Caribou, Me., isn't on the international financial map. Nor is Kauai, Hawaii. But money-center bankers rushing to participate in the nationwide wave of bank mergers are about to learn more than they ever wanted to know about these obscure markets. The Justice Dept. has made examples of them to launch its new campaign to use the antitrust laws to check anticompetitive bank mergers.
In doing so, Justice's antitrusters are colliding with banking regulators--the Federal Reserve, the Federal Deposit Insurance Corp., and the Treasury Dept.--that are pushing consolidation as a way to build a stronger, better-capitalized financial system. The antitrust officials prevailed in the cases of First Hawaiian Inc.'s purchase of First Interstate of Hawaii, and Fleet/Norstar Financial Group Inc.'s acquisition of the failed Bank of New England Corp.
The deals went forward only after the banks agreed to sell off branches in Kauai, Caribou, and other small cities where the takeovers would markedly reduce competition. Fleet/Norstar "had to negotiate over everything--Justice even wanted to pick which branches they would divest," grouses Washington attorney Michael Greenspan, who represented the Providence company.
EXCESS CAPACITY. Justice's tougher position isn't likely to scuttle all the pending merger activity. But it could delay and complicate such proposed deals as BankAmerica's acquisition of Security Pacific, the merger of NCNB with C&S/Sovran to form a Southeastern giant dubbed NationsBank, Society's takeover of Ameritrust in Cleveland, and Bank of Boston's planned union with Shawmut National. Why, asks a senior Fed official, "did they have to pick banking, the one industry that's flush with excess capacity?"
In the past, Justice had little reason to pick banking because the merger partners' territories seldom overlapped. A Pittsburgh bank, for instance, would buy into Philadelphia. But today's mergers are often in the same market, driven by the search for savings from dropping duplicative branches and services--and reducing competition. Cities and counties are becoming dominated by fewer, bigger banks (chart). The Southern Finance Project, a Charlotte (N. C.) research group, calculates that the BankAmerica merger will boost concentration beyond Justice's competitiveness benchmark in 75 counties in six Western states, while the new NationsBank will sharply reduce competition in 13 South Carolina counties. NCNB, in filings with the Fed, sees problems in just seven counties.
The Fed, which reviews most bank mergers, measures concentration by computing banks' market shares in total deposits, both business and consumer. That aims to weigh competition across the spectrum of banking services.
Lately, Justice has taken a more restrictive stand on bank mergers. It seeks to measure any harm that mergers would inflict on small and medium-size businesses, such as restricting loan availability. Those customers "have a narrower range of product options and suppliers than do individual consumers for many important banking products," Assistant Attorney General James F. Rill told the House Banking Committee on Sept. 24.
LESS LEEWAY. Yet figures on loans in local markets are much harder to obtain than deposit statistics: First Hawaiian charged that the Justice Dept. overestimated concentration in its small-business market by 1,000%. And by treating business loans and checking accounts as integral parts of the market, Justice ignores or downplays competition from thrift institutions and commercial finance companies.
The new Justice line also eliminates mitigating factors that bank regulators consider. The Fed gave Fleet more antitrust leeway because it was acquiring a failed bank. But Justice disagreed, noting that the FDIC rejected a competing bid for the Bank of New England from San Francisco's BankAmerica, which had no New England presence.
Justice's tougher stance has had only a minor effect--so far. Fleet, which already had agreed to divest $60 million of the $15 billion in assets it had acquired, had to sell off another $25 million. First Hawaiian's deal was held up for five months over divesting six branches and a finance-company office. But observers fret over the impact if Justice throws a roadblock in the way of one of today's big, highly visible megamergers. "You can't enforce old-fashioned antitrust law and have a more efficient banking system," says George M. Salem, bank analyst at Prudential Securities Inc. The question before the Bush Administration is which goal it would rather pursue.