The Federal Reserve is required by statute to consider the potential effect on competition of any application it receives involving a merger or acquisition. The applicant should address the effect of a potential merger or acquisition on competition.
Evaluating Competitive Effects
- The competitive analysis of banking mergers and acquisitions begins with an initial assessment based on market shares and market concentration for any geographic banking markets (CASSIDI - Competitive Analysis and Structure Source Instrument for Depository Institutions) in which the parties to a transaction have overlapping operations. Deposits of the depository institutions within the market are used as a proxy for the cluster of banking products and services of which the banking product market is composed. The primary assessment tool for measuring market concentration and evaluating the competitive effects of a transaction is the Herfindahl-Hirschman Index (HHI).
- The initial HHI calculations are based upon deposit shares of the depository institutions in a local banking market.
- Analysis of competitive effects in wholesale markets, markets for other banking products and services, and markets for products and services outside of banking, which may be local, regional, or national in scope, is undertaken on a case-by-case basis.
- To expedite the review and approval process, the Board of Governors (Board) delegates approval authority to the relevant Reserve Bank for applications that pass certain initial screens that measure the likely competitive effects of the transaction. Once an application is received, the Reserve Bank determines whether the application can be approved under delegated authority.
The Board's delegation criteria for competition state that an application must be reviewed by the Board if:
- the merger or acquisition would raise the HHI by 200 points or more AND to a level of 1800 or higher in any local banking market in which the parties to a transaction have overlapping operations OR
- the merger or acquisition would increase the post-transaction market share for the acquiring firm to more than 35 percent in any overlapping market.
In general, if an application exceeds delegation criteria in one or more local banking markets, it must be acted upon by the Board; however, in certain cases, a Reserve Bank can act on the application after Board review and once certain mitigating factors are considered (SR 19-10/CA19-9).
Analysis of Mitigating Factors
When a proposed merger or acquisition exceeds the delegation screens, in one or more local banking markets, Board and Reserve Bank staff will consider whether certain factors that mitigate the anticompetitive effects of the proposed transaction are present.
FRS staff may choose to give the deposits of thrifts that are active commercial lenders with full-time commercial lending staff a 100 percent weighting in HHI/market share calculations. Among other factors, Board staff considers the amount of commercial and industrial (C&I) loans made by a thrift relative to its other lending activities or overall assets, as well as its C&I lending relative to the C&I lending activity of local commercial banks.
FRS staff also will consider whether any credit unions should be included in the structural concentration calculations based on the competitive pressure they exert on banks in the market. Credit unions are typically included in these calculations if three conditions are met: (1) the field of membership includes all, or almost all, of the market population (broad membership criteria); (2) the credit union's branches are easily accessible to the general public (operates street level/brick and mortar branches); and 3) the credit union offers a range of consumer banking products.
FRS staff will also consider mitigating factors such as (1) the attractiveness of a market for entry or the ease of entry into the market, especially actual de novo entry into the market; (2) the number of competitors in the market; (3) the number of competitors with significant market shares; (4) the effects of a shrinking market; and (5) whether the target bank is failing or experiencing severe financial difficulties. In addition, the applicant can present unique facts and circumstances that are deemed to mitigate the anticompetitive effects of a transaction.
Divestiture of branches in markets where competitive concerns are present may also be a potential remedy. A divestiture typically involves the sale of one or more branches, including the assets and deposits associated with those branches, to a third party, preferably a new entrant into the market. The appropriateness and necessary level of divestitures is assessed on a case-by-case basis in consultation with the Department of Justice.
Other Agency review
The Department of Justice (DOJ) conducts a concurrent competitive review of applications and provides comments to the responsible banking agency, such as the Federal Reserve, regarding possible competitive concerns with a proposed transaction. See the DOJ website for additional information. Additional Resources - Competitive Effects FAQ.
Using CASSIDI to Complete an Initial Competitive Analysis
For proposals involving mergers and acquisitions, the application requires the applicant to perform an initial competitive analysis. The Federal Reserve Bank of St. Louis maintains a website called CASSIDI (Competitive Analysis and Structure Source Instrument for Depository Institutions). CASSIDI allows an applicant to calculate preliminary market shares and HHI changes for potential transactions. The site also includes up-to-date information about Federal Reserve banking markets for all 12 districts.
CASSIDI is the primary tool of the Federal Reserve System, Department of Justice and the public for performing competitive analysis. CASSIDI contains information for the entire country and is updated on a regular basis.
Through CASSIDI, a member of the public may search for and view banking market definitions, find banking market concentrations and perform "What If" (pro forma) HHI analysis on banking market structures.
CASSIDI also offers an array of mapping options, enabling an applicant or member of the public to view banking market boundaries, find depository institutions and compare market concentrations across banking markets.
It is important to verify that the weights assigned in the CASSIDI model are reflective of the institution type. For example, a SLHC with a thrift may show a 50% weighting even if that SLHC converted to a BHC; the model does not automatically keep up with charter changes and this information would need to be shared with St. Louis so the model weights could be adjusted for that charter change. Please advise FRS staff about discrepancies.
Antitrust analysis of bank mergers defines banking markets to be geographically local and to consist of the cluster of financial products supplied by commercial banks. This definition is based on assumptions about the behavior of households and small businesses when they purchase banking services.
The Board and Reserve Banks review market definitions for markets where competitive thresholds for delegation are exceeded to ensure that those definitions are still appropriate. Applicants also may request a review of the definition of a geographic market relevant to their application by proposing an alternative market definition and providing supporting evidence. If an application involves a branch in an area that does not have a defined banking market, that area will also be reviewed and a banking market will be defined.
The Federal Reserve is required to consider financial stability effects of certain proposals, including proposed bank acquisitions, mergers, or consolidations. Staff will assess the extent to which the proposal would result in an increase in size, interconnectedness, complexity, cross-border activity, or other factors that could affect the financial stability of the United States.
The Board publishes a Financial Stability Report, which can be accessed here. This report summarizes the Board’s framework for assessing the resilience of the U.S. financial system and presents the Board’s current assessment. The Board endeavors to promote public understanding regarding its financial stability analysis and increase transparency and accountability regarding the reviews it conducts under the financial stability factor.
A Reserve Bank can act on an application filed under Section 3 or Section 4 of the BHC Act or the Bank Merger Act only where the proposed transaction presents minimal risks to financial stability. Applications that satisfy the following criteria are presumed not to raise material financial stability concerns, and thus, may be acted on under delegated authority:
- The combined pro forma consolidated assets of the applicant and target total less than $100 billion (measured at parent company level for applicant and target); or
- The acquisition is a reorganization of an existing holding company that does not result in a material change in the consolidated assets of the holding company; or
- The target is an insured depository institution and its consolidated assets are less than $10 billion.
In every case, Reserve Bank staff will ensure that there is no evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risk factors.
Finally, the Board reserves the right to rebut the above presumptions if the transaction involves a global systemically important bank (G-SIB). Transactions by foreign banking organizations (FBOs) would also likely be flagged for Board review based upon their cross-border activities.
If a transaction does not meet the above criteria, the associated application may not be delegated to a Reserve Bank, and the Board is required to act on the application.
As part of the competitive analysis, a review of any potential management interlocks is also conducted. Regulation L restricts a management official from the following:
(a) Community. A management official of a depository organization may not serve at the same time as a management official of an unaffiliated depository organization if the depository organizations in question (or a depository institution affiliate thereof) have offices in the same community.
(b) RMSA. A management official of a depository organization may not serve at the same time as a management official of an unaffiliated depository organization if the depository organizations in question (or a depository institution affiliate thereof) have offices in the same RMSA and, in the case of depository institutions, each depository organization has total assets of $50 million or more.
(c) Major assets. A management official of a depository organization with total assets exceeding $10 billion (or any affiliate of such an organization) may not serve at the same time as a management official of an unaffiliated depository organization with total assets exceeding $10 billion (or any affiliate of such an organization), regardless of the location of the two depository organizations.
Further information can be found in Regulation L.