679 (1964) (dissenting
opinion).
44. United States v. First Natl Bank & Trust Co. of Lexington, 208 F. Supp. 457 (E.D.
Ky. 1962).
45. 376 U.S. at 668.
46. Id. at 669.
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an unreasonable restraint of trade in violation of section 1 of the
47
Sherman Act.
Mr. Justice Harlan again dissented, stating: "the Court's opinion
amounts to an invocation of formulas of antitrust numerology and a
presumption that in the antitrust field good things come usually, if not
always, in small packages.
48
He argued that the majority found no
fault except bigness.
The dissent and majority differed as to the applicability of the criteria
enumerated in United States v. Columbia Steel Co.4 9 There, United States
Steel's acquisition of the assets of Consolidated Steel was lawful because
United States Steel's rate structure and the location of its fabricating
subsidiaries prevented it from competing effectively in Consolidated's
market. United States Steel sold its fabricated structural steel products
nationwide, while Consolidated's market was only in eleven states. The
Court stated:
In determining what constitutes unreasonable restraint, we do not think
the dollar volume is in itself of compelling significance; we look rather to
the percentage of business controlled, the strength of the remaining competition, whether the action springs from business requirements or purpose to
monopolize, the probable development of the industry consumer demands,
and other characteristics of the marketY0°
Mr. Justice Douglas, for the majority in Lexington, confined the
Columbia Steel criteria to its facts.-" Mr. Justice Harlan felt that the
economic and noneconomic criteria of Columbia Steel should be applied
to determine what constitutes unreasonable restraint 2 Size was not the
only factor to be considered.
Progeny of Lexington and Philadelphia soon reached the courts. In
United States v. Crocker-Anglo National Bank, 3 the government's motion
for a preliminary injunction against a proposed merger, under section 7
of the Clayton Act, was denied. The banks had a total of 202 branches,
and were fifth and eighth largest respectively. After the proposed merger,
the resulting bank would be the fourth largest in California, with 9.7%
of the total deposits. In denying the injunction, the court considered
factors similar to those advocated by Mr. Justice Harlan's dissent in
Lexington. The court held there was little probability that competition
would be reduced because of the size and extent of competition of other
47. Id.
48. Id. at 673.
49. 334 U.S. 495 (1948).
50. Id. at 527-28.
51. United States v. First National Bank & Trust Co. of Lexington, 376 U.S. 665, 672
(1964).
52. Id. at 675.
53. 223 F. Supp. 849 (N.D. Cal. 1963).
1967]
BANK MERGERS
banks, the ease of entry into banking in California, the history of rapid
growth and success of new banks. In addition, the merging banks had
not been competitors and the markets served were different.
Using Philadelphiaand Lexington as precedent, the District Court in
United States v. Manufacturers-Hanover Trust Co.,5" found it easy to
hold that a three-year-old merger violated section 7 of the Clayton Act
55
and section I of the Sherman Act in both the national and local markets.
The defendant had received prior approval from the New York Superintendent of Banks,56 the Federal Reserve Board, the FDIC, and the
Comptroller. These agencies concurred that there would be no adverse
effect on competition, but the Justice Department disagreed.
Prior to the merger, Manufacturers was the fifth largest of the 72
commercial banks in the New York metropolitan area and the sixth
largest of 13,484 commercial banks in the nation. Hanover was the eighth
largest in the metropolitan area and fourteenth in the nation. After the
merger, the resulting bank was third in the metropolitan area and fourth
in the nation. Hanover was a wholesale bank with ten branches in Manhattan while Manufacturers was a retail bank with 120 branches in the
five boroughs. Hanover had no history of mergers and Manufacturers had
one major merger and five minor ones between 1938 and 1960.11
The decision rested on the finding that the merger "tends to create a
monopoly by significantly increasing concentration and accelerating the
trend toward oligopoly.""" However, after the merger ManufacturersHanover's share of the total assets of commercial banks in the metropolitan area declined from 13.6% to 11.5% In addition, its asset, deposit
and loan growth had not kept pace with its competitors. ManufacurersHanover's growth was 1.6%, while the average growth of its competitors
was 20.0% during the three-year period after the merger. ManufacturersHanover was one-third to one-half smaller than its two larger local
competitors and only slightly larger than the next three.5 9
After the merger, Manufacturers-Hanover's share of the market did
not increase. Since 1952 its competitors had been growing in size and
number: "[t]he number of billion dollar banks outside of New York
54. 240 F. Supp. 867 (S.D.N.Y. 1965).
55. Id. at 955
56. N.Y. Banking Law § 601-b (Supp. 1966) provides in part as follows: "In determining
whether to so approve [a merger], the superintendent shall take into consideration . . .
whether the effect of such merger or acquisition shall be either to expand the size or extent
of the resulting or acquiring institution beyond limits consistent with . .. effective competition . . . whether such merger or acquisition may result in such a lessening of competitors
as to be injurious to the interest of the public or tend toward monopoly and primarily, the
public interest and need and convenience thereof"'
57. 240 F. Supp. at 895.
58. Id. at 949.
59. Id. at 932.
66
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had almost tripled." 60 In addition, New York had not participated in
the nation's economic growth and there was a "decline in the proportion
of resources held by banks . . . located elsewhere."" 1 Finally, prior to
the merger, Manufacturers' and Hanover's banking activities had not
been competitive but "complimentary." 6' 2
Though the court articulated the shibboleth that size alone is not
illegal, they found it difficult to follow. There was no showing of a reduction in competition, but the contrary.0 3 Yet, the court was afraid to
sanction a merger which produced the fourth largest bank in the United
States, with approximately 52 billion dollars in assets and was almost
twice as large as the next six banks in the country.
Stimulated by the four cases and three other proceedings initiated 'by
the Justice Department, 64 legislative interest as to applicability of antitrust laws to bank mergers was renewed.
Senator Robertson introduced S. 1698,0 which would have amended
the Bank Merger Act to provide that all mergers approved under the act
are immune from proceedings under the Sherman and Clayton Acts. The
bill's purpose was to insure, that banks were subject exclusively to the
provisions of the Bank Merger Act. It was designed to restore what the
legislative history, but for Philadelphia, indicated Congress intended
when it enacted the Bank Merger Act of 1960. Banking factors and competitive factors, not the limited rule of the Clayton Act, were to apply
to each merger.6
The bill passed the Senate but never got out of the House Committee
on Banking and Currency, which was working on its own version.
THE LAW
Bill67
produced by the committee, was passed by
The Bank Merger
6
the House and the Senate, and became law on February 21, 1966.60
60. Id. at 907.
61. Id. at 906.
62. Id. at 936.
63. "The merger . . . improved the balance of the competitive structure and intensified
competition for the three leaders." Id. at 933.
64. The mergers of: Continental-Ilalnois Natl Bank & Trust Co. with -City National
Bank & Trust Co., in Chicago, Third Natql Bank with Nashville Bank & Trust Co. in Nashville and Mercantile Trust Co. with Security Trust Co. in St. Louis, Wall Street Journal,
Feb. 10, 1966, at 51, col. 1.
65. S. 1698, 89th Cong., 1st Sess. (1965).
66. See, Hearings on S. 1698 Before the Subcomm. on FinancialInstitutions of the Senate
Comm. on Banking and Currency, 89th Cong., 1st Sess. (1965).
67. 80 Stat. 7 (1966), 12 U.S.C. § 1828(c) (Supp. II 1965-66).
68. The House passed it, 372 to 17, on Feb. 8. 1966. 112 Cong. Rec. 2360 (1966). The
Senate unanimously passed it on Feb. 9, 1966. 112 Cong. Rec. 2551 (1966).
69. 80 Stat. 7 (1966), 12 U.S.C. § 1828(c) (Supp. II 1965-66).
1967]
BANK MERGERS7
Initial criticism focused on the Act's compromise character and predicted
that it would not resolve the existing confusion. 0
Doubt as to the vitality of the Bank Merger Act of 1960 after Philadelphia and Lexington, created a situation requiring congressional
action. Congress had to choose a policy and create a definite standard
to resolve the uncertainty. One alternative available, would have been to
affirm Philadelphiaand make competition the criteria of legality for bank
mergers. The other, would have been to permit certain mergers even if a
reduction of competition resulted.
Congress embodied its choice in section 5 of the Bank Merger Act of
1966:
The responsible agency shall not approve(A) any proposed merger transaction which would result in a monopoly, or which would be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize the business in any part of the
United States, or
(B) any other prbposed merger transaction whose effect in any section
of the country may be substantially to lessen competition, or to tend to create
a monopoly, or which.in any other manner would be in restraint of trade
unless it finds that the anticompetitive effects of the proposed transaction
are clearly outweighed in the public interest by the probable effect of the
transactionin meeting the convenience and needs of the community to be
served.
.
In every case, the responsible agency shall take into consideration the
financial and managerial resources and future prospects of the existing and
proposed institutions, and the convenience and needs of the community to
be served. (Emphasis added.) 7'
By adopting a standard of "convenience and needs," Congress apparently approved certain mergers even if they reduced competition.72 Which
mergers. conform to this standard? An anticompetitive merger, where
one of the banks was in the danger of failing, would qualify. 3 Under
section 6 of the Act, the appropriate banking agency is authorized to
approve 4 merger "to prevent the probable failure of one of the banks."
Upon approval, the transaction may be consummated immediately, and
is not susceptible to attack under the Clayton Act. However, it is not
clear that all mergers involving a failing bank would be immune from
attack. If, for example, the second largest bank in a market with ten
banks, out-bids the seventh largest, and merges with the failing bank to
70. N.Y. Times, Jan. 23, 1966, at 36, col. 4.
71. 80 Stat. 8 (1966), 12 U.S.C. § 1828(c) (Supp. II 1965-66).
72. But see statement of Representatives Ashley and Reuss who "... agreed that it would
leave the competition test dominant in any final decision on a merger." 24 Cong. Q. 286, 288
(1966).
73. Statement of Congressman Reuss as reported in the Wall Street Journal, Feb. 9, 1966,
at 32, col. 1.
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 17
become the largest, would this merger meet the convenience and needs
of the community? Might not the community be better served if the
merger was with the seventh largest bank?
The legislative history of the 1966 Bank Merger Act suggested areas,
other than the failing bank situation, where a merger might be approved
even if competition were reduced. For example, if a bank has management problems and they can be corrected by a merger, then the merger
should be sanctioned. Yet, does it meet the convenience and needs of the
community where the two merging banks are the only ones serving
the community? The convenience and needs standard does not provide
sufficient criteria for a choice between a market structure which provides
two alternatives of unequal strength and a market served by a highly
efficient and progressive monopolist.74
Can a merger be justified, under the convenience and needs standard,
on the ground that the resulting bank will be better able to compete in a
national or regional market and may render these markets more competitive or that the area needs a larger bank in order to attract business
and stimulate economic development?7" It is likely that this argument
would be rejected, as it was in Philadelphia."° It has been suggested that
the weighing of positive effects in one market against negative effects in
another is not permitted under section 7, perhaps because it is beyond
the competence of the judiciary.77
Determination of whether a merger meets the "convenience and needs
of the community" requires expertise in economic analysis and ultimately
a policy judgment by the decision maker. The former is exercised by a
bank agency, while the latter, by whomever exercised, is not susceptible to
78
review because of the indefiniteness of the standard.
Under the Act's structure, exercise of both these functions falls to
the court. Section (7) (B) provides:
(B) In any judicial proceeding attacking a merger transaction approved under paragraph (5) on the ground that the merger transaction alone
and of itself constituted a violation of any antitrust laws other than section
2 of [the Act of July 2, 1890, section 2 of the Sherman Antitrust Act, 15
U.S.C. 2], the standardsapplied by the court shall be identical with those
74. Some of the problems suggested are anticipated by the Act. Under section (7) (b),
mergers are still vulnerable under section 2 of the Sherman Act.
75. Cf. Comment, 71 Yale L.J. 502, 526 (1962).
76. 374 U.S. at 371.
77. Pollack, supra note 42, at 163.
78. Cf. Stigler, Mergers and Preventive Antitrust Policy, 104 U. Pa. L. Rev. 176, 182
(1955). But see ". . . ambiguity is needed to invite the litigation and provoke thoughtful
pondering from which fruitful change may derive." Bok, Section 7 of the Clayton Act and
the Merging of Law and Economics, 74 Harv. L. Rev. 226, 353 (1960).
1967]
BANK MERGERS
that the banking agencies are directed to apply under paragraph (5).
(Emphasis added.) 79
Under section (7) (A), a court is required to review the issues de novo.
The judiciary is not designed to deal with economic questions.80 If a
judge is forced to make policy judgments in this area, he may revert to
where he feels the most certain, the antitrust laws and, in so doing, possibly subvert Congress' intent.
It has been suggested, however, that a court is the proper body to
.. . shape the large outlines of our national economic policy, where
Congress has not stated its will."8 1 A court is best equipped to do this,
it is contended, because its work is subject to effective public scrutiny,
judges are experts in synthesis, and "the judiciary has the potential advantage of coordinated direction with ultimate responsibility in one
'8 2
Supreme Court.
Delay in judicial action caused by crowded dockets, the appellate
procedures, inconsistent district court decisions and the Supreme Court's
option not to hear an appeal will cause uncertainty in an area where none
should exist. Judges may be well equipped to define broad policy questions, but a case by case evaluation of economic policy will not produce
a coordinated system of regulation.
United States v. First City NationalBank of Houstons provided the
Supreme Court with an initial opportunity to examine a proposed merger
under the 1966 Act. It was hoped that the Court would find that the Act
provided banks with a large measure of anti-trust immunity."4 Instead,
the Court "applied the brakes to the bank merger movement."8' 5 In a
narrow opinion Houston announced, in dicta, principles reaffirming
Philadelphia.
The Supreme Court in Houston reversed the District Court's dismissal
of the government's complaint which only was brought under section 7
of the Clayton Act,' and, on remand, directed "that the [statutory]
stays continue until the hearings below are completed and any appeals
had. 8 7 It rejected the argument that the complaint was defective since
79. 15 U.S.C. § 1828(c) (7) (B)
(Supp. 1[ 1965-66).
80. However, under section (7) (D), the court may have the aid of the appropriate banking agency which ". . . may appear as a party of its own motion and as of right, and be
represented by its counsel."
81. Schwartz, Legal Restriction of Competition in the Regulated Industries: An Abdication of Judicial Responsibility, 67 Harv. L. Rev. 436, 473 (1954).
82. Id. at 474.
83. 386 U.S. 361 (1967).
84.
85.
86.
87.
The Washington Post, January 19, 1967, at D8, col. 4.
The Wall Street Journal, March 28, 1967, at 2, col. 3.
Id. at 3.
Id. at 8.
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 17
it was not brought under the Bank Merger Act. 8 By reading sections
(c) (7) (A) and (c) (7) (B) 8 9 together, Mr. Justice Douglas found that
"an action challenging a bank merger on the ground of its anticompetitive
effects is [properly] brought under the antitrust laws."""
In the Court's view, the Act did not change the section 7 standard of
the Clayton Act." Philadelphiaremains the lawY2 The Act, however,
provides the new defense of " 'convenience and needs'98 once it [has]
been determined that a transaction would have anticompetitive effects,
as judged by the standards normally applied in antitrust actions."9 4 The
bank also has "the burden of proof.., to establish that an anticompetitive
merger is within the exceptions of [the Act] .""
For the Court to find only the above two changes shows an insensitivity
to the factors which caused Congress to act. Though congressional intent
was not uniform in favoring banks with antitrust immunity, it was uniform in desiring the reduction of the uncertainty produced since Philadelphia.The Court responded with silence.
The remainder of the opinion is the Court's discussion of the scope
of judicial review under the Act. Houston rejects the argument that the
Comptroller's decision is to be sustained if it is supported by substantial
evidence. The Court, in its de novo review, "should make an independent
determination of the issues."9 8 Mr. Justice Douglas reasoned that the
practice prior to the Act was that the Court's judgment was conclusive
"and we cannot find a purpose on the part of Congress to change the
97
rule."
Houston also rejects the argument that an independent judicial determination
"...
raise[s] serious constitutional questions by making the
courts perform non judicial tasks."9 8 "The appraisal of' competitive
factors is grist for the antitrust mill." 9
The Court has not done little in Houston, because it has returned the
bank merger problem to Congress, where it properly belongs.
88.
89.
90.
91.
92.
Id. at 2.
12 U.S.C. § 1828 (Supp. II 1965-66).
386 U.S. at 363.
Id. at 365.
Accord, Brennan, Developments in Banking Law-1966, 22 Bus. Law 625, 626 (1966).
93. 80 Stat. 7 (1966), 12 U.S.C. § 1828(c) (5) (b) (1966).
94.
95.
96.
97.
United States v. First City National Bank of Houston, 386 U.S. 361, 363-64 (1967).
Id. at 366.
Id. at 368.
Id. at 369.
98. Id.
99. Id.
1967]
BANK MERGERS
RECOMMENDATIONS
The rationale for applying section 7 to bank mergers is the continuing
desire to retain a traditional banking system composed of a large number
of independent banks. 00 However, it is inappropriate to apply the competitive standard of the Clayton Act to the commercial banking industry
because market performance will be unaffected by preventing mergers.' 0 '
The specialized nature of the banking system, which is regulated by
federal and state law, is essentially cooperative rather than competitive. 10 2
Whatever competition exists is a direct function of the size of the consumer and is not related to an atomistic market structure.
The national banking system, which is regulated by federal law, state
law, and private cooperation, is essentially noncompetitive. It even has
been suggested that "a high degree of cooperation among banks is
n0 3
essential.'
Private practices among banks, such as clearing house associations,
correspondent and participation relationships, which require cooperation
rather than competition, usually have been sacrosanct under the antitrust
laws. The clearing house associations are designed primarily to facilitate
the check collection process, but they tend to standardize community
banking. Member banks arrange hours of operation, fringe services,
advertising practices and interest to be paid on time deposits. 0 4 It has
been observed that "about the only matter not regulated by clearinghouses ... is the rate of interest at which banks should lend."'10 5
A participation relationship exists when a number of banks participate
jointly in the extension of credit to a single customer and agree upon
the rate and the terms.' 06 Though the antitrust laws would be applied if
two steel companies entered into a similar requirements contract, participation relationships :have had antitrust immunity. 0 Usually, corre100. Comment, 75 Harv. L. Rev. 756, 775 (1965).
101. "1. .* the conviction [is] that small business and the dispersion of economic power
are salutary and should be encouraged. . . . This premise clearly suggests reliance upon a
structural theory of competition which stresses the advantages of large numbers of small-sized
firms. Such theories have been qualified or attacked increasingly by observers who have
emphasized the moderating role of potential competition, countervailing power, and a con-
geries of political and social forces, which brings the behavior of big business more clearly
into line with the results which would be anticipated under competitive conditions." Bok,
Section 7 of the Clayton Act and the Merging of Law and Economics, 74 Harv. L. Rev. 226,
247 (1960).
102.
103.
104.
105.
See Massel, Legal and Economic Aspects of Competition, 1960 Duke LJ. 157, 167.
Berle, Banking under the Anti-Trus=t Laws, 49 Colum. L. Rev. 589, 592 (1949).
Comment, 62 Mich. L. Rev. 990, 998 (1964).
D. Alhadeff, Monopoly and Competition in Banking 26 (1954).
106. Id. at 25.
107. Comment, supra 104, at 1000.
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 17
spondents are a small unit bank and a larger city bank. The relationship
enables the former to make bigger loans, while the latter acquires new
customers. It also enables the country customer bank to keep its city
correspondent from invading its geographic market. Services provided
by the larger correspondent to its bank customers is another area where
cooperation pre-empts competition. The city bank holds deposits, invests
funds, grants loans, and gives advice on banking policy to its correspondent. 108
Operations of federal banking agencies, reduce the areas in which
banks could compete. The FDIC and the Federal Reserve Board prohibit insured and member banks from paying interest on demand deposits
and also set the maximum rates of interest which can be paid on time
deposits. Commercial loan rates are not determined exclusively by competition, because the range within which competition may occur is restricted. Maximum rates which can be charged are regulated by state
usury laws, while minimum rates are affected by changes in the federal
reserve re-discount rate, open market operations by the Federal Reserve
Board and modifications in reserve requirements. 0 9
Public policy sanctions private regulation of the prime rate, which is
set by price leadership within the banking community. The effect is to
prevent banks from competing as to the minimum lending rate that is
accorded to major borrowers of the best credit standing." 0 For example,
on March 10th, 1966, Morgan Guaranty Trust Company of New York,
the nation's sixth largest bank, raised the prime rate to 5y2 per cent
from 5 per cent. Morgan's action was adopted, within a matter of hours,
by all major commercial banks within the country."' It even was predicted that the Administration was not displeased and that the Federal
Reserve Board would "legitimize" the prime rate by increasing the discount rate."'
State banking laws insulate banks from competition and perpetuate
the existing market structure by controlling entry. In New York, for
example, an existing bank may not open a branch "in a city or village...
in which is already located the principal office of another bank, trust
company or national banking association.""11 In Pennsylvania, banks
108. D. Alhadeff, supra note 105, at 26.
109. Comment, 75 Harv. L. Rev. 756, 764-65 (1965).
110. R. Robinson, The Management of Bank Funds 201 (1962).
111. N.Y. Times, Mar. 11, 1966, at 1, col. 6.
112. Wall Street Journal, Mar. 11, 1966, at 3, col. 3.
113. N.Y. Bank Law 10(1)(b) (McKinney 1967).
1967]
BANK MERGERS
may only have a branch located "in the same county in which its principal place of business is located or in a county contiguous thereto .... M14
State branching restrictions control federal regulation of branching of
national banks. A national bank may operate a new branch only "if such
establishment and operation are at the same time expressly authorized
to State banks by the law of the State in question. 1" 5
Preservation of the existing banking system is caused, in part, by the
membership of the state regulatory agencies, which are authorized to
approve mergers and branching. In New York, where the vote of six is
required for action, five of the two members of the Banking Board are required to have "banking experience."' " 6 Similarly, in Pennsylvania,
1 7
the Banking Board, which ultimately approves or disapproves mergers,
is composed of eleven members, six of whom are selected from nominees
submitted by the Pennsylvania Bankers Association."' It is likely that
these members will preserve the system from which their positions were
derived.
State banking agencies have discretion in approving merger and branch
applications. In New York, one of the factors considered in approving
an application is "whether the effect.., shall be either to expand the size
of the resulting institution beyond limits consistent with effective competition. .. .,11' Therefore, the effect is that the agency is authorized to
protect the existing banks. Pennsylvania requires its Banking Board to
consider, when approving a merger or branch application, whether the
area to be served is "without adequate banking services or facilities."
Emphasis on the adequacy of existing facilities will protect the existing
bank from new entrants. The banking agencies, by limiting entry, are
"free entry of many imperfect comresponding to the principle that:
20
petitors can wipe out profit.'
Bank competition is limited to commercial loans made to large borrowers.' 21 Since competition is a direct function of the size of the
borrower, 122 competition cannot be created, stimulated or maintained by
114.
115.
116.
117.
118.
119.
120.
121.
(1963).
122.
(1964)
Pa. Stat. Ann. tit. 7 § 904(b) (1965).
12 U.S.C. § 36(c)(1) (Supp. 1965).
N.Y. Bank Law § 13(2) (McKinney 1950).
Delaware County Nat'l. Bank v. Campbell, 378 Pa. 311, 315, 106 A.2d 416, 420 (1954).
Pa. Stat. Ann. tit. 7 § 2005(a) (1965).
N.Y. Bank Law § 601(b) (McKinney 1967).
E. Samuleson, Economics: An Introductory Analysis 493 (6th ed. 1964).
C. Whittlesey, A. Freedman & E. Herman, Money & Banking: Analysis & Policy 540
United States v. First Nat'l. Bank and Trust Co. of Lexington, 376 U.S. 665, 679
(dissenting opinion).
74
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 17
a section 7 antitrust policy which emphasizes an atomistic market struc123
ture of many small independent banks.
Competition, and hence lower rates, exists only because the alternative
sources are nationwide for the large borrower. Credit can be obtained
either from banks or from the sale of the borrower's commercial paper. 24
A small borrower pays higher rates for commerical loan because it has
no (or limited) alternatives. Its ability to obtain credit depends upon its
"personal" reputation and a history of continued dealings with one
25
bank.1
Increases in concentration, through mergers and branching, have been
in the public interest.'2 6 Operating costs decline when bank size increases
through merger and when a unit bank operates as a branch. Average
rates of interest charged on loans decline as the size of a bank increases
and small loans are negotiated more cheaply by a branch bank than a
small unit bank. 2 Branch banks provide a greater quality, quantity and
variety of services than unit banks and at no greater costs. For example,
branch offices have been established in shopping centers, transportation
terminals and office-locations where unit banks never tended to exist.
Innovations, such as the introduction of automatic data processing and
1 28
the use of computers come from the larger and not the smaller banks.
Significant economies of scale exist or result from merger and branch-1
2
ing because operating costs are a direct function of a bank's deposits.
The greater its deposits, the lower its costs. 3 0
CONCLUSION
If you exempt banks from antitrust, you might as well also shoot the policeman on the corner.
Wright Patman' 3 1
It is suggested here that section 7 of the Clayton Act be made inapplicable to commercial bank mergers. However, banks should continue to be
susceptible to prosecution under section 2 of the Sherman Act.1 3 2
123. Ellis, Anti-Trust, Bank Mergers and The P.N.B. Decision, 81 Banking L.J. 303, 310
(1964).
124. D. Alhadeff, supra note 105, at 23 et seq.
125. Comment, 75 Harv. L. Rev. 756, 770 (1965).
126. See C. Whittlesey, A. Freedman & E. Herman, supra note 121, at 541.
127. D. Alhadeff, supra note 105, at 77, 127.
128. Phillips, Bank Merger, Branching and Holding Companies in the Commonwealth of
Pennsylvania (1965) (unpublished).
129. There has been some evidence to the contrary which has questioned the existence of
economies of scale in banking. Bowman, Toward Less Monopoly, 101 U. Pa. L. Rev. 577, 587
(1953); Comment, 68 Yale L.J. 1627, 1656 (1959).
130. D. Alhadeff, supra note 105, at 29.
131. N.Y. Herald Tribune, May 19, 1965, at 42, col. 3.
132. 15 U.S.C. § 2 (Supp. I, 1965).
1967]
BANK MERGERS
Prohibitions, through applications of the antitrust laws, against in-
creased concentration in banking subverts the policy of those laws. Prevention of branching and mergers insulates the high cost, high expense,
inefficient, noninnovating small unit bank from the vagaries of competition.133 The application of section 7 to commercial banking substantially
may lessen the possibility of competition.5 4
The existing federal, state, and private regulations make banking cooperative rather than competitive. Political reality makes it unforsee-
able that these regulations will be abandoned in order to make banking
competitive. The structure of the banking system appears impervious to
change.
The Sherman Act should continue to apply to bank mergers. The potential abuses inherent in a concentration of wealth and power in one
private national bank (with 13,000 branches) or five or twenty-five
national banks should be controlled under section one and two of the
Sherman Act. 35
In essence, the proposal offered here is that the "convenience and
needs" standard of the Bank Merger Act of 1966 be read to mean that
section 7 of the Clayton Act is inapplicable to bank mergers. It is more
appropriate that banking factors and economic analysis be used to judge
the legality of mergers.' 36
Utilization of economic and banking criteria will achieve the goals of
antitrust policy: "low costs, low prices, progressiveness and
distribution
' 37
of economic resources in accord with consumer desires.'
133. "The fact is that the little banker is the 'monopolist.' He wants to exclude credit
facilities from any other source than from his bank. He wants to monopolize the credit
accomodations of his community." 75 Cong. Rec. 9892 (1932) (remarks of Senator Glass).
134. "The lanky Harvard professor John Kenneth Galbraith said that the trend to great
size is 'immutable,' and the antitrust laws 'egitimatize' the real exercises of market power
'by a rather diligent harassment of those who have less of it' . . . . And here enters the
element of charade ... if a firm is already large, it is substantially immune under the antitrust laws. If you already have the basic requisites of market power, you are safe." Washington Post, June 30, 1967, at D12, col. 5.
135. Naturally, this is a social and not an economic judgment.
136. "[No personal freedoms are in jeopardy, nor do we ponder the dissolution of a
going concern. The impact of the law is merely preventive, and there ... are generally other
methods of expansion." Bok, supra note 78, at 273.
137. Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L. Rev. 281, 282 (1956).