SPEAKERS CONTENTS INSERTS Tables
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58–762
1999
EFFECTS OF CONSOLIDATION ON THE STATE OF COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
JUNE 3, 1998
Serial No. 116
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
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CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
HEARING DATE
June 3, 1998
OPENING STATEMENT
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary
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WITNESSES
Baer, Hon. Bill, Director, Bureau of Competition, Federal Trade Commission
Bennett, Steven A., General Counsel, Banc One Corporation
Brock, James W., Moeckel Professor of Economics, Miami University
Flory, Bill, Owner, Flory Farms, Inc., Culdesac, Idaho, on behalf of the National Association of Wheat Growers
Foorman, Jim, Senior Vice President for Law, First Chicago NBD
McQuillan, William L., President, City National Bank, on behalf of the Independent Bankers Association of America
Meyer, Hon. Laurence H., Governor, Federal Reserve System
Nannes, Hon. John M., Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice
Polking, Paul, General Counsel, NationsBank Corporation and Jim Roethe, General Counsel, BankAmerica Corporation
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Roche, John J., Executive Vice President and General Counsel, Citicorp
Torres, Frank, Legislative Counsel, Consumers Union
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Baer, Hon. Bill, Director, Bureau of Competition, Federal Trade Commission: Prepared statement
Bennett, Steven A., General Counsel, Banc One Corporation: Prepared statement
Brock, James W., Moeckel Professor of Economics, Miami University: Prepared statement
Flory, Bill, Owner, Flory Farms, Inc., Culdesac, Idaho, on behalf of the National Association of Wheat Growers: Prepared statement
Foorman, Jim, Senior Vice President for Law, First Chicago NBD: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary: Prepared statement
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McQuillan, William L., President, City National Bank, on behalf of the Independent Bankers Association of America: Prepared statement
Meyer, Hon. Laurence H., Governor, Federal Reserve System: Prepared statement
Nannes, Hon. John M., Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice: Prepared statement
Pease, Hon. Edward A., a Representative in Congress from the State of Indiana: Prepared statement
Questions Presented for Response by Banc One and First Chicago
Polking, Paul, General Counsel, NationsBank Corporation and Jim Roethe, General Counsel, BankAmerica Corporation: Prepared statement
Roche, John J., Executive Vice President and General Counsel, Citicorp: Prepared statement
Torres, Frank, Legislative Counsel, Consumers Union
APPENDIX
Material submitted for the record
EFFECTS OF CONSOLIDATION ON THE STATE OF COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
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WEDNESDAY, JUNE 3, 1998
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to call, at 1:15 p.m., in Room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, Bill McCollum, George W. Gekas, Howard Coble, Charles T. Canady, Bob Goodlatte, Ed Bryant, Asa Hutchinson, Edward A. Pease, Chris Cannon, John Conyers, Jr., Robert C. Scott, Melvin L. Watt, Sheila Jackson Lee, and William D. Delahunt.
Staff Present: Joseph Gibson, Chief Antitrust Counsel; Shawn Friesen, Staff Assistant; Brendan Dignan, Staff Assistant; and Julian Epstein, Minority Chief Counsel and Staff Director.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The Committee will come to order while the breathless chairman apologizes for keeping you waiting. I had to fill in for Senator McCain in a Chamber of Commerce luncheon and it was off the Hill. So I do apologize.
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Today the committee conducts the second in a series of oversight hearings on recent mergers. Our focus today will be on the effects of consolidation on the state of competition in the financial services industry. We began the series with a hearing on airline alliance agreements on May 19. I want to begin by saying almost exactly the same thing I said about the airline alliances. Not all financial service mergers are created equal. Each one has different characteristics and each one should be judged on its own merits.
That said, I will also say that each one deserves a careful review by the agencies that are before us. I do not have a preconceived opinion as to whether any of these mergers is pro-competitive or anti-competitive, but I have called this hearing to learn what both proponents and the critics have to say.
These mergers are large and they have a big effect on the economy. For that reason, it is important that we have a public debate about their pros and cons, and I am hopeful today's hearing will add to that debate. I am also interested to learn what the witnesses have to say about the antitrust provisions of H.R. 10, the financial services modernization legislation which passed the House a few weeks ago, but it is over in the other body. Although these provisions were a relatively small part of the overall bill, they are of great importance, given this recent wave of mergers. I expect there will be more mergers in this industry, and so I have invited the witnesses to comment on these provisions if they want to do so.
In that connection, I would just note that under current law, bank mergers are not reviewed under the Hart-Scott-Rodino Act that covers most other large mergers in the economy. Rather, they are subject to special bank merger statutes. The language that we included in H.R. 10 will apply the following principle to the new conglomerate mergers involving banks and nonbanking financial institutions like insurance companies and securities brokerages. The bank parts of the merger should be treated under the current bank merger statutes and the nonbanking part should be treated under Hart-Scott-Rodino Act. I believe that is the right policy, but I surely want to hear what the witnesses have to say.
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Another important part of this language clarified the Federal Trade Commission's authority toward nonbank financial institutions. The Federal Trade Commission Act currently prohibits the FTC from enforcing the act against banks because they are so heavily regulated by the banking agencies. The language in H.R. 10 makes it clear that this prohibition does not extend to other nonbank companies that may be owned by banks if H.R. 10 becomes law.
In other words, a nonbank cannot escape the requirements of the act simply by being owned by a bank. I believe these are important parts of the bill, and until today they have not been considered in this committee. So I hope this hearing will contribute to that debate as well.
I surely look forward to hearing from our distinguished witnesses today on both the current mergers and the legislation, and I deeply appreciate all of you coming and contributing to this important debate.
With that, I turn to Mr. Conyers, the Ranking Minority Member, for an opening statement.
[The prepared statement of Mr. Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today the Committee conducts the second in a series of oversight hearings on recent mergers. Our focus today will be on the effects of consolidation on the state of competition in the financial services industry. We began this series with a hearing on airline alliance agreements on May 19.
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I want to begin by saying almost exactly the same thing that I said about the airline alliances. Not all financial services mergers are created equal. Each one has different characteristics, and each one should be judged on its own merits. Having said that, I will also say that each one deserves a careful review by the agencies that are before us. I do not have a preconceived opinion as to whether any of these mergers is procompetitive or anticompetitive, but I have called this hearing to learn what both the proponents and the critics have to say. These mergers are large, and they have a big effect on the economy. For that reason, it is important that we have a public debate about their pros and cons, and I am hopeful that today's hearing will add to that debate.
I am also interested to learn what the witnesses have to say about the antitrust provisions of H.R. 10, the financial services modernization legislation which passed the House a few weeks ago. Although these provisions were a relatively small part of the overall bill, they are of great importance given this recent wave of mergers. I expect that there will be more mergers in this industry, and so I have invited the witnesses to comment on these provisions if they want to do so.
In that connection, I would just note that under current law, bank mergers are not subject to the Hart-Scott-Rodino Act that covers most other large mergers in the economy. Rather, they are subject to special bank merger statutes. The language that we included in H.R. 10 would apply the following principle to the new conglomerate mergers involving banks and non-bank financial institutions like insurance companies and securities brokerages: the bank part of the merger should be treated under the current bank merger statutes and the non-bank part should be treated under the Hart-Scott-Rodino Act. I believe that is the right policy, but I want to hear what the witnesses have to say.
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Another important part of this language clarified the Federal Trade Commission's authority towards non-bank financial institutions. The Federal Trade Commission Act currently prohibits the FTC from enforcing the Act against banks because they are so heavily regulated by the banking agencies. The language in H.R. 10 makes it clear that this prohibition does not extend to other non-bank companies that may be owned by banks if H.R. 10 becomes law. In other words, a non-bank cannot escape the requirements of the Act simply by being owned by a bank.
I believe these are important parts of the bill, and until today they have not been considered in this committee. So I hope this hearing will contribute to that debate as well. I look forward to hearing from our witnesses today on both the current mergers and the legislation. I appreciate all of you coming.
With that, I will turn to Mr. Conyers for an opening statement.
Mr. CONYERS. Good morning, Chairman Hyde and members of the committee. I think we are honored to have as many experts from the Federal Government here today. This question of the effects of consolidation on competition in the financial services industry becomes more and more pressing as we move along. There is a merger situation going on, unprecedented in American history, $1 trillion worth of mergers and acquisitions last year. That is the relative size of the gross national product of Italy. And this year, the predictions are that they will be even larger. The banking industry is no exception; 7,000 mergers since 1980, touching almost 80 percent of all banking assets and reducing the number of banks from 14,000 to 9,000. There was $70 billion worth of merger activity in 1995; $123 billion in 1996; $186 billion in 1997. The concentration of banking assets in this industry in America continues its upward spiral.
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Studies of these mergers reveal some causes for concern: higher fees for consumers at the larger banks, fewer loans to small business and those who are not economically privileged in communities. Eight of the large bank mergers in a study showed that six of the eight experienced dramatic stock underperformance, raising questions about the efficiency of these mergers. And there is a concern now that the mergers could lead to monopolistic powers in credit card and ATM financial services. We have got a problem here, a big problem.
We have got all kinds of situations, hybrid mergers, mergers of one group on one end of the country and another huge group at the other, CitiCorps, Travelers, NationsBank and Bank of America, Banc One and First Chicago, all different kinds of mergers that raise different kinds of questions—Washington Mutual and Great Western—in the savings and loan industry.
And so I join the members of the committee and the chairman in this beginning inquiry into a very complex subject matter. May I commend the chairman of the committee, Mr Hyde, for his amendment in the financial services bill that came up a few weeks ago in which we retained important antitrust enforcement at the Department of Justice and FTC for nonbank mergers of financial service industries. I think that amendment will prove its value immediately. So I thank the Chair and yield back the balance of my time.
Mr. HYDE. I thank you. The panelists are on a rather short time schedule. I merely give you that for information so you might be brief in any opening statement.
Do you have one, Mr. Scott?
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Mr. SCOTT. No, I do not, Mr. Chairman.
Mr. HYDE. You are a real gentleman. You are a real swell guy.
Mr. Delahunt, do you have an opening statement?
Mr. DELAHUNT. I am a swell guy too.
Mr. HYDE. Wonderful.
I now hesitate to look over on the Republican side. Mr. Gekas, do you follow precedent?
Mr. GEKAS. I do not believe in precedent in most cases, but I think the glance of the chairman denotes precedence. I will yield back my non-time.
Mr. HYDE. I thank the gentleman.
Mr. Coble?
Mr. COBLE. Mr. Chairman, I am happy to declare myself a swell guy No. 4.
Mr. HYDE. Well, I guess it is up to you, Mr. Bryant.
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Mr. BRYANT. I have no opening statement, Mr. Chairman.
Mr. HYDE. Our first panel consists of three witnesses from government agencies which are involved in this area.
First we have Governor Laurence Meyer of the Federal Reserve System. Governor Meyer is a graduate of Yale University and the Massachusetts Institute of Technology. Governor Meyer taught at Washington University from 1969 to 1996. He also formed his own economic forecasting business, which he ran from 1982 to 1996. Governor Meyer is recognized as one of the leading economic forecasters in the country. He took office in 1996 and his term runs until 2001.
Our next witness is Mr. John Nannes, a deputy assistant attorney general in the Department of Justice's Antitrust Division. Mr. Nannes is a graduate of the University of Michigan Law School, after which he clerked for Judge Roger Robb of the D.C. Circuit and Justice William Rehnquist of the Supreme Court of the United States. He spent 3 years at the Antitrust Division in the mid-1970's, and after that he joined the Washington office of Skadden, Arps, where he was a partner for 21 years, and he took his current position last March.
Our third witness is Mr. Bill Baer, the director of the Bureau of Competition, which is the antitrust side of the Federal Trade Commission. Mr. Baer is a graduate of Lawrence University and the Stanford Law School. He began his career at the Commission in the late 1970's, serving in several posts, and then became a partner in the law firm of Arnold & Porter for 12 years. Chairman Pitofsky appointed Mr. Baer as director in April 1995.
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We really welcome the three of you and look forward to your testimony.
Mr. HYDE. Governor Meyer, we understand you have to leave to catch a plane at about 2:30, so we appreciate your willingness to come under that time pressure. And if we are not finished with you, why please feel free to go ahead and leave and we will not talk about you when you are gone.
May I suggest, by the way, about 5 minutes for your presentation in chief—your statements will be received into the record and will be considered seriously by the committee and the staff—but to leave time for questioning, if you can do that. We will not be rigorous in the application of that.
STATEMENT OF HON. LAURENCE H. MEYER, GOVERNOR, FEDERAL RESERVE SYSTEM
Mr. MEYER. Mr. Chairman and members of the committee, I am pleased to appear before this committee on behalf of the Federal Reserve Board to discuss antitrust issues related to mergers and acquisitions involving U.S. banking organizations.
When considering the competitive effects of a proposed bank merger or acquisition, the Board may not approve a proposal that would result in a monopoly or that may substantially lessen competition or tend to create a monopoly in a particular market. In the case of proposals that involve the acquisition of a nonbanking company by a bank holding company, the Board must consider whether the acquisition can be reasonably expected to produce benefits to the public such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects.
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Given the Board's statutory responsibility to apply the antitrust laws in banking, it is critical to understand that in the vast majority of cases, the relevant concern is competition in local banking markets. Importantly, while since the early 1980's concentration has increased in some local markets, it has decreased in others. The end result is that in both urban and rural markets, measures of concentration have remained essentially unchanged even as nationwide concentration has increased substantially.
Why hasn't the current merger movement increased average local market concentration? There are a number of reasons. But administration of the antitrust laws has almost surely played a role in restricting local market concentration. In considering the competitive effects of a proposed bank acquisition, the Board's analysis begins with defining the geographic areas that are likely to be affected by a merger. A merger would generally not be regarded as anticompetitive if the resulting measures of concentration do not exceed the criteria in the Justice Department merger guidelines for banking. If these guidelines are violated, a more thorough economic analysis is required.
When conducting such an analysis, the Board uses information from its own major national surveys, from telephone surveys of households and small businesses in the market being studied, from on-site investigations by staff, and from various standard databases with information on market income, population, deposits, and other variables. These data, along with the results of general empirical research, are used to assess the importance of the many factors that may affect competition.
Such factors include the strength of potential competition, the importance of nonbank competitors, the economic vitality of the market, and any other relevant characteristics of the case. Some merger applications are approved only after the applicant proposes the divestiture of offices in local markets. We believe that such divestitures can provide a useful vehicle for eliminating the potentially anticompetitive effects of a merger in specific local markets while allowing the bulk of the merger to proceed.
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The Board makes a concerted effort to provide the industry and other market participants with clear competition standards in order to make the regulatory process as efficient as possible. As a result, Board denials of applications on competitive grounds are rare. Nevertheless, despite the Board's efforts to inform the industry of its antitrust policy and standards, the Board has denied four applications because of adverse competitive effects during the 1990's.
The Federal Reserve and the Department of Justice coordinate their antitrust analysis through a combination of formal and informal procedures. For example, the geographic markets used to conduct the competitive analysis are provided by the Federal Reserve to the Department of Justice. The Department of Justice regularly sends the Federal Reserve and other banking agencies a listing of those mergers that the Department of Justice believes are acceptable. A substantial amount of information is also shared on an ad hoc basis. Such informal interactions occur routinely in both banking and nonbanking cases and are probably the single most important means by which the Federal Reserve and Department of Justice coordinate their competitive analyses.
Generally, the Board's competitive analysis of nonbanking acquisitions are very similar to that used in banking mergers. The economic analysis begins with determining the product market in question and then the relevant geographic area for assessing competition. The relevant market area may be local, regional, national or international depending upon the product under review and the exact nature of the marketplace.
Proposed changes in market structure are examined along with other factors, such as potential competition, to determine the extent to which competition may be reduced. Over the years, nonbanking acquisitions generally have raised fewer competitive concerns than banking mergers. This is because nonbanking activities have been usually conducted in markets where industry concentration was low or moderate and where numerous competitors existed.
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In conclusion, the Federal Reserve is required by law to assess the competitive implications of proposed bank mergers and acquisitions. To meet this responsibility, we devote considerable resources to the case-by-case evaluation of merger proposals. We believe that the Federal Reserve's and the Department of Justice's administration of the antitrust laws in banking have helped to maintain competitive banking markets during the most significant consolidation of the banking industry in U.S. history. It is the Board's intention and expectation that this will continue to be the case in the future.
Thank you.
Mr. HYDE. Thank you, Governor Meyer.
[The prepared statement of Mr. Meyer follows:]
PREPARED STATEMENT OF HON. LAURENCE H. MEYER, GOVERNOR, FEDERAL RESERVE SYSTEM
I am pleased to appear before this Committee on behalf of the Federal Reserve Board to discuss antitrust issues related to mergers and acquisitions between U.S. banks and between banking organizations and other financial services firms. Under U.S. law, when considering the competitive effects of a proposed bank merger or acquisition, the Board is required to apply the competitive standards contained in the Sherman and Clayton Antitrust Acts. Under these standards, the Board may not approve a proposal that would result in a monopoly or that may substantially lessen competition or tend to create a monopoly in a particular market. In the case of proposals that involve the acquisition of a nonbanking company by a bank holding company, the Board must consider whether the acquisition can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects. My statement today will discuss how the Federal Reserve implements these requirements. I will also try to provide some broad perspective on the ongoing consolidation of the U.S. banking system and the potential effects of bank mergers.
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It is important to understand that the Bank Holding Company Act does not give the Board unfettered discretion in acting on merger and acquisition proposals, and that competition is not the only criterion that the Board must consider when assessing such a proposal. Other factors that the Bank Holding Company Act requires that the Board consider include the financial and managerial resources and future prospect of the companies and banks involved in the proposal, and the effects of the proposal on the convenience and needs of the community to be served, including the performance record of the depository institutions involved under the Community Reinvestment Act. The Bank Holding Company Act also establishes nationwide and individual state deposit limits for interstate bank acquisitions and consolidated home country supervision standards for foreign banks. In my testimony before the Committee on Banking and Financial Services on April 29, I discussed each of these topics in some detail. Lastly, if a bank holding company proposes to acquire a firm that is engaging in an activity not previously approved for bank holding companies, the Board must determine whether such activities are so closely related to banking or to managing or controlling banks as to be a ''proper incident'' to banking.
I. Trends in Mergers and Banking Structure
It is useful to begin a discussion of the Board's antitrust policy toward bank mergers with a brief description of recent trends in merger activity and overall U.S. banking structure. The statistical tables at the end of my statement provide some detail that may be of interest to the Committee.
Bank Mergers: There have been over 7,000 bank mergers since 1980 (table 1). The pace accelerated from 190 mergers with $10.2 billion in acquired assets in 1980, to 649 with $123.3 billion in acquired assets in 1987. In the 1990s, the pace of both the number and dollar volume of bank mergers has remained high. So far this year, the rapid rate of merger activity has continued. For example, if only the five largest mergers or acquisitions approved or announced since December are completed, a total of over $500 billion in banking assets will have been acquired.
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The incidence of ''megamergers,'' or mergers among very large banking organizations, is a truly remarkable aspect of current bank merger activity. But, it is useful to recall that very large mergers began to occur with growing frequency after 1980. In 1980, there were no mergers or acquisitions of commercial banking organizations where both parties had over $1.0 billion in total assets (table 2). The years 1987 through 1997 brought growing numbers of such acquisitions and, reflecting changes in state and federal laws, an increasing number of these involved interstate acquisitions by bank holding companies. The largest mergers in U.S. banking history took place or were approved during the 1990s—including Chase-Chemical, Wells Fargo- First Interstate, NationsBank-Barnett, and First Union-CoreStates. And while these mergers set size precedents, the recently proposed mergers of Citicorp and Travelers, and NationsBank and BankAmerica, if consummated, would set a new standard for sheer size in U.S. banking organizations.
National Banking Structure: The high level of merger activity since 1980, along with a large number of bank failures, is reflected in a steady decline in the number of U.S. banking organizations from 1980 through 1997 (table 3). In 1980, there were over 12,000 banking organizations, defined as bank holding companies plus independent banks; banks (independent banks plus banks owned by holding companies) in total numbered nearly 14,500. By 1997, the number of organizations had fallen to about 7,100 and the number of banks to just over 9,000. The number of organizations had declined over 40 percent and the number of banks by over one-third.
The trends I have just described must be placed in perspective, because taken by themselves they hide some of the key dynamics of the banking industry. Table 4 shows some other important characteristics of U.S. banking. While there were about 1,450 commercial bank failures and over 7,000 bank acquisitions between 1980 and 1997, some 3,600 new banks were formed. Similarly, while over 18,000 bank branches were closed, the same period saw the opening of nearly 35,000 new branches. Perhaps even more importantly, the total number of banking offices, shown in table 3, increased sharply from about 53,000 in 1980 to over 71,000 in 1997, a 35 percent rise, and the population per banking office declined. This includes former thrift offices that were acquired by banking organizations. Fewer banking organizations clearly has not meant fewer banking offices serving the public.
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These trends have been accompanied by a substantial increase in the share of total banking assets controlled by the largest banking organizations. For example, the proportion of domestic banking assets accounted for by the 100 largest banking organizations went from just over one-half in 1980, to nearly three-quarters in 1997 (table 5). The increase in nationwide concentration reflects, to a large degree, a response by the larger banking organizations to the removal of state and federal restrictions on geographic expansion both within and across states. The industry is moving from many separate state banking structures toward a nationwide banking structure that would have existed already had legal restrictions not stood in the way. The increased opportunities for interstate banking are allowing many banking organizations to reach for the twin goals of geographic risk diversification and new sources of ''core'' deposits.
As I will discuss shortly, it may well be that the retail banking industry is moving toward a structure more like that of some other local market industries such as clothing and department store retailing. As in retail banking, clothing and department store customers tend to rely on stores located near their home or workplace. These stores may be entirely local or may be part of regional or national organizations. Thus, it should perhaps not be surprising that banks, now freed of barriers to geographic expansion, are taking advantage of the opportunity to operate in local markets throughout the country as have firms in other retail industries.
But, it would be a mistake to think that adjustment to a new statutory environment—and the increased opportunities for geographic diversification—were the only reasons for the current volume of bank merger activity. Each merger is somewhat unique, and likely reflects more than one motivation. For example, a recent study of scale economies in banking suggests that efficiencies associated with larger size may be achieved up to a bank size of about $10–$25 billion in assets. In addition, some lines of business, such as securities underwriting and market-making, require quite large levels of activity to be viable.
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Increased competitive pressures caused by rapid technological change and the resulting blurring of distinctions between banks and other types of financial firms, lower barriers to entry due to deregulation, and increased globalization also contribute to merger activity. Global competition appears to be especially important for banks that specialize in corporate customers and wholesale services, especially among the very largest institutions. Today, for example, almost 40 percent of the U.S. domestic commercial and industrial bank loan market is accounted for by foreign-owned banks.
More generally, greater competition has forced inefficient banks to become more efficient, accept lower profits, close up shop, or—in order to exit a market in which they cannot survive—merge with another bank. Other possible motives for mergers include the simple desire to achieve market power, or the desire by management to build empires and enhance compensation. Some mergers probably occur as an effort to prevent the acquiring bank from itself being acquired, or, alternatively, to enhance a bank's attractiveness to other buyers.
Many of these factors are also motivating mergers between bank and nonbank financial firms. However, in these cases, a key causal factor is the on-going blurring of distinctions between what were, not very long ago, quite different financial services. Today, as the Board has testified on many occasions, and despite the fact that banks continue to offer a unique bundle of services for retail customers, it is increasingly difficult to differentiate between many products and services offered by commercial banks, investment banks, and insurance companies. Thus, we should not find it surprising that firms in each of these industries should seek partners in the others.
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Local Market Banking Structure: Given the Board's statutory responsibility to apply the antitrust laws so as to ensure competitive banking markets, it is critical to understand that nationwide concentration statistics are generally not the appropriate metric for assessing the competitive effects of mergers. Moreover, the extent to which mergers can increase national concentration is limited by the provisions in the Riegle-Neal Act of 1994 that amended the Bank Holding Company Act and established national (10 percent) and state-by-state (30 percent) deposit concentration limits for interstate bank acquisitions. States may establish a higher or lower limit, and initial entry into a state by acquisition is not subject to the Riegle-Neal statewide 30 percent limit.
Beyond this, the Board has a statutory responsibility to apply the antitrust laws so as to ensure competitive local banking markets. Evidence indicates that in the vast majority of cases the relevant concern for competition analysis is competition in local banking markets. This is based partly on survey findings that indicate that households and small businesses obtain most of their financial services in a very local area. In addition, it is based on empirical research that shows deposit rates tend to be lower and some loan rates, particularly those on loans to small businesses, are higher in local markets with relatively high levels of concentration.
While concentration has increased in some local markets, it has decreased in others, from 1980 through 1997, in both urban and rural markets, so that the average percentage of bank deposits accounted for by the three largest firms has remained steady or actually declined slightly, even as nationwide concentration has increased substantially (table 6). Essentially similar trends are apparent when local market bank concentration is measured by the Herfindahl-Hirschman Index (HHI), defined as the sum of the squares of the market shares. Because of the importance of local banking markets, I would like to provide somewhat more detail on the implications of bank mergers for local market concentration.
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Metropolitan Statistical Areas (MSAs) and non-MSA counties are often used as proxies for urban and rural banking markets. The average three-firm deposit concentration ratio for urban markets decreased by three percentage points between 1980 and 1997 (table 6). Average concentration in rural counties declined by 1.7 percentage points. Similarly, the average bank deposit-based HHI for both urban and rural markets fell between 1980 and 1997 (table 7). When thrift deposits are given a 50 percent weight in these calculations, average HHIs are sharply lower than the bank-only HHIs in a given year, but the HHIs trend slightly upward since 1984. On balance, the three-firm concentration ratios and the HHI data indicate that, despite the fact that there were over 7,000 bank mergers between 1980 and 1997, local banking market concentration has remained about the same.
Why haven't all of these mergers increased average local market concentration? There are a number of reasons. First, many mergers are between firms operating primarily in different local banking markets. While these mergers may increase national or state concentration, they do not tend to increase concentration in local banking markets and thus do not reduce competition.
Second, as I have already pointed out, there is new entry into banking markets. In most markets, new banks can be formed fairly easily, and some key regulatory barriers, such as restrictions on interstate banking, have been all but eliminated.
Third, the evidence overwhelmingly shows that banks from outside a market usually do not increase their market share after entering a new market by acquisition. Studies indicate that when a local bank is acquired by a large out-of-market bank, there is normally some loss of market share. The new owners are not able to retain all of the customers of the acquired bank. Anecdotal evidence suggests that some other banks in the market mount aggressive campaigns to lure away customers of the bank being acquired.
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Fourth, it is important to emphasize that small banks have been and continue to be able to retain their market share and profitability in competition with larger banks. Our staff has done repeated studies of small banks; all of these studies indicate that small banks continue to perform as well as, or better than, their large counterparts, even in the banking markets dominated by the major banks. This may be due, in part, to more personalized service. But whatever the reason, based on this experience, we expect that there will continue to be a large number of banks remaining in the future.
Despite a continued high level of merger activity, studies based on historical experience suggest that in about a decade there may still be about 3,000 to 4,000 banking organizations, down from about 7,000 today. Although the top 10 or so banking organizations will almost certainly account for a larger share of banking assets than they do today, the basic size distribution of the industry will probably remain about the same. That is, there will be a few very large organizations and an increasing number of smaller organizations as we move down the size scale. It seems reasonable to expect that a large number of small, locally oriented banking organizations will remain. Moreover, size does not appear to be an important determining factor even for international competition. Only very recently have U.S. banks begun to appear, once again, among the world's twenty largest in terms of assets. Yet those U.S. banks that compete in world markets are consistently among the most profitable and best capitalized in the world, as well as being ranked as the most innovative.
Finally, administration of the antitrust laws has almost surely played a role in restricting local market concentration. At a minimum, banking organizations have been deterred from proposing seriously anticompetitive mergers. And in some cases, to obtain merger approval, applicants have divested banking offices with their assets and deposits in certain local markets where the merger would have otherwise resulted in excessive concentration.
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Overall, then, the picture that emerges is that of a dynamic U.S. banking structure adjusting to the removal of longstanding legal restrictions on geographic expansion, technological change, and greatly increased domestic and international competition. Even as the number of banking organizations has declined, the number of banking offices has continued to increase in response to the demands of consumers, and measures of local banking concentration have remained quite stable. In such an environment, it is potentially very misleading to make broad generalizations without looking more deeply into what lies below the surface. In part for the same reasons that make generalizations difficult, the Federal Reserve devotes considerable care and substantial resources to analyzing individual merger applications.
II. Federal Reserve's Application of Antitrust Standards
The Federal Reserve Board is required by the Bank Holding Company Act (1956) and the Bank Merger Act (1960) to review specific statutory factors arising from a transaction when (1) a holding company acquires a bank or a nonbank firm, or merges with another holding company, or (2) the bank resulting from a merger of two banks is a state-chartered member bank. The Board must evaluate, among other things, the likely effects of such mergers on competition. This section of my statement discusses in some detail the methodology the Board uses in assessing the competitive effects of a proposed merger.
Competitive Criteria: In considering the competitive effects of a proposed bank acquisition, the Board is required to apply the same competitive standards contained in the Sherman and Clayton Antitrust Acts. The Bank Holding Company (BHC) Act and the Bank Merger Act do contain a special provision, used primarily in troubled-bank cases, that permits the Board to balance public benefits from proposed mergers against potential adverse competitive effects. The law also requires that the Board consider the potential effects on competition in the relevant market when bank holding companies acquire nonbank firms, as will be discussed later.
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The Board's analysis of competition begins with defining the geographic areas that are likely to be affected by a merger. Under procedures established by the Board, these areas are defined by staff at the local Reserve Bank in whose District the merger would occur, with oversight by staff in Washington. In mergers where one or both parties are in two Federal Reserve Districts, the Reserve Banks cooperate, as necessary. To ensure that market definition criteria remain current, and in an effort to better understand the dynamics of the banking industry, the Board has recently sponsored several surveys, including national Surveys of Small Business Finances, a triennial national Survey of Consumer Finances, and telephone surveys in specific merger cases, to assist it in defining geographic markets in banking. These surveys are particularly useful because electronic technology and banks with widespread branch networks are becoming more prevalent. The surveys and other evidence continue to suggest that small businesses and households most often obtain their banking services in their local area. This implies using a local geographic market definition for analyzing competition. Local markets would, of course, be less important for the financial services obtained by large businesses.
With this basic local market orientation of households and small businesses in mind, the staff constructs a local market index of concentration, the HHI, which is widely accepted as a useful measure of market concentration, in order to conduct a preliminary screen of a proposed merger. The HHI is calculated based on local bank and thrift deposits. The merger would generally not be regarded as anticompetitive if the resulting market share, the HHI, and the change in that index do not exceed the criteria in the Justice Department's merger guidelines for banking. However, while the HHI is an important indicator of competition, it is not a comprehensive one. In addition to statistics on market share and bank concentration, economic theory and evidence suggest that other factors, such as potential competition, the strength of the target firm, and the market environment may have important influences on bank behavior. These other factors have become increasingly important as a result of many recent procompetitive changes in the financial sector. Thus, if the resulting market share and the level and change in the HHI are within Justice Department guidelines, there is a presumption that the merger is acceptable, but if they are not, a more thorough economic analysis is required.
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To conduct such an analysis of competition, the Board uses information from its own major national surveys noted above, from telephone surveys of households and small businesses in the market being studied, from on-site investigations by staff, and from various standard databases with information on market income, population, deposits, and other variables. These data, along with results of general empirical research by Federal Reserve System staff, academics, and others, are used to assess the importance of various factors that may affect competition. To provide the Committee with an indication of the range of other factors the Board may consider in evaluating competition in local markets, I shall outline these factors.
Potential competition, or the possibility that other firms may enter the market, may be regarded as a significant procompetitive factor. It is most relevant in markets that are attractive for entry and where barriers to entry, legal or otherwise, are low. Thus, for example, potential competition is of relatively little importance in markets where entry is unlikely for economic reasons.
Thrift institution deposits are now typically accorded 50 percent weight in calculating statistical measures of the impact of a merger on market structure for the Board's analysis of competition. In some instances, however, a higher percentage may be included if thrifts in the relevant market look very much like banks, as indicated by the substantial exercise of their transactions account, commercial lending, and consumer lending powers.
While the merger guidelines provide a significant allowance for nonbank competition, competition from other depository and nonbank financial institutions may be given some additional consideration if such entities clearly provide substitutes for the basic banking services used by most households and small businesses. In this context, credit unions and finance companies may be particularly important.
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The competitive significance of the target firm can be a factor in some cases. For example, if the bank being acquired is not a reasonably active competitor in a market, the loss of competition would not be considered to be as severe as would otherwise be the case.
Adverse structural effects may be offset somewhat if the firm to be acquired is located in a declining market. This factor would apply where a weak or declining market is clearly a fundamental and long-term trend, and there are indications that exit by merger would be appropriate because exit by closing offices is not desirable and shrinkage would lead to diseconomies of scale. This factor is most likely to be relevant in rural markets.
Competitive issues may be reduced in importance if the bank to be acquired has failed or is about to fail. In such a case, it may be desirable to allow some adverse competitive effects if this means that banking services will continue to be made available to local customers rather than be severely restricted or perhaps eliminated.
A very high level of the HHI could raise questions about the competitive effects of a merger even if the change in the HHI is less than the Justice Department criteria. This factor would be given additional weight if there has been a clear trend toward increasing concentration in the market. The possibility of efficiency gains, especially via scale economies, is considered when appropriate, although this has generally not been a significant factor.
Finally, other factors unique to a market or firm would be considered if they are relevant to the analysis of competition. These factors might include evidence on the nature and degree of competition in a market, information on pricing behavior, and the quality of services provided.
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Some merger applications are approved only after the applicant proposes the divestiture of offices in local markets, and where the merger cannot be justified using any of the criteria I have just discussed. We believe that such divestitures have provided a useful vehicle for eliminating the potentially anticompetitive effects of a merger in specific local markets while allowing the bulk of the merger to proceed.
Remedies: Divestitures and Denials: The Board makes a concerted effort to provide the industry and other market participants with clear competition standards in order to make the regulatory process as efficient as possible. This is accomplished especially through published Board Orders on individual merger decisions. Furthermore, staff at the Reserve Banks and the Board often provide guidance to banks and bank holding companies that are considering a merger even prior to the filing of a formal application as well as after an application is filed. In this way, applicants learn very early in the process whether their application is likely to raise antitrust concerns. In fact, because this information regarding the principles applied by the Board in its competitive analysis is so readily available, applicants are able to structure proposals so that few merger applications are denied on competitive grounds.
Some potential applicants choose not to file an application after being advised of the Board's policy and standards. Other potential applicants, who recognize that their application raises serious concerns about competition, choose to make divestitures of offices to remedy the competition problem. As I indicated above, divestitures have proven to be an effective way for applicants to resolve a competition problem without jeopardizing the entire deal. Indeed, the Board has approved 48 merger applications involving divestitures during the 1990s.
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Board denials of applications on competitive grounds are rare. Nevertheless, despite the Board's efforts to inform the industry of its antitrust policy and standards, the Board has denied four applications because of adverse competitive effects during the 1990s.
Reviews of Policies and Procedures: Given the rapid pace of change in the U.S. banking and financial system, the Board and its staff review policies and procedures for assessing competition on a nearly continuous basis. Periodically, more formal reviews are conducted, the most recent of which was completed by Board staff early last year. This review essentially confirmed the continued appropriateness of our existing methodology. I would like to highlight five aspects of that review that might be of particular interest to the Committee.
Since at least the mid-1960s, the cluster of products and services that constitutes commercial banking has been used, and reaffirmed by the courts, as the relevant product line for bank merger analysis. The cluster is meant to encompass the set of products and services that is purchased primarily from banks, a set that technological and other market developments have clearly changed over time. However, extensive review of available data, including our practical experience in analyzing cases, indicated that there still exists a core of such activities for both households and small businesses. Such activities certainly include federally insured deposits and, for small businesses, likely encompass certain credit products and services as well. Thus, the cluster continues to be the product line used by the Board for bank merger analysis.
The staff's review also indicated very strong support for the continued use of local geographic markets for the cluster of bank services as the primary concern of competition analysis. Survey data indicate, for example, that 98 percent of households, and 92 percent of small businesses use a local depository institution. In addition, it is estimated that almost 90 percent of services consumed at depositories by households, and 95 percent of services consumed by small business, are provided by local depositories. On a closely related issue, our staff considered whether it might be appropriate to use somewhat different competition standards in urban and rural markets. This question was motivated by the fact that, since rural markets tend to be more concentrated than urban markets, it is frequently more difficult for banks in a given rural market to merge with each other than it is for banks in an urban market. However, no objective basis was discovered for treating urban and rural markets fundamentally differently in the analysis of potential competitive effects of a merger. Thus, all proposals continue to be evaluated on a case-by-case basis using common standards.
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Our staff also reviewed whether continued use of the Department of Justice's merger guidelines was appropriate or whether, in light of institutional and technological changes, a more liberal initial screen should be applied. While the market for banking services certainly has become more competitive since the existing guidelines were established in 1984, the current guidelines continue to provide a useful initial screen for deciding whether a proposed merger is likely to have anticompetitive effects. In particular, the more generous allowance in the guidelines for the effects of nonbank competition were deemed to remain sufficient for the vast majority of cases. Exceptions can be dealt with on an individual basis. Moreover, there is considerable virtue in having both the Federal Reserve and the Department of Justice use the same initial screen. In the end, there appears to be no substitute for a careful case-by- case analysis, of the type that I discussed above, of proposals that violate the Board's and the Department of Justice's initial guidelines.
Lastly, in light of a substantial body of evidence accumulated over the 1980s, economies of scale are considered as a potential mitigating factor in our analysis of merger proposals. Many studies using data from the 1970s and 1980s indicated only small economies of scale in banking, economies that were exhausted at about $100 million in total assets. However, recent research using data from the 1990s suggests that significant scale economies may exist for much larger firms, perhaps for banks as large as $10 to $25 billion in assets. If these results hold up to additional scrutiny, we will clearly need to evaluate once again the weight given to economies of scale in competition analysis.
Coordination with Department of Justice: The Federal Reserve and the Department of Justice (DOJ) coordinate their antitrust analysis of banking consolidations through a combination of formal and informal procedures. These procedures have two objectives. First, they ensure that the two agencies share information that is relevant to the competition analysis of all bank merger proposals which raise a serious competitive issue. Second, they ensure that the analysis of each agency is known to the other.
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A number of procedures have been developed at various stages of the application process. Largely, they entail the exchange or sharing of documents. The Department of Justice, for example, is provided a copy of all bank applications made to the Federal Reserve. The geographic markets used to conduct the competitive analysis are provided by the Federal Reserve to the DOJ. Also, the Department of Justice regularly (about every two weeks) sends the Federal Reserve and other banking agencies a document listing those mergers that the DOJ believes are not likely to have significantly adverse competitive effects. Finally, in cases involving Justice Department-required divestitures, the Department typically sends the Federal Reserve a copy of the ''letter of agreement'' that identifies the terms of the required divestitures.
A significant amount of information is also shared on an ad hoc basis. Direct staff-to- staff communications, including conversations and meetings, play an important role in the resolution of difficult competitive issues. Communications between the staffs of the Justice Department and the Federal Reserve can be frequent and may occur without limit at any stage of the application process, including pre-application and post-approval. In the past, a range of issues has been discussed and resolved informally, including both geographic and product market definitions and divestiture requirements. Such informal interactions occur routinely in both banking and nonbanking cases and are probably the single most important means by which the Federal Reserve and the Department of Justice coordinate their competitive analyses.
The Department of Justice places substantial weight on the potential effect of a merger on lending to small businesses. The Board also considers small business lending but in the context of the more general analysis of the cluster of banking services. Because of these differences in emphasis, the Board and Department may, in occasional cases, reach different conclusions regarding the competitive effects of a merger.
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Recent Cases: As I noted earlier, the Board has always believed that it is important to make its antitrust policy clear to the industry and other members of the public. One way it attempts to accomplish this is by providing a detailed analysis of competitive issues in its public Order on each case. In a number of recent large and complex cases, the Board has reinforced its policy and methodology for analyzing competition, and reminded applicants of the need for noticeable, and possibly increasing, ''mitigators'' in cases that exceed the Department of Justice screening guidelines. This was done because during the past couple of years an increasing number of applicants came very close to the Board's limits, in terms of structural effects and strength of mitigating factors, for approving bank mergers. It appeared as though some applicants had concluded that the Board had relaxed its competition standards. That conclusion is incorrect.
For example, in one recent Order the Board noted,
As the Board has indicated in previous cases, in a market in which the competitive effects of a proposal as measured by market indexes and market share exceed the DOJ guidelines, the Board will consider whether other factors tend to mitigate the effects of the proposal. The number and strength of factors necessary to mitigate the competitive effects of a proposal depend on the level of market concentration and size of the increase in market concentration.(see footnote 1)
The Board has recently also considered cases in which Department of Justice guidelines were exceeded in a large number of local markets. In those cases as well, the Board indicated that mitigating factors should exist in each local market being affected. There, the Board stated that:
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In these cases, the Board believes that it is important to give increased attention to the size of the change in market concentration as measured by the HHI in highly concentrated markets, the resulting market share of the acquiror and the pro forma HHIs in these markets, the strength and nature of competitors that remain in the market, and the strength of additional positive and negative factors that may affect competition for financial services in each market.(see footnote 2)
In summary, at a time when the banking industry is undergoing an unprecedented merger movement that is likely to continue for a considerable period, it is particularly important to have a public policy that will maintain a competitive banking marketplace and that is well understood by all market participants. The Board seeks to accomplish these public policy objectives in an efficient and effective manner by maintaining a relevant and up-to-date policy, cooperating closely with the Department of Justice, keeping the industry and other members of the public well informed, and providing information and guidance through staff at the Board and Reserve Banks.
Nonbank Acquisitions: The ability of bank holding companies to engage in a wide range of nonbanking activities was made possible by the 1970 amendments to the Bank Holding Company Act. Permissible nonbanking activities are those that satisfy a two-part test delineated in section 4(c)(8) of the Bank Holding Act. This test first requires the Board to find that a nonbanking activity is ''closely related to banking.'' Second, the Board must determine that the performance of the activity ''can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.''
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The Board has determined that nonbanking activities are closely related to banking if they meet any one of three criteria: (1) banks generally have in fact provided the proposed services; (2) banks generally provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed services; or, (3) banks generally provide services that are so integrally related to the proposed services as to require their provision in a specialized form.
The competitive effects of a proposal must be reviewed as part of the ''net public benefits'' test that governs nonbanking acquisitions. Unlike the case in banking acquisitions, however, in every nonbanking acquisition, the Board must also weigh other possible effects—such as undue concentration of resources and the existence of unfair competition—against public benefits and find that public benefits are predominant in order to approve the proposal.
Generally, the Board's competitive analysis of nonbanking acquisitions is very similar to that used in banking mergers. In particular, the economic analysis begins with determining the product market in question, and then the relevant geographic area for assessing competition. The relevant market area may be local, regional, national, or international, depending on the product under review and the exact nature of the marketplace. Then, proposed changes in market structure are examined along with other factors, such as potential competition, to determine the extent to which competition may be reduced. Over the years, nonbanking acquisitions generally have raised fewer competitive concerns than banking mergers. This is because nonbanking activities have generally been conducted in markets where industry concentration was low or moderate and where numerous competitors existed (e.g., consumer finance and mortgage banking).
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III. Conclusion
The Federal Reserve is required by law to assess the competitive implications of proposed bank mergers and acquisitions. In order to fulfill its statutory responsibilities, the Federal Reserve devotes considerable resources to the case-by-case evaluation of merger proposals. The Board normally focuses its analysis on a proposed merger's potential impact on competitive conditions in local markets for banking services. In some cases, particularly those involving the acquisition of nonbank firms, broader geographic areas are used. The Federal Reserve's (along with the Department of Justice's) administration of the antitrust laws in banking has helped to maintain competitive banking markets in the midst of the most significant consolidation of the banking industry in U.S. history. It is the Board's intention and expectation that this will continue to be the case in the future.
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
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Table 7
Mr. HYDE. Mr. Nannes.
STATEMENT OF HON. JOHN M. NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Mr. NANNES. Thank you, Mr. Chairman and members of the committee. It is a pleasure for me to be here with you this afternoon on behalf of the Antitrust Division of the Department of Justice to discuss our enforcement program with respect to mergers in the banking industry.
Today's hearing is certainly timely, as this is a time when significant changes are occurring in the banking and financial service industries. I think it is apparent to all that we are now beginning to see banks involved in mergers of a different size and scope than we have seen in the recent past.
Today I would like to describe for you how the Antitrust Division analyzes bank mergers generally and to describe some recent instances where we have determined that competitive problems would exist but for antitrust intervention. The analytical approach that we have used, applied on a case-by-case basis to particular mergers, will, I believe, continue to preserve competition as the banking and financial service industries head into the 21st century.
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Mr. HYDE. Mr. Nannes, would you pull the mike a little closer to you? Good. Thank you.
Mr. NANNES. The Antitrust Division is the antitrust enforcement agency that reviews acquisitions and mergers among depository institutions. We typically receive notice of about a thousand mergers per year, and we have established a special unit within the Antitrust Division that focuses exclusively on bank mergers. Of those thousand notifications, approximately 100 each year present issues of significant complexity that require an in-depth competitive analysis. And thus far in fiscal 1998, we have required remedies as conditions of mergers in 10 transactions, which is approximately the same number we did in all fiscal year 1997.
The bank merger statutes require that bank regulatory agencies consider competitive effects of a transaction along with other factors. For both bank-bank mergers and transactions involving the merger with respect to a bank holding company, the Department of Justice gets 30 days after the agency reaches its decision, during which time the Antitrust Division can determine whether it believes filing suit is warranted. And if we do file suit, the transaction is automatically stayed.
One of the overall effects of this regulatory structure is that the Division's competitive concerns are usually resolved by the parties before litigation is filed and litigation, therefore, is rare. A significant advance in the bank merger competitive review process occurred in 1994 with the development and publication of merger screening guidelines on a collaborative basis by the Antitrust Division, the Fed, and the OCC. In practice, the screening guidelines have ensured that the bank merger applications contain information sufficient for the Antitrust Division as well as the bank agencies can consider and is sufficient to allow them to reach an initial assessment of a merger's competitive effects.
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The screening guidelines indicate, as Governor Meyer indicated, that we will look first at market concentration and then at the change in concentration that would occur as a result of the merger, and make a first cut to ascertain whether the transaction is potentially competitively problematic. If the proposed merger fails the concentration screens in the guidelines, the Department does an in-depth factual analysis to determine the likely competitive effects of the merger on consumers in the affected markets.
In doing that analysis, we apply the same methodology that we use generally in other industries; namely, our Horizontal Merger Guidelines, with the objective being to determine whether the merger could create or facilitate the exercise of market power to the detriment of consumers, consumers here being defined as either individual citizens or businesses. We will analyze the transaction with respect to each product market, each affected geographic area. That includes its impact on retail customers and on businesses, small and large.
In each instance, what we are looking to see is whether bank customers will continue to have reasonable alternatives to which to turn in the event that the merging parties seek to raise prices or to diminish their service offerings. Historically we have found, as has the Fed, that bank mergers are less likely to threaten competition in products and services provided to retail consumers because they often have other options that are not available to businesses, such as thrifts and credit unions.
To the extent our investigations have resulted in a determination of competitive concerns, we are usually able to address those through targeted divestitures which require the establishment of a new entity to step into the shoes of the party being acquired in the market that is problematic. Our law enforcement objective with respect to mergers is to prevent anticompetitive effects. Our divestiture remedies that are ordered in those instances often involve the establishment of a new network of branches, often in urban areas, to help ensure a viable long-term competitor.
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In recent years, we have undertaken significant divestitures in at least three major transactions. Just to summarize them for you, the first was NationsBank and Barnett Banks. We required divestitures of approximately 124 branches, accounting for deposits of over $4 billion. And we worked closely with the Florida Attorney General's Office in fashioning that relief.
Similarly, just 2 months ago, in the First Union/CoreStates financial transaction that had significant impacts in Pennsylvania, and particularly in Philadelphia, we negotiated a very substantial divestiture. And just last month, we did so similarly with respect to Banc One and First Commerce that had impact principally in Louisiana.
I should emphasize for you that we will take whatever action is necessary and insist on whatever remedy needs to be agreed to in order to be sufficient to prevent anticompetitive mergers. We think on a going-forward basis, while these transactions may change the numbers and change the dimension of the size and scope, that the analytical framework that we have developed is a sound framework and will be applied on a going-forward basis.
With respect to the time constraints that you have, Mr. Chairman, I will rely on the remainder of my statement, which is being submitted into the record, except to indicate that we will continue to apply a forward-looking analysis into each and every banking merger.
Mr. HYDE. Thank you very much.
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[The prepared statement of Mr. Nannes follows:]
PREPARED STATEMENT OF HON. JOHN M. NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Mr. Chairman, and members of the Committee, it is a pleasure for me to appear before you today on behalf of the Antitrust Division of the Department of Justice to discuss our enforcement program with respect to mergers involving the banking industry.
Free-market competition is the engine that has made the American economy the envy of the world. In particular, our nation's economic vitality depends upon the financial soundness and competitive structure of the banking industry, for it is the credit provided by that industry to American consumers and businesses that helps the free-market engine run smoothly. Experience has shown that where there are competing sources of credit, the price of credit is lower and its availability is greater. That rivalry also brings consumers the benefits of greater innovation and better quality financial services.
Today's hearing is most certainly timely, as this is a time when significant changes are occurring in the banking and financial services industries. While we have seen a large number of bank mergers over the past decade as bank regulatory strictures on the geographic area in which a bank may operate have loosened, I think it is apparent to all that we are now beginning to see banks involved in mergers of a different size and scope than we have seen in the recent past.
With respect to size, transactions such as the recently announced proposed merger between NationsBank and Bank of America dwarf the size of previous bank mergers. I think it is entirely possible that we will see other large bank mergers proposed in the future as well. Not only are we likely to see transactions between large banks in the future, but we are also likely to see more and more of an entirely new type of merger transaction, the merger between a large bank and a large financial services company. A current example of this type of transaction is the proposed merger between Citicorp and Travelers Group.
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Congress, banking regulators and antitrust authorities all must ask what are the implications of this changing landscape. From an antitrust perspective, will these transactions require a change in focus of bank merger review? How should these transactions be analyzed from an antitrust perspective? Are transactions of these types likely to limit consumer options such that prices will rise and quality of products and services will decline? All of these questions, and many others, need to be considered with an eye to ensuring that the changing landscape will not result in large institutions with market power that would enable them to force customers to pay higher fees and lending rates, receive lower rates for deposits, and receive lower service quality.
Today I would like to describe how the Antitrust Division analyzes bank mergers generally, briefly outlining both the regulatory structure under which we conduct our review and the analytical approach that we take. I will also briefly describe some recent instances where we have required divestitures that are designed to remedy the competitive concerns that exist with the merger, while allowing the merged firm to realize efficiencies associated with the parts of the transaction that do not raise competitive concerns. The analytical approach that we use, applied to the facts presented in particular mergers, will, I believe, continue to preserve competition as the banking and financial services industries head into the 21st century.
Regulatory Structure
The Antitrust Division is the antitrust enforcement agency that reviews acquisitions and mergers among depository institutions.(see footnote 3) The Department typically receives notice of approximately 1,000 mergers per year that propose to combine assets of depository institutions. We have established a special unit within the Antitrust Division that focuses entirely on bank mergers. Of those 1,000 merger notifications, approximately 100 each year initially present issues that require an in-depth competitive analysis. Thus far in fiscal year 1998, we have required remedies to preserve competition in ten instances, already equaling the number of matters in which remedies were required to preserve competition in fiscal year 1997.
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Generally speaking, the Division's review of mergers involving depository institutions does not take place under the Hart-Scott-Rodino premerger notification regime but instead under the bank regulatory statutes. Under these statutes, authority to approve or disapprove mergers rests with one of four bank regulatory agencies.(see footnote 4) The bank merger statutes require that the bank regulatory agencies consider competitive effects of a transaction along with other factors such as convenience and needs in their decision process. Bank-bank mergers require a competitive factors report from DOJ. For both bank-bank mergers and transactions involving the merger of bank holding companies, DOJ is afforded a 30-day post approval waiting period in which to file suit before the transaction receives antitrust immunity. Filing of a suit by DOJ triggers an automatic stay. One overall effect of this regulatory structure is that the Division's competitive concerns are usually addressed by the Division reaching an agreement with the parties for some type of remedy, and litigation is rare.(see footnote 5)
Screening Guidelines
A significant advance in the bank merger competitive review process was achieved in 1994 with the development by the Division, the FRB and the OCC of the Bank Merger Screening Guidelines, which clarify each agency's processes and, in a single document, set out the ground rules for each agency's review of mergers.
In practice, the Screening Guidelines have ensured that bank merger applications come to the Division with the information necessary for us to review them and reach an initial assessment of a merger's likely competitive effects. The Guidelines have allowed us and the other agencies to begin an examination and analysis of the competition issues and possible resolutions at an early stage.
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The screening guidelines indicate that we will look first at market concentration and the change in that concentration as a result of the merger to make a first cut with respect to potential competitive concerns. If either the market concentration is low or the resulting increase in concentration in the market is low, that will end our inquiry. If the proposed merger fails the market concentration tests in the screens, it does not necessarily mean that a competitive problem exists. Instead, if the proposed bank merger fails the screens, then the Department does an in-depth factual analysis to determine the likely competitive effects of the merger on consumers in the affected markets.
Analytical Approach of the Antitrust Division
The Antitrust Division's review of proposed bank mergers applies the same methodology that we use in other industries—that of the Horizontal Merger Guidelines(see footnote 6)—to analyze the likely effect of the merger on competition to supply each product sold by each merging firm in each geographic area in which the product is sold. The objective of the analysis, of course, is to assess whether the merger could create or facilitate the exercise of market power, where market power is defined as the ability of firms to increase price or reduce quality from competitive levels. The Division will thus analyze the merger's impact on the range of products and services provided by banks in particular geographic areas. These include deposit, loan, and investment and trust services sold to retail consumers; deposit, loan, and various other services, including cash management services, sold to businesses; and correspondent services, such as check clearing and foreign exchange services, sold to other banks.
In each investigation we conduct, we look for the choices consumers will have if, after a merger, there are price increases. If you are getting a small business loan from a commercial bank, for instance for working capital, and if the merged bank tries to raise its prices, what choices do you have? If the small business has sufficient reasonable alternatives available to it besides the merged bank, we would not be concerned from an antitrust perspective. On the other hand, if there were not sufficient reasonable alternatives available, we would be concerned about the merger.
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Historically, we have generally found that bank mergers are less likely to threaten to reduce competition in products and services provided to retail consumers, as opposed to business consumers, because retail consumers typically have local banking alternatives available to them, such as other banks, thrifts and credit unions, sufficient to prevent the creation or exercise of market power. However, where we have found such competitive concerns, targeted divestitures have protected retail consumers. Of course, we will continue to screen and investigate during our bank merger reviews for any significant loss of competition in the retail area.
To the extent that our investigations have resulted in a determination that competitive concerns exist, it has most often been with respect to the availability of banking services, including loans and credit, to small and medium-sized businesses. Such small and medium-sized businesses may have few alternatives available to them for some of their credit needs.
For example, small businesses tend to have some types of credit needs—such as lines of credit for business startup and working capital purposes—that may attract neither in-region thrifts or credit unions nor banks located in other regions. These businesses tend to have to rely on local commercial bankers for such credit needs. Thus, a merger between two of only a few local commercial banks in a particular market could raise competitive concerns.
Recent DOJ Enforcement Efforts
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Our law enforcement objective with respect to bank mergers—like that of all mergers—is to prevent the anticompetitive effects of a particular merger, thereby ensuring that competition is preserved. With respect to bank mergers, we are typically able to accomplish this objective through targeted divestitures while at the same time permitting those parts of the merger that do not have anticompetitive effects (and indeed may generate efficiencies) to go forward. In some instances, particularly in urban areas, requiring a network of branches to be divested (along with associated deposits and loans) helps ensure that a viable, long-term competitor can replace the competition lost via the merger of competitors.
In December 1997, we secured a major divestiture in the proposed acquisition of Barnett Banks by NationsBank. NationsBank agreed to divest approximately 124 branches in fifteen areas of Florida with total deposits of approximately $4.1 billion. That is the largest bank divestiture ever in a single state and overall is second only to the divestitures required in the 1992 BankAmerica/Security Pacific transaction. The Division's investigation was conducted jointly with the Florida Attorney General's Office, which provided us with important information about local market conditions and effective relief alternatives.
Similarly, working closely with the Pennsylvania Attorney General's Office, the Division announced on April 10 that First Union and CoreStates Financial would be required to divest 32 CoreStates branch offices with total deposits of approximately $1.1 billion before they could go forward with their proposed merger. The branch offices required to be divested are located in the city of Philadelphia and in the contiguous counties of Delaware and Montgomery and in the Lehigh Valley. The divestiture that we required is already producing benefits to competition in the Philadelphia area. Those 32 branches were sold to Sovereign Bancorp, a Pennsylvania based bank. Sovereign Bancorp simultaneously purchased an additional 63 branches from First Union/CoreStates, thereby greatly enhancing its competitive stature in the city of Philadelphia and throughout the entire eastern Pennsylvania region.
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Most recently, on May 4, we announced that Banc One had agreed to the divestiture of 25 branch offices with total deposits of $614 million in four Louisiana banking markets in order for its acquisition of First Commerce to go forward.
I think it is helpful to note that according to the Federal Reserve Board, which keeps such data, while banking consolidation has led to higher nationwide shares, as measured by assets, of the largest institutions in the past fifteen years, concentration in local geographic markets has remained roughly constant. This is due to a variety of factors, including antitrust enforcement by the banking agencies and the Antitrust Division, new entry into banking markets, and the fact that a number of these bank mergers did not involve competitors serving the same market and thus did not affect local market concentration.
I should emphasize that, as in other industries, we will take whatever action is necessary—and insist on whatever remedy is necessary—to prevent anticompetitive mergers. The bank mergers that have in recent years presented competitive problems, though, have been susceptible to the type of targeted divestitures that I have described, and I believe the relief we have obtained has successfully preserved competition in affected markets.
Looking to the future, the fact that some future bank-bank mergers may involve significantly larger banks is not likely to require a change to the analytical approach used by the Department to review bank mergers. We will continue to analyze the merger's impact on competition to supply each product and service provided by the merging banks in the relevant geographic areas. To the extent that there are not likely to be sufficient alternatives to the merging banks available to consumers (whether retail or business), we will not hesitate to seek necessary remedies to preserve competition. I will note, of course, on a purely factual basis that, other things being equal, the larger the shares of the merging parties with respect to certain products or services in relevant geographic areas, the more competitive concerns the merger may present.
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With respect to bank-nonbank mergers, the mergers that we have reviewed to date generally have not raised serious competitive issues. However, as the financial services field continues to undergo rapid change, we will examine each market involved in such mergers closely to see if any mergers of this type may adversely affect competition and consumers.
Conclusion
I would like to conclude my remarks by emphasizing that the Antitrust Division's focus in reviewing a bank merger—and, indeed, any merger—is on whether the merger will hurt consumers by raising prices, reducing quality, or limiting innovation. Our job is to see that businesses and individuals, as consumers of credit and other banking products and services, are not harmed by consolidation within the banking industry. While we will not stand in the way of mergers that are competitively neutral or even beneficial for competition and consumers, we will continue to ensure that the competition that benefits us all is not sacrificed by mergers in the banking industry. As financial service modernization goes forward and we see mergers of larger size and scope, the Antitrust Division will continue to apply forward-looking competitive analysis to each and every merger.
Mr. HYDE. Director Baer.
STATEMENT OF HON. BILL BAER, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION
Mr. BAER. Thank you, Mr. Chairman. It is an honor to be here and a privilege to share the panel with two such distinguished public servants.
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This hearing is both timely and important. There obviously is a lot going on in the financial institution sector. What I want to do in my testimony is summarize briefly the role antitrust and consumer protection enforcement, the two responsibilities Congress has given the FTC, can play in this environment.
We are seeing rapid changes in the financial institution sectors, particularly involving mergers. Some of that simply reflects the booming economy. Mergers generally, as the chairman indicated in his opening remarks, have increased by over 300 percent in the last 6 or 7 years. But there is also something going on here that is unique to the financial services sector. We are seeing erosion of traditional barriers separating industries that previously provided discrete financial services.
As a result, there is an accelerating transformation of financial services markets and the growth of competition that is more product-based rather than industry-based than it had been in the past. The trend began in the eighties with the loosening of restrictions on interstate banking and is accelerating as companies anticipate the passage of H.R. 10 or some variation of that legislation.
Now, our country's past experience with deregulation in other sectors teaches us that removal of regulatory overlays potentially offers significant benefits to consumers. That potential exists as well here. As banks are allowed to move into other sectors, as nonbanking entities such as insurance companies and brokerage houses are allowed to own banks, we have the potential for more competition, for lower price and for new services to be offered.
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Our experience with the deregulation of long distance telephone is a good example of how the public can benefit from a deregulating environment. But experience also teaches us that in this changing environment we will need effective consumer protection and antitrust enforcement to make sure those markets remain competitive and that consumers are not deceived or otherwise mistreated.
Here our experience with airline deregulation is instructive. Deregulation had some significant benefits. It brought some lower prices. But ineffective merger enforcement at the Department of Transportation early on allowed airlines to become dominant in some hub cities, giving those airlines the power to rob consumers of the benefits of deregulation. On the consumer protection side, we saw deceptive airline fares advertised in the early years before Federal enforcement forced adequate disclosure to consumers of the fares and conditions being placed on them.
Going forward, we need to be particularly alert to the effect relaxed regulation over financial institutions will have on the incentives of parties to merge and the potential for anticonsumer conduct. My colleague Mr. Nannes's testimony described the banking mergers that are reviewed by DOJ and the divestitures they require to preserve competition. Those mergers are exclusively the jurisdiction of the Department of Justice. But some of those same issues can arise in other segments of the financial services industry where the FTC has antitrust authority as well.
Just a couple of years ago, the FTC investigated an attempt by two companies, First Data and First Financial, to create a monopoly over consumer money wire transfers. At that point only two firms, Western Union and Moneygram, provided consumer wire money transfers. These wire transfers are critically important to low- and middle-income consumers, many of whom lack a banking relationship and therefore need access to wire transfers in order to get money from one place to another. We stopped that part of the merger. And by requiring divestiture of the Moneygram business, we estimate we are saving consumers up to $30 million a year in the form of lower prices for consumer money wire transfer.
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Our experience in other deregulating markets also helps us understand some other things we need to be concerned about. One is potential competition. We need to make sure that mergers do not eliminate one of a few firms who potentially would provide competition in a sector of the financial institution markets that is now lacking in competition. In deregulating natural gas, we found a couple years ago that pipelines mergers threatened to prevent the potential for competition to come into play and offer the benefit of lower prices.
We also need to make clear, as both of the prior witnesses have emphasized, that we need to enforce antitrust laws at not just the macro level but we need to look at the local community effect of each merger, to make sure competition is not being eliminated.
We also need to be alert to the fact that even if prices are falling in a market, they may not fall as fast as they otherwise would if we let people merge and slow the rate of decline in prices. That was true with airlines. It was true in a case we brought last year challenging the merger of Staples and Office Depot, two firms who had brought lower office supply prices to consumers in many markets. Within the merger, they would have continued to offer low prices, just not as low as they would have been without the merger. We served a court injunction blocking the merger and preserving the competitive environment.
Finally, it is important not to overlook consumer protection issues, issues of credit access, fair credit reporting, consumer privacy, and consumer fraud. We have seen a growth in recent years of sub-prime lending, efforts by firms to offer credit to folks who cannot get into banks and get loans on terms that are available to most other people. There has been some fraud, some deception. There have been mergers which have allowed these firms to offer sub-prime lending on a national basis. But while there may be nothing wrong with these mergers so long as prices don't go up, we need to make sure that consumer protection is effectively provided.
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And finally, Mr. Chairman, we need to make sure that privacy concerns are not overlooked, that as banks move into other sectors of the financial institutions, that credit reports are not shared in a fashion that allow misinformation about consumer credit histories to be further disseminated in the marketplace.
With that I will stop and turn back to you, Mr. Chairman. Thank you.
[The prepared statement of Mr. Baer follows:]
PREPARED STATEMENT OF HON. BILL BAER, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION
I. Introduction
The Federal Trade Commission (''Commission'' or ''FTC'') is pleased to have this opportunity to testify before the Committee concerning mergers and acquisitions in financial services industries.(see footnote 7) Mergers of firms engaged in some aspect of financial services are increasing, caused in large part by the erosion of traditional barriers that separate industries that provide financial services. As a result, there is an accelerating transformation of financial services markets and the growth of product-based competition (e.g., several types of firms offering similar financial products), rather than competition within traditional industry segments (e.g., banking and insurance). Indeed, H.R. 10, as passed by the House of Representatives, would eliminate regulatory barriers and allow federal regulators to engage in product-based rather than industry-based regulation.
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One of the implications of product-based competition is that, while there is a trend toward greater consolidation within the traditional financial services industry, there has been growth in the number of firms outside that industry that provide financial services and products. Opening up markets to new firms has the potential to result in increased competition, but it may also lead to competitive scenarios that are unfamiliar to traditional regulators. It is here that the Commission can provide significant assistance to the deregulatory effort. The Commission has a long history of examining product-based competition and ensuring that consumers are protected in the purchase of all products.
Competition in the banking and financial services industries is vital to the stability and growth of the American economy. Accordingly, any change in regulatory policy should be carefully considered, not only in light of safety and soundness, but also with regard to competition and consumer protection.
II. Background on the FTC
The Commission welcomes the opportunity to provide its perspective on how the evolution of these markets will affect consumers and the need for government enforcement in the areas of competition and consumer protection. The FTC is the sole general jurisdiction federal agency committed to both competition and consumer protection law enforcement.
In this testimony, we first discuss some important competition and consumer protection issues in financial services, followed by a discussion of how increased deregulation will affect the need for government enforcement with respect to both consumer protection and competition. Finally, we comment on the provisions of H.R. 10 which clarify the FTC's jurisdiction. We believe this clarification is important to assure that consumers receive the full benefits of the efforts to deregulate these markets.
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As the financial services environment changes, there will be heightened need for vigilant review and enforcement by the FTC of both the antitrust and consumer protection laws. While the Federal Trade Commission Act does not apply directly to banks or savings and loan institutions,(see footnote 8) today's financial services transactions most often involve new combinations of holding companies (bank or otherwise), nonbank companies, or nonbank subsidiaries. In such cases, the Commission has previously played an important role in eliminating unlawful restrictions on competition and in protecting consumers from fraud and deceptive practices in financial services industries. The Commission enforces the Clayton Act and the FTC Act against anticompetitive conduct, both merger and nonmerger. Furthermore, the Commission's Credit Practices Division is almost exclusively devoted to policing unlawful credit practices in the financial services industry. It also enforces a number of federal statutes relating to consumer credit practices of nonbank financial service providers. Finally, the Commission assists the banking agencies in developing consumer protection regulations and addresses issues related to electronic commerce.
III. Competition and Consumer Protection in the Financial Services Industry
The Commission believes that consumer protection and competition enforcement should work together to help ensure that consumers receive the benefits of effectively functioning markets. In the financial services area—as in all other areas—consumers are best served when they are able to make free choices in a free market. There are two functional requirements for a market to be free—that competitors be able to provide a range of options for consumers, and that consumers have the ability to make informed decisions from among those options.
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Those two ingredients of a free market define the roles of the Commission's competition and consumer protection functions. The antitrust laws protect the range of options in the market, barring firms from engaging in illegal price fixing, restricting entry, or otherwise limiting the choices available to consumers. The credit statutes enforced by the Commission, as well as Section 5 of the FTC Act, protect consumers' ability to select among those options, so that their choice is not distorted by deception or by incomplete or inaccurate information. Both sets of laws will play a vital role in the financial services industry.
As in many other markets, there has been a tremendous increase in mergers, acquisitions and strategic alliances in the financial services industry. Although in the past, bank to bank acquisitions were common,(see footnote 9) a vast number of recent acquisitions and alliances in the financial services market involve holding companies or nonbank firms, including nonbank affiliates of banks.(see footnote 10) One recent example of FTC merger enforcement in the financial services industry was the Commission's 1995 challenge to First Data Corp.'s acquisition of First Financial Management Corp., which would have combined the only two competitors in the consumer money wire transfer market, Western Union and MoneyGram.(see footnote 11) This case was significant because it involved important product-based analysis of a financial services product. Millions of consumers use wire transfers, often in emergency situations, such as when a person loses a wallet or when a traveler runs out of money. They are also extensively used by consumers without banking relationships, who constitute about 20–25 percent of the total population. By requiring divestiture of MoneyGram, the Commission's enforcement action prohibited First Data from creating a monopoly in this market. We estimate that our enforcement action saved consumers $15 million to $30 million per year.(see footnote 12)
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Similarly, in the consumer protection area, the FTC has played a significant role in enforcement in the financial services market. Indeed, in the credit area alone, the Bureau of Consumer Protection enforces twelve federal credit laws that cover almost every aspect of consumer credit.(see footnote 13) Under these statutes, the FTC engages in enforcement efforts that include, but are not limited to, preventing discrimination in credit, abusive debt collection tactics, inaccurate data reporting to credit reporting bureaus, failure to provide credit information disclosures, and deception and unfair practices in consumer credit transactions.
The Commission has extensive experience in addressing consumer protection issues that arise in the financial services industry. This experience is invaluable in considering financial industry consolidation and market realignment to reflect product-based competition. For instance, in 1992, Citicorp Credit Services, Inc., a subsidiary of Citicorp, agreed to settle charges that it aided and abetted a merchant engaged in unfair and deceptive activities.(see footnote 14) In 1993, the Shawmut Mortgage Company, an affiliate of Shawmut Bank Connecticut, N.A., and Shawmut Bank, agreed to pay almost one million dollars in consumer redress to settle allegations that it had discriminated based on race and national origin in mortgage lending.(see footnote 15) In 1996, the J.C. Penney Company entered into a consent decree and paid a civil penalty to resolve allegations that the company failed to provide required notices of adverse actions to credit applicants.(see footnote 16) In 1998, in conjunction with the law enforcement efforts of several state attorneys general, the Commission finalized a settlement agreement with Sears, Roebuck and Company, which safeguards $100 million in consumer redress based on allegations that the company engaged in unfair and deceptive practices in its collection of credit card debts after the filing of consumer bankruptcy.(see footnote 17)
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In addition to these enforcement actions, the FTC provides consultation to Congress and to the federal banking agencies about consumer protection issues involving financial services. For example, the Commission has recently reported to or testified in Congress regarding the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and electronic commerce. In addition, the Commission periodically provides comments to the Federal Reserve Board regarding the Fair Credit Reporting Act, and the implementing regulations for the Truth in Lending Act, the Consumer Leasing Act, the Electronic Funds Transfer Act, and the Equal Credit Opportunity Act.(see footnote 18)
IV. The Evolving Financial Services Industry
As the financial services industry joins other industries in which competition has replaced extensive regulation due to technological changes and improved understanding of markets, it is important that deregulation should be accompanied by effective antitrust and consumer protection law enforcement, to prevent the anticompetitive accumulation and abuse of private market power and to prevent fraud or deceptive practices.(see footnote 19)
A. Rethinking How We View Financial Services
Where regulatory barriers are eliminated, competition has the potential to benefit consumers through lower prices, more efficient allocation of resources, and greater innovation. However, these potential savings and innovations will not appear automatically once regulation is reduced. Ensuring the benefits of competition requires vigilant enforcement of antitrust and consumer protection laws with a focus on the products and financial services delivered to consumers—particularly where banks are permitted to join firms in other markets and industries.
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As the federal banking agencies have relaxed regulations on nonbank activities by banks and their affiliates, for example, banks have acquired securities firms and formed joint ventures with nonbanks. The proposed merger between Citicorp and the Travelers Group brings together a bank holding company and an insurance and securities company. Joint ventures have been created between banks and nonbanks to provide new products in emerging markets of electronic commerce. If some form of financial reorganization legislation is enacted, firms that include both banks and other entities will proliferate. While many mergers and joint ventures represent a sound response to such deregulation, others may be likely to preserve or create anticompetitive power. Accordingly, enforcers must undertake careful and sophisticated analyses to ensure that consumer benefits will not be dissipated by the accumulation of private market power or markets that fail to provide adequate consumer protection.
B. Effective Enforcement of Competition Policies
The antitrust laws were designed by Congress to apply to all industries. However, when the FTC Act was enacted in 1914, Congress excluded banks from FTC jurisdiction, apparently because they already were extensively regulated.(see footnote 20) In banking, jurisdiction over competition issues, including mergers, was given to the federal bank regulatory agencies.(see footnote 21) Competitive review by specialized regulatory agencies may be efficient when the regulatory structure as a whole limits mergers to intraindustry consolidations. In the new environment, however, the antitrust agencies should conduct the appropriate antitrust review.
As one of the two federal agencies responsible for merger enforcement, the FTC has a broad base of experience related to the antitrust analysis of mergers generally. Especially in a period of rapid consolidation and market expansion, it is important that the Commission consider several principles of merger enforcement that apply across all industries.
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Effective merger enforcement is necessary to preserve the procompetitive effects of deregulation. In several cases in recent years, the Antitrust Division or the FTC challenged a proposed merger or acquisition to ensure that the competitive benefits of regulatory reform were not frustrated. For example, shortly after the substantially deregulatory Telecommunications Act of 1996 was enacted, the Commission challenged the acquisition of Turner Broadcasting by Time Warner, alleging that the merger would restrict other distributors' access to video programming, as well as program producers' access to distribution outlets.(see footnote 22) The Commission entered a settlement with Time Warner to preserve the opportunity for telephone companies to compete against cable television companies, for cable companies to compete against telephone companies, and for wireless communications companies to compete against both telephone and cable companies—all objectives of the Telecommunications Act.
As cross-industry expansion occurs, antitrust enforcers should protect against the loss of potential competition. When regulations limited the scope of activity of financial services firms, practically all mergers were horizontal, i.e., between existing competitors. However, recent regulatory changes enable firms to expand their products and services across traditional industry lines so that, for example, bank holding companies may own insurance or securities companies. We have already begun to see proposed mergers among firms engaged in banking, securities, and insurance. When these acquisitions occur, it is important to consider whether potential competition is eliminated. The FTC has expertise in this issue and has challenged several mergers because of the loss of potential competition. For example, competition in the delivery of natural gas has been substantially deregulated. In one recent case involving Questar and Kern River, two western natural gas pipelines, the Commission blocked an acquisition by the only transporter of natural gas into Salt Lake City of a 50 percent interest in the only potential competitive pipeline.(see footnote 23) The acquisition would have eliminated potential competition from a new entrant in the natural gas transportation market.
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Merger analysis should focus on whether any group of consumers may be subject to the exercise of market power. When there is a significant trend toward consolidation and the size of mergers increases, the immediate focus of attention may be at a macro level. Such a focus, however, may miss important competitive problems. In merger analysis we look to determine if there is any group of consumers who may end up paying higher prices as a result of the merger. This focus on competitive harm derives directly from Section 7 of the Clayton Act, which prohibits anticompetitive mergers ''in any line of commerce,'' and it allows otherwise procompetitive mergers to proceed once their anticompetitive aspects have been addressed. For instance, in the FTC's First Data case, one could have argued that many consumers had other alternatives to wire transfers, such as credit or ATM cards. However, our investigation found that for those consumers without banking relationships, who were significant users of these services, credit or ATM cards were not a viable alternative.
Competitive problems can exist in markets even where prices are falling. In new or expanding markets, prices often decrease. When firms in those markets merge, they may claim that antitrust scrutiny is unnecessary because prices are falling. Although such mergers typically do not raise competitive concerns, that does not suggest that antitrust scrutiny is unnecessary. In our challenge to the Staples–Office Depot merger last year, the defendants made that argument without success. In enjoining the merger, the court held that, although prices had decreased over time, eliminating competition between Office Depot and Staples would slow that trend, which would result in a price increase to consumers. Consumers deserve the benefit of all economic and competitive forces that are moving in the direction of lower prices and higher quality goods, and competition enforcement can insure that they get these benefits.
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Where enforcement action is necessary, settlements should restore the competition that existed before the merger. Our obligation as antitrust enforcers is not only to bring cases but also to ensure that, where settlement is appropriate, sufficient assets are divested to restore competition to the premerger level. Over the past three years, the Commission has given renewed attention to assuring that divestitures required by our consent agreements effectively restored competition. The Commission implemented a number of reforms to improve the divestiture process. These changes include imposing shorter divestiture periods, identifying up-front buyers, requiring broader asset divestiture packages, appointing interim trustees, and imposing ''crown jewel'' provisions.(see footnote 24) The Commission now insists that divestitures be accomplished in a shorter time so that competition is restored more quickly and it is less likely that assets will deteriorate in the interim. These reforms have begun to show progress in the divestiture process: the average time to divestiture has fallen by more than a third. Currently, many consent agreements have up-front buyers.
The Bureau of Competition is also engaged in a long-term review of past divestitures to determine whether they are effective in restoring competition. Based on the interim results of that review, we are trying to improve our analysis of how to structure effective consent agreements. Designing divestitures in retail markets can be particularly difficult. It is often critical to require a divestiture of a sufficient set of retail locations to a single buyer. Divestiture to a single buyer is often preferable so that a firm can acquire the full range of distributional and advertising efficiencies.
C. The Importance of Consumer Protection Law Enforcement
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Expanding markets, deregulating markets, and markets undergoing rapid technological change attract those who prey on the vulnerable. Consumer protection plays an important role in the development of these markets, especially in financial service markets, where safety and security are crucial to consumers.
One example of how the Commission has addressed the challenges of an evolving environment for financial services is in the area of subprime lending. Subprime loans, the extension of credit to higher-risk borrowers, have typically been made by nonbank lenders and are increasingly being made by large corporations that operate nationwide. Although subprime lenders provide loans to consumers who previously have been underserved by banks and other creditors, questions are increasingly being raised about the abusive practices that are reportedly occurring in the industry and about the effects of these practices on the most vulnerable consumers. These abusive lending practices often involve lower-income, elderly, and minority borrowers who may not have easy access to competing sources of credit. The effects of this type of ''predatory lending'' are severe—consumers can lose their homes and all the equity that they have spent years building. The Commission has begun to address reported abuses in the subprime home equity market. In recent testimony before the Senate Select Committee on Aging,(see footnote 25) the Commission outlined its approach consisting of individual law enforcement actions,(see footnote 26) coordinated enforcement with states,(see footnote 27) and consumer education.(see footnote 28)
Another consumer protection concern relates to the privacy of consumers' commercial transactions. Over the last several years, the Commission has been particularly active on privacy issues and has held workshops, convened public meetings, conducted studies, issued reports, and testified before Congress regarding privacy issues.(see footnote 29)
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Cross-industry mergers, such as the Citicorp/Travelers Group transaction, may raise important privacy concerns, in particular over the treatment of consumer information by affiliated companies. Such mergers may allow detailed and sometimes sensitive information about consumers, including medical and financial data, to be shared with relatively few restrictions among newly related corporate entities.(see footnote 30) Consumers might not anticipate that providing information to one entity for insurance underwriting purposes, for example, might later be used for different purposes by a financial institution that is or becomes an affiliate. The Commission is examining a number of issues relating to consumer privacy issues and tomorrow will present Congress with a report and recommendations.(see footnote 31)
V. The Importance of FTC Jurisdiction
As set forth above, the Commission will continue to protect consumers and competition as restrictions applicable to the financial services industries are reduced. We believe the clarification in H.R. 10 will provide greater comfort to consumers as the financial services industry undergoes rapid transformation. As banks or their affiliates are authorized to enter nonbanking arenas in which both competition and consumers have traditionally been protected by the FTC, it is important that the Commission's ability to continue to protect competition and consumers in these nonbank businesses not be restricted. If market forces are to succeed in delivering the benefits of competition and nondeceptive information for consumers, the FTC must continue to bring its expertise to bear in markets in which it is now active. H.R. 10 clarifies the FTC's jurisdiction to ensure that the Commission continues to have the ability to enforce the competition and consumer protection laws with respect to nonbank companies.(see footnote 32)
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VI. Conclusion
As the financial services industry undergoes great change, it is important that consumers share in the benefits of consolidation. Technological innovations in electronic commerce, along with service innovations that combine banking, securities, and insurance elements have increased the potential for competition among industries that were once rigidly separated. Many of the legal and regulatory structures erected over the last fifty years are being streamlined or removed. These changes have the potential to increase consumer welfare far into the future.
Our competition enforcement action in First Data and our consumer protection enforcement action in Capital City Mortgage reflect important parallels. The markets in both of these cases were developed by nonbank financial service providers and serve the increasingly expanding population of consumers without banking relationships. Although the general expansion of the financial services industry may suggest more competition and choices for the majority of consumers, there are still a large number of underserved consumers who may not receive the benefits of this expansion. These consumers may have very limited choices in the market and may be particularly vulnerable to the exercise of market power or fraudulent or abusive activities. For these consumers, diligent enforcement of competition and consumer protection laws is particularly important.
These enforcement actions also suggest the value of lodging both competition and consumer protection responsibilities in a single agency. Having a single agency address both issues enables the consumer protection and competition missions to exchange information with each other and develop a unified approach to rapidly evolving markets. This enables the FTC to perform the fundamental function of protecting the basic conditions to effective consumer choice—options in the marketplace, and an ability to choose freely and knowledgeably among them.
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This potential must be protected and nurtured through, among other policies, strong antitrust and consumer protection law enforcement. Commission antitrust enforcement has been effective in the broader financial services market in preventing the anticompetitive accumulation and abuse of private market power. The Commission has developed significant expertise in addressing both competition and consumer protection issues regarding financial services and nonfinancial commercial enterprises. For these reasons, the Commission believes that it should continue to have all the tools necessary to fulfill this vital role into the future.
Mr. HYDE. Thank you very much, Director Baer. One of our members, Mr. Ed Pease of Indiana, had to leave to preside over the House beginning at 2 o'clock. But he asked me to advise the committee that he has submitted an opening statement, which I ask unanimous consent that it be placed in the record. Without objection, so ordered.
[The prepared statement of Mr. Pease follows:]
PREPARED STATEMENT OF HON. EDWARD A. PEASE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA
I appreciate the leadership Chairman Hyde has demonstrated in conducting this oversight hearing to review the effects of the recent wave of consolidations in the banking industry and the effects of these mergers on the customers and communities these institutions serve.
I am particularly concerned with the possible effects of one of the mergers whose announcement prompted this oversight hearing, the proposed merger of First Chicago and Banc One, which are the largest and second largest financial services organizations serving Central Indiana. The combined institution would hold in excess of 45% of all bank deposits in Indianapolis. Similar results would obtain in Lafayette and other communities across the state.
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I have discussed the proposed merger with Steve Goldsmith, the Mayor of Indianapolis, and I am aware of his concerns that the proposed merger has the potential to have damaging effects on the city. Officials of both institutions will testify later this afternoon, and I look forward to their testimony about how they believe the proposed merger will serve the convenience and needs of bank customers and businesses in Indianapolis and throughout Indiana.
As Congress considers the effects of the recent wave of mergers, one important issue is with making certain that competition will remain robust in the communities affected by the merger, so that depositors and businesses will continue to have access to a sufficient number of healthy, efficient financial services firms. The antitrust considerations are reviewed by the Federal Reserve and the Antitrust Division of the Department of Justice, and I anticipate with interest their testimony on how they intend to approach the competition issues presented by mergers of large banks.
The issues presented by the proposed mergers go well beyond traditional antitrust concerns, however, and raise the fundamental question whether the combined institutions would serve the needs of the communities in which they are located. Both First Chicago and Banc One have been good corporate citizens of Indiana, as separate institutions. I want to make certain that, if their merger is approved, they will remain responsive to the needs of members of the communities in Indianapolis and in other cities they would serve.
These mergers raise concerns in several areas, including the potential for assessment of increased fees on depositors; potential job losses especially in the important customer service center area; vacancies in real estate that is critical to the economic health of downtown areas; the continued availability of funding for affordable housing; protecting access of small businesses to capital; and the effect of the merger on the level of charitable contributions to civic and non-profit groups.
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In additional, Congress and federal agencies have become increasingly concerned in recent months with the possible effects of the Year 2000 conversion problem on the continued ability of financial services firms to serve their customers, and I am concerned whether the recently announced bank mergers will exacerbate the problem.
In conclusion, Mr. Chairman, I want to express again my appreciation for your calling this oversight hearing to allow Congress and the public the opportunity to learn more about these important issues as the proposed mergers are under consideration.
Mr. HYDE. He also wishes me to mention that he has expressed concerns about the impact of the First Chicago/Banc One merger and has submitted questions for them which are in this report. So, without objection, it will be placed in the record.
[The information referred to follows:]
QUESTIONS PRESENTED BY CONGRESSMAN EDWARD A. PEASE FOR RESPONSE BY BANC ONE AND FIRST CHICAGO
The banking regulatory agencies are required to evaluate the impact of your proposed merger on the convenience and needs of the communities you serve before they approve your merger. Could you describe the impact this merger will have on the services your respective banks and the new bank will provide to local communities?
How many branches will you be closing as a result of this merger? Where?
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How many residents [of Indiana] [of Indianapolis] will lose their jobs or be asked to move more than 25 miles as a result of this merger?
Will your presence in low and moderate income neighborhoods be reduced by branch closing or consolidations?
More specifically, are you going to close branches in low to moderate income neighborhoods?
I understand that as part of your planned merger you will close a subsidiary that you have used to provide a second opportunity for loans to borrowers who do not qualify under the underwriting standards applied by your banks. Will your service to low to moderate income borrowers be reduced as a result of this closure?
Can you say that you will make any improvements to your service to local communities as a result of this merger?
Have you made any commitments, in connection with this proposed merger, to maintain or increase your levels of charitable giving in the communities that your banks now serve?
Do you intend to do so?
What effect will the proposed merger have on the on-going Year 2000 remediation projects underway at your banks, and what assurances can you give the committee that, if the merger is allowed to occur, the computers and telecommunications systems at the combined institution will work on January 1, 2000, so that your customers will not suffer any disruption in their access to financial services?
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| Banc One Corporation, |
| Columbus, OH. |
| First Chicago NBD Corporation |
| Chicago, IL, July 7, 1998. |
Hon. EDWARD A. PEASE, Member,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CONGRESSMAN PEASE: Thank you for your interest in the upcoming merger of BANC ONE CORPORATION (''BANC ONE'') and First Chicago NBD (''FCNBD'') and its impact on consumers and businesses served by them. There are many reasons why we believe the proposed transaction will benefit our customers and shareholders as well as the communities we serve. In view of the significant overlap of the BANC ONE and FCNBD branches in certain Indiana markets, it is understandable that you have questions about how the merger will affect your constituents and the communities within your district; however, we are confident that after reviewing this letter you will agree that our merger will have a positive impact on the communities we serve.
Before addressing how the merger may affect the market, it is important to note that a significant transformation is occurring in the banking industry. The migration of our customers to alternative channels of delivery reflects growing consumer demand for 24 hour, seven day a week access to banking services. For example, approximately 65% of all new BANC ONE consumer checking accounts opened in the past twelve months are totally automated, self serve accounts. These accounts provide free checking for those consumers, such as Social Security recipients, who make at least one direct ACH deposit per month. Another feature of this account is free, unlimited access to proprietary, deposit taking BANC ONE ATMs. For customers who do not have a direct ACH deposit, the monthly fee is $3-$5. First Chicago NBD's basic checking account in Indiana is quite similar. It has a monthly fee ranging from $3-$4 with all transactions at First Chicago NBD ATMs being free of charge.
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Consumer demand for alternative delivery channels coupled with advances in technology have brought about two very significant changes in banking. First and foremost is the reconfiguration of delivery systems to meet the convenience and needs of the market. Expansion to 24 hour, seven day a week access though the establishment of national telephone call centers, the widespread deployment of ATM and cash dispensing machines and the development of computer based banking is being funded, in part, by the elimination of underperforming banking centers throughout the system. This significant reconfiguration of retail banking delivery is occurring independent of bank mergers. Yet, because this reconfiguration of delivery systems is coincident with mergers and acquisitions, the public often mistakenly believes mergers are the cause of branch closings.
You have inquired as to whether the merger will cause branches to close. Both BANC ONE and First Chicago NBD had previously announced branch closings. In the case of BANC ONE, thirteen Indianapolis branches were identified for consolidation one year ago. Eight of these branches are situated in middle and upper income areas while five are in low and moderate income communities. These consolidations would have occurred irrespective of the merger. Currently, BANC ONE and First Chicago NBD are working with the Department of Justice and the Federal Reserve Board to agree upon a divestiture plan for Indiana branches whereby certain locations of the combining organizations will be sold (not closed) to another competitor. We will be required to divest in accordance with federal antitrust laws but we are making an affirmative effort to structure the divestiture package such that it will provide a real opportunity for the establishment of a strong acquiring banking organization.
The strong, new, competitive banking organization resulting from the required divestiture should safeguard the economic strength of the community, ensure plentiful job opportunities for displaced employees, and ensure that downtown Indianapolis remains a vital community. We expect that any real estate made surplus by the merger will be absorbed by the market (including the buyer of the divestiture package) and we intend to select a buyer with the capacity to provide the kind of civic leadership that has long characterized the Indianapolis business community. We are committed to working closely with you, Mayor Goldsmith and other Indiana officials to ensure a smooth transition for all of our many constituencies.
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After we know the extent of the required divestiture, we may still have branch facilities that will be redundant. At this point, however, we are unable to identify these branches but we believe there will be branches that will close. In selecting which branches will be consolidated into nearby facilities, we will consider many factors including the condition of the physical facilities, traffic patterns, customer retention needs, and the surrounding neighborhood environment. As always, we will work proactively to ensure any closed facilities continue to make a positive contribution to the community.
You also have inquired as to whether the merger will cause the closing of BANC ONE's subprime lending subsidiary, BANC ONE FINANCIAL SERVICES (''BOFS''). There are no plans to close this company or to transfer it to a location outside of Indianapolis. In fact, BOFS is considering new business initiatives which could create additional new jobs in Indianapolis.
With respect to job loss, we cannot at this point specify how many jobs will be lost in Indiana, although it is our hope that the buyer of the divested branches will provide opportunities for many affected employees. It also has been our experience in prior mergers that many job reductions can be accomplished by attrition. We are committed to keeping the downtown Indianapolis employee base strong and, consistent with this commitment, we are engaged in discussions with the City of Indianapolis regarding the expansion of housing opportunities in the central city area.
In regard to ongoing philanthropic support, we intend to continue in a leadership position through the contribution of both human and philanthropic capital to area institutions and causes. We are keenly aware of the potential for destabilization which any precipitous reduction in funding could cause, especially among smaller neighborhood organizations. We intend to work through the transition with our grantees and to maintain a level of philanthropic support which is commensurate with our size and profitability.
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BANC ONE and First Chicago NBD anticipate that mission-critical systems are or will be Year 2000 compliant on a timely basis. We don't foresee the merger distracting the new BANC ONE from being Year 2000 compliant and, in fact, believe the merger will advance our Year 2000 compliance efforts in some areas.
It is our strong belief that this merger will serve the public interest by building upon the respective strengths of our companies. This will mean enhanced access, strong retail services with comprehensive product offerings and flexible underwriting. With respect to low and moderate income consumers specifically, BANC ONE is launching a community outreach banker program to serve consumers outside of the standard branch setting. The outreach banker will provide a focus on used car loans, secured credit cards, basic banking services and other assistance for those seeking to establish credit, repair credit, hold a job or become a homeowner. The outreach banker will also work to ensure consumers have the skills to successfully leverage banking technology. Indiana small businesses will benefit from BANC ONE's expanded capacity to underwrite SBA guaranteed loans and to access resources funded through BANC ONE's Community Development Corporation such as Capital Across America, the nation's first Small Business Investment Corporation established to meet the equity capital needs of women-owned businesses.
We trust this letter has been responsive to your request. In the event your have any additional questions, please do not hesitate to contact us.
Very truly yours,
| BANC ONE CORPORATION |
| Steven Alan Bennett, Senior Vice President |
| FIRST CHICAGO NED CORPORATION |
| James L. Foorman, Senior Vice President. |
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Mr. HYDE. The Chair recognizes Mr. Conyers for purposes of questioning.
Mr. CONYERS. Thank you, Chairman Hyde. Thank you for your statements, gentlemen. My commendations to you, Director Baer.
Well, let's get with it now. CitiCorps, Travelers, NationsBank, Bank of America, Banc One, First Chicago. What is the problem? What is it that in these hybrid mergers they raise different questions? And Washington Mutual, Great Western. What should we be looking for, gentlemen?
I will start with Governor Meyer. I was going to start with you, Mr. Deputy Attorney, but you looked at him.
Mr. NANNES. He has a plane to catch. I want to give him first call.
Mr. CONYERS. Good idea.
Mr. MEYER. Well, as I think you indicated, these are all quite different by their nature. In the case of BankAmerica and NationsBank, we have two banks that already have significant geographic scale combining and becoming largely a national banking organization. On the other hand, they do not overlap in many markets. I have not seen all the details on this but that is the basic nature of this merger.
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In the case of the CitiCorp/Travelers, you have really more of the acquisition between banking and nonbanking activities with the unique characteristic that some of the activities that are being joined are impermissible for bank holding companies and have to be divested under current law. And in the case of Banc One and First Chicago, that is a more traditional competitive analysis because there is more overlap in local banking markets. They are all quite different in those respects.
Mr. CONYERS. What about Western Mutual and Great Western and the S&L, who handles that? I know you do not. But anybody here?
Mr. NANNES. Congressman, that would be a matter that would come to us for review, although it wouldn't be going through the Fed.
It is fair to say, I think, that what Governor Meyer has indicated is the range of likely permutations that present different potential policy issues. So without speaking to any particular transaction that we or they may be reviewing at the time, you have situations where you either have banks that are competing in a certain geographic area trying to join together, you have banks that are in different geographic areas that are looking to link up, or you have banks or nonbanks that are seeking to combine. And those seem to be the three permutations that we happen to find ourselves looking at with respect to actual transactions that are pending now. But I think they cover the waterfront in terms of lacking variations.
Mr. CONYERS. Well, gentlemen, don't you see any problems here? That is what we are here for. I know I described it, you described it back to me, it is a wonderful day and the weather is nice, but what the heck? We got a big problem here. Let me try to underline it. There is plenty of antitrust case law, Governor Meyer, to tell us that the NationsBank and Bank of America and their consolidations in different markets create antitrust problems because they can suppress competition anyway; right?
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Mr. MEYER. I really cannot talk to the specifics of that case.
Mr. CONYERS. That is not specifics of the case, that is antitrust law, sir. Isn't that right?
Mr. MEYER. Antitrust law as it applies to banking typically involves competition in local markets. To the extent that any banks merge that are in overlapping markets, it will raise competitive concerns and it will be carefully analyzed.
Mr. CONYERS. Well, okay. Let me just dwell on that a little bit more. There is antitrust case law to tell us that consolidations of companies in different markets can suppress competition that existed by the implicit threat of one of the companies otherwise moving into the other's markets if prices are too high or output too low. Isn't that a good theory?
Mr. MEYER. Are you talking about interlinked oligopoly theory? I am not exactly sure what you are referring to there.
Mr. CONYERS. Well, it is your area, not mine. I mean, do you want me to go back and take you through the case law? Is that true or false, or is it much more complex?
Mr. MEYER. No. It is much more simple.
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Mr. CONYERS. Then give me a simple answer.
Mr. MEYER. And that is, in a case where there is a merger that involves increased concentration in a local market, there is a potential that increased market power would be asserted and that would be to the disadvantage of consumers and businesses, and would result in higher loan rates to firms and lower deposit rates to consumers. And that is precisely why the antitrust law is applied, to ensure that those mergers do not lead to, in the words of the Clayton Act, a substantial decrease in competition.
Mr. CONYERS. Well, now, what do you want me to do? I can take two aspirin and go to bed tonight and let the Chairman know how I feel in the morning, or you can tell me there is a big problem here, a big potential problem. I am not asking to go into your files. I do not want to get a heads-up on whether it will be allowed or not. But do you have a problem, or is this just chatting between the Judiciary Committee and all of you distinguished panelists?
Mr. MEYER. Let's look at it in perspective. From 1980 through 1997, we had 7,000 bank mergers. We had a significant increase in national concentration of the proportion of assets that were controlled by the top 100 banking organizations. And yet the average concentration ratios in local markets, rural and urban, basically did not change, and that was, in fact, because of the implementation of the antitrust laws.
Mr. CONYERS. I know that. That is one thing I do know. You are right. But you do not want to tell me that I am right, which you are here to tell us, right? In other words, this is not much of a problem.
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Mr. MEYER. There is a significant wave of consolidations going on. It is extremely important that those who are in charge of implementing antitrust carry out the responsibilities carefully and diligently to ensure that that competitive outcome that has been achieved over that period continues going forward. So I think there is plenty of work to be done here.
Mr. CONYERS. Okay. All right.
Now, what about the Citicorp-Travelers $700 billion merger regarded by some as having a minimal impact on competition because both companies are involved in different markets, and the merger creates a one-stop shopping network for numerous financial services? But with the passage of the Financial Services Modernization Act, which allows banks and other financial service companies to compete with one another, such a merger at this time could lessen the vigorous competition that might otherwise exist between these giants, right?
Mr. MEYER. Well, I think these mergers that involve diversification are, in part, an attempt to allow what were formerly banking institutions to compete with security firms, insurance firms, et cetera. So part of this consolidation has a natural element to it, that it is part of the attempt to broaden the degree of competition in the financial services industry. There are certainly plenty of issues in cases that involve acquisitions of banks and of nonbanking activities, but I wouldn't make a blanket statement——
Mr. CONYERS. Of course not.
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Mr. MEYER [continuing]. In that case.
Mr. CONYERS. Of course not. So wrong?
Mr. MEYER. I wouldn't make a blanket statement.
Mr. CONYERS. Not right or wrong; somewhere in between? Okay.
Thank you very much.
All right. Mr. Deputy Attorney, Assistant Attorney General, what is your view about the NationsBank and the Bank of America and Citicorp and Travelers?
Mr. NANNES. Mr. Congressman, if you will allow me to respond generically with respect to the issues that you have raised rather than to any particular transaction, that would make me more comfortable.
Mr. CONYERS. Great. Okay.
Mr. NANNES. It is certainly true, as Governor Meyer indicated, that when you have situations where banks that do not presently compete seek to combine, you don't see some of the same problems that you do particularly in local areas with respect to in-region banks that might seek to combine.
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Certainly, there is an issue we have to take a look at, which I think is what you were alluding to with respect to potential competition—I think Mr. Baer indicated that that is a part of conventional antitrust analysis—that even if you have people who are merging, if they are not presently competitors, they might be potential competitors of one another, and you are eliminating the prospect of the potential competition if you allow them to join.
But obviously, with respect to any merger between two parties, you have an elimination of the prospect of future competition between them, so what you have to look to is to see what the market is going to look like post their merger.
If there are other people who could enter their regions or other people who are in their regions currently providing competition, then one would ordinarily not be terribly concerned about the elimination of one particular potential competitor. But if, in fact, what we are seeing is the initiation of a significant wave of large megamergers, even between parties who don't presently compete but may compete in the future, then our antitrust barometer reading goes up, and it goes from blue to red, and we get substantially more concerned.
I would note for you, though, that at least in one respect Congress has already stepped in because in the Riegle-Neal Act back in 1994, Congress has already legislated a cap on the level of national concentration that is permissible. So here we have a situation where Congress has stepped in sooner than perhaps even more aggressive and traditional antitrust laws would have suggested. So there is at least a cap on the upward side.
Now, you also asked a question about bank consolidations with entities that are not currently involved in the banking industry. The same analysis, it seems to me, would ensue. You might not have existing present competition between those parties, but they may be potential competitors for one another as the barriers to banks engaging in nonbank activities is lowered and similarly going in the opposite direction. But there, if you have two situations where companies are providing very different lines of business, you have to look, it seems to me, not only at what players are providing both of those businesses, but which players are providing those businesses individually, because unless the merger parties have the power to tell a consumer, you take all of our services on a one-stop shopping basis or none at all, consumers can decide whether or not they want to purchase collectively from a single entity or divide their purchases up among an insurance company and a bank, or an insurance company, a bank and a securities firm.
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So those are issues that once again, it seems to me, are on the table now as these barriers to bank expansion into other areas are lowered, and if and when there are more transactions of this sort, the antitrust concerns will increase over time.
Mr. CONYERS. Thank you, Mr. Nannes.
Director Baer, do you have any observations about this conversation before I turn my time back?
Mr. BAER. I agree with the analysis that my colleague, Mr. Nannes, has presented. One has to look carefully. You can't prejudge, but you have to be very alert to make sure both on a present day competition basis and on a looking forward future competition basis that consumers aren't going to get the shaft.
Mr. CONYERS. Well, in Banc One/First Chicago, they are already charging $3 to speak to a teller. Yeah.
Well, okay. Nobody—you know, it is from us that we are—that I am presenting a picture of alarm about a trillion dollars' worth of mergers going on, and everybody that is a panelist is pretty cool. I mean, maybe after a good night's sleep I will be feeling better, I will reread the testimony, and really there is probably not too much cause for alarm. I mean, times are good. The bubble is up. The market is great. What is to complain about?
Mr. NANNES. Congressman, with respect to any particular transaction, we will be looking at it to see if there are any identifiable anticompetitive effects that we can predict with respect to any segment of the consumer universe that is served by the banks involved in the transaction. And if there are those kinds of specific potentials for anticompetitive effects, a diminishment of a reasonable range of options for consumers, whether it is at the retail level or at the business level, we will intervene.
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Mr. CONYERS. Well, if we come back next year and it is $2 trillion, will everything be okay then, too, if all the little rules and nuances are being observed; 3 trillion? I mean, when does it get to a point where somebody says, wait a minute? Is there a point? Maybe I am—maybe I am looking at this wrong.
Mr. NANNES. Well, the answer is, is that there is a point. That point is likely to be defined not in terms of aggregate size of the parties as much as it is on the relative concentration of their behavior in particular relevant
markets.
Mr. CONYERS. Thank you, Chairman.
Mr. HYDE. Thank you.
By the way, the First Chicago charge for talking to a teller preceded the merger some couple of years, I think. I remember when it happened, I was startled, but they can—you know, they charge what the market will bear. I should think another bank, if they wanted some business, could act in a competitive fashion. But I don't think the merger led to that charge.
Mr. CONYERS. Mr. Chairman.
Mr. HYDE. Yes, sir.
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Mr. CONYERS. If there is no competition, they can charge $5 a person, not $3.
Mr. HYDE. Oh, you are quite right, and that is why we are having these hearings.
The gentleman from Florida.
Mr. MCCOLLUM. Thank you. Thank you, Mr. Chairman.
Well, I, as my chairman once did, I serve on the Banking Committee as well as over here, so I wear two hats. I see some of you in both places, and I think this is a very good hearing today, a very important hearing.
Having examined your testimony and listened to what you have had to say, it seems to me that you are making a couple of very precise points, and all three of you are pretty much on the same sheet of music, that having mergers to have nationwide banking, and that is where we are apparently headed, is not much different than any other kind of nationwide business that we have in the country today. In and of itself, that does not mean there is a problem with anticompetition. It is whether or not in any locality, and that is what you stress with us, there is or isn't competition.
I know in my State of Florida, where we have had a lot of merger activity and a great deal of interest in the Barnett Bank case you raised, which Nations was part of, every time we look around, there is a new independent bank springing up with a new charter. Now, that may not be true in Iowa or somewhere else, but it certainly is in my State. And the other side of that coin is we have had major interests coming into my State from banks in other parts of the country, and they are coming in not to just Nations buying Barnett and otherwise. So there are a lot of choices out there.
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The question that I think you are telling us is, when you look at this antitrust question, whether it is at the Board of Governors level at the Federal Reserve, or whether it is the Antitrust Division in the Justice Department, or whether it is the Federal Trade Commission, the issue is what is happening in Orlando, what is happening in Miami, what is happening in New York or wherever. And I think that is the only way to look at it, and I can envision where that is not a good thing necessarily.
And I see in here, you have cited specifically where there was a requirement that Nations divest itself of a certain number of branches in Florida because there was going to be a problem with that. And that's, to me, a very appropriate thing to do.
Let me suggest or ask a question, though. I am particularly interested, Mr. Nannes and Governor Meyer, in the relationship between the Federal Reserve and the Justice Department. In your testimony you have each deferred in some ways to the other. It looks like, Governor Meyer, that the Federal Reserve goes by the guidelines, antitrust guidelines, of the Justice Department. And it looks like the Justice Department, while having its own actions on bank mergers, treats this situation differently than you might others because there is some deference to the Federal Reserve that gets first crack at this.
Maybe I should go to you first, Mr. Nannes. To what extent does the Justice Department give any deference to the Federal Reserve? Is this unique in antitrust because there is a government regulatory agency here that has an obligation before you even look at it to examine this? Does this make your task a different kind of a task? Is there a different review process? Is there any deference given to what the Federal Reserve Board may or may not have done or its findings, or is it just helpful or what?
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Mr. NANNES. There are a lot questions there, Congressman. Let me try to answer as many of them as I can.
It is certainly not unprecedented for there to be an industry where there is an agency, an administrative agency, with a task and mission that is industry-specific, where in conjunction with mergers or acquisitions that agency needs to take into account not only traditional competitive concerns, but a broader array of public interest factors like safety of the banking system and matters of that kind.
Historically, for example, if you look at the old Civil Aeronautics Board or if you look at the Interstate Commerce Commission, those were situations in which regulatory agencies had a public interest mandate to review mergers, but the Antitrust Division was able to participate in those proceedings by making its views known and occasionally, in various circumstances, to take the agencies to court if the Antitrust Division disagreed with the judgments made by the agencies.
In point of fact, there are some differences between that model and even the model we have with the Fed, because we and the Fed essentially make independent reviews and then reach a judgment with respect to our assessment of the competitive implications.
We do not defer to the Fed in the sense that courts often defer to administrative agencies as having a primary jurisdiction in the matter. In fact, we believe that as the principal interested enforcement agency, we ought to have some doctrinal primacy with respect to merger analysis.
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On the other hand, recognizing that it is difficult for industry to plan its transactions to conform with existing standards unless those standards are clearly articulated and uniformly applied, we have worked out an arrangement with the banking agencies over time where we agree very substantially on a proper analysis, agree very substantially on the data that needs to be supplied to allow the agency and the Justice Department to conduct that analysis, and the results are——
Mr. MCCOLLUM. So the standards are the same is what you are saying, that you work with.
Is that true, Governor Meyer, your basic standards you are describing, the local analysis I read in your testimony, is the same analysis Mr. Nannes' department or division uses?
Mr. MEYER. Fundamentally, it is the same. That doesn't mean in specific cases that different judgments couldn't be made about geographic markets or other details that could lead to differences in outcomes. That is possible. But we work very hard with each other to share information, share analysis, and to minimize that.
Mr. MCCOLLUM. And the same is true with the Federal Trade Commission? You have the basic same standard that you use; is that correct?
Mr. BAER. That is correct.
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Mr. MCCOLLUM. Thank you. Thank you, gentlemen. Thank you, Mr. Chairman.
Mr. HYDE. Thank you. The gentleman's time has expired.
The gentleman from Virginia, Mr. Scott.
Mr. SCOTT. Thank you, Mr. Chairman.
I just had a couple of questions. Unlike the gentleman from Florida and the gentleman from North Carolina, I don't serve on the Banking Committee, so some of this is rather new to me. On the antitrust decision of whether something is competitive or anticompetitive, did I understand you to say that you looked at a regional overlap?
Mr. NANNES. Yes, sir. Basically, what we look to ascertain is whether the merging parties offer any products or services in any overlapping geographic areas. Now, those areas may be slightly smaller than a regional area; in fact, quite often they are because the parties are——
Mr. SCOTT. Most banks now compete on a national level. I mean, credit cards, you never go to the bank.
Mr. NANNES. There are certain elements of the banking business where competition does occur at the national level, and I think credit cards is a pretty good example. There are others, such as loans to small business or consumer checking accounts, where consumers and small businesses are still very much wedded to their local community and want the convenience of dealing with a local banking facility.
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Mr. SCOTT. So do you consider the national part of the competition as competitive from an antitrust perspective?
Mr. NANNES. Yes, sir. With respect to any particular market, product market, product service offering, we will look to see whether the appropriate geographic focus is national or regional or State or local. So it varies according to the product.
Mr. SCOTT. You mentioned the package deals where a bank could package some of their other services. Have you seen evidence of that in any of the mergers?
Mr. NANNES. Well, hypothetically, I think the thought is that if banking legislation is enacted, there will be a great expansion in the range of activities in which banks can engage. Historically banks have been confined to a rather small subset of financial services under important limitations imposed by the Fed. So I don't know that we have had a long history of that, but generally speaking, I think banks endeavor to market their products separately.
They also—they may use what we call a cross-marketing opportunity. They may use the relationship they have with a consumer, for example, who has a checking account there to send the customer some information relating to securities trading, for example, and hope that the customer will use the local banker to do the service. But there are important consumer protection issues and standards that the banks have to apply in circumstances to make sure that the customer is not misled with respect to the security of any investment.
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Mr. SCOTT. If a consumer is going into a bank for a loan, and at the same time they are being solicited for other business, do you see any evidence that that relationship is abused?
Mr. NANNES. Certainly not on a general basis. I mean, there may be particular instances with which we are not familiar where somebody has——
Mr. SCOTT. Is anything in the merger transaction established to prevent that abuse?
Mr. NANNES. Generally speaking, I mean, there are—there are laws, both banking and nonbanking laws, that constrain the ability of someone to force a customer to accept multiple products when the customer would have a preference to accept only one of the products.
Mr. SCOTT. What does ''force'' mean?
Mr. NANNES. Well, essentially to condition your ability to get a loan on your commitment to deal with the bank on other available services.
Mr. SCOTT. I ask that rather facetiously because some of the pressure is subjective and not objective.
Did anybody else want to comment on that, whether or not there has been a grouping of services?
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Mr. BAER. Well, there are some potential consumer protection issues that arise, making sure that consumers are told what it is they are being asked to sign up for, being told they have the option of buying them individually.
This is an issue that we will have to watch closely as we begin to deregulate. There is potential, as the Congressman correctly notes, for there to be some consumer abuse. At the same time, there is potential for people to get a better deal. You know, if you do one-stop shopping, maybe you can save 100 bucks, but the point is not to make it something that is forced on consumers and not to make it something that consumers unwittingly buy into.
Mr. SCOTT. When you see the large mergers, do you see evidence that there are, in fact, efficiencies of scale that might be passed on to the consumer?
Mr. MEYER. Most of the evidence on bank mergers is that economies of scale arise at fairly low levels—up to a very small level, maybe $100 million. In the 1990's there has been some evidence to suggest it might go as high as 10 to 25 billion. So there is some new evidence that suggests that economies of scale might be somewhat more widespread.
We are talking today about mergers that go well beyond that level, and for the most part we wouldn't think that the economies of scale are relevant except in the following sense: As we are getting a blurring between financial services and we are getting into new activities, securities and others, where there may be greater economies of scale in some of these new activities, nonbanking activities, than was true in traditional banking.
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Mr. SCOTT. Thank you, Mr. Chairman.
Mr. HYDE. The gentleman from Pennsylvania, Mr. Gekas.
Mr. GEKAS. I thank the Chair.
As we have grown to understand it, when two banks wish to merge, they file an application, do they not, and that application finds its way to the Reserve Board and to the Justice Department simultaneously; is that correct? Or what does the law provide? It seems to me there is no distinction there.
Mr. MEYER. Well, it does. Of course, there are mergers which go to another banking agency rather than the Federal Reserve. If it involves a bank holding company, if it involves a merger in which the combined bank is a State member bank, it comes to the Board of Governors, but there are other cases of bank-to-bank mergers that involve national banks that would go to the OCC, et cetera. But there would be an application. If it was a case that would come to the Federal Reserve, an application would be made by the bank to the Reserve bank in their district, and there is also a requirement—under Hart-Scott-Rodino that all—that, with regard to mergers above a certain threshold the Justice Department is notified.
Mr. GEKAS. Is notified. That is, it is filed with some other agency, and then that—that agency has to notify Justice, or a part of the application requires notice to Justice? In other words——
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Mr. MEYER. They are required separately to notify Justice.
Mr. GEKAS. But in these particular cases it doesn't necessarily involve the Federal Trade Commission, does it?
Mr. BAER. If it is a bank merger, it does not, sir.
Mr. GEKAS. All right. Now, I noticed in the written statements, and particularly during the oral statements, that none of the three of you really focused on whether or not—maybe it is not important at this juncture—whether H.R. 10 and its prospective provisions would affect all to which you are offering testimony here today.
Mr. MEYER. Yes.
Mr. GEKAS. Now, Mr. Baer did in his written statement say that you have proffered testimony in other arenas on that subject, but if the proposed merger includes some nonbanking services that are treated under H.R. 10, would in the first instance the Federal Trade Commission now be in the notification mode? Would they be at the start in the—in the analysis game?
Mr. BAER. Yes, sir, they would.
Mr. MEYER. But more than that. Not only that, because in cases of nonbank acquisitions by a bank holding company, they no longer would have to be approved by the Board at all. So no matter how large those acquisitions would be, there would be no antitrust role of the Federal Reserve in those cases.
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Mr. GEKAS. How about Justice?
Mr. NANNES. Yes, sir. Under Hart-Scott-Rodino, assume you had a situation, a component of the transaction, that did not come within the jurisdiction of the banking agency because it was not a bank-related line of business. Okay? If H.R. 10 is enacted, the parties would have to make a Hart-Scott-Rodino filing with respect to that activity. Hart-Scott-Rodino forms are filed with both the Justice Department and the Federal Trade Commission. That is what happens with respect to most businesses, for example, that don't have a regulatory agency oversight. And then once the HSR filing is made with the FTC and Justice, we work out amongst ourselves which of the two agencies will investigate the matter.
It is virtually unprecedented for us to both investigate it, and we have worked out a system over time where that is done through a process of accommodation, a compromise between the agencies.
Mr. GEKAS. Mr. Baer says in his statement that H.R. 10 provides clarification.
It doesn't clarify anything for me. But what kind of clarification does it provide? On the regular jurisdiction of the agencies, is that what it provides clarification on?
Mr. BAER. Yes, sir. The concern was that as banks, by virtue of the legislation, begin to do more through—either through affiliates or subsidiaries in nonbanking sectors—to make sure that the FTC, which has had jurisdiction in that area, will retain that jurisdiction. That way we can put our resources to work on the types of transactions as I described in my oral testimony, the First Data-First Financial consumer money wire transfer deal, to make sure that there aren't anticompetitive consequences flowing from mergers that involve competing interests that don't involve the banking activities of the entities merging.
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Mr. GEKAS. Back to something from the original question that I asked. If it is a pure merger between two banks, are there no scenarios under which the Federal Trade Commission would believe that it has some authority to intervene to enforce antitrust provisions?
Mr. BAER. If it is pure bank on bank, our statute says that the FTC jurisdiction is precluded. And that was done because, as Mr. Nannes noted, there is fairly comprehensive regulatory oversight and antitrust oversight by the Antitrust Division. So we are out of that picture.
Mr. GEKAS. I yield back the balance of my nontime.
Mr. HYDE. I thank the gentleman.
And the gentleman from North Carolina, Mr. Watt.
Mr. WATT. Mr. Chairman, I had agreed with Mr. Delahunt to let him go next since he has another commitment.
Mr. HYDE. Very well. We will respect that. And Mr. Delahunt.
Mr. DELAHUNT. Yes. I thank my friend from North Carolina.
Just a follow-up question first to you, Mr. Meyer, and I am looking at the clock. I know you have a plane to go to. But you indicated that economies of scale realized some $25 billion. Was this—over what time frame are we talking about?
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Mr. MEYER. Well——
Mr. DELAHUNT. Approximately.
Mr. MEYER. It is not a time frame. It is that as an organization expands in size, maybe from 10 to say 25 billion, for example, there might be some evidence that per unit costs of providing services would be reduced.
Mr. DELAHUNT. I thought you said there has been some sort of analysis done which showed that the recent wave of mergers——
Mr. MEYER. No.
Mr. DELAHUNT. No?
Mr. MEYER. It was just that the research done in the 1990's has reached a different conclusion from research that had been done earlier. The earlier research showed that the economies of scale were exhausted at a very much lower level of assets.
Mr. DELAHUNT. Okay. The research in the 1990's indicated that there are substantially more savings effected from economies of scale?
Mr. MEYER. There is at least some evidence to that point. More work needs to be done.
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Mr. DELAHUNT. Has there been any research done or analysis done which would show that the consumer, as opposed to the investor, benefited from the economies of scale?
Maybe you, Mr. Baer, have some information in that regard. Governor?
Mr. MEYER. The evidence on the economies of scale is really having to do with the costs of production. It is relevant, but doesn't pertain directly to who gets the benefits of that. And——
Mr. DELAHUNT. I understand that, but I was just wondering whether there has been any analysis of the benefits of mergers and acquisitions. Is it responsible for the increase that we see in the stock price, or does it get passed on to the consumer in terms of lower fees charged? That is the import of my question.
Mr. BAER. The Justice Department and the FTC within the last year have amended our merger guidelines to spell out the process by which we look at efficiencies, and one of the reasons we did that was to make clear the importance of passing through the efficiencies of a particular merger to consumers. And——
Mr. DELAHUNT. And this only occurred in the past year?
Mr. BAER. Yes.
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Mr. DELAHUNT. Okay.
Mr. BAER. But what we did in announcing those revised guidelines was make it clear that one need not only look to the size of the efficiencies being claimed by the parties and making sure that those were well documented, but making sure as well that in examining competitive implications, that there would be enough competitors in the market to make sure that some substantial portion of those savings did go to the consumers' bottom line and not just the shareholders' bottom line.
Mr. DELAHUNT. That's my point.
Mr. BAER. It doesn't necessarily all have to go to consumers.
Mr. DELAHUNT. Right.
Mr. BAER. But as long as there is some sharing of benefits.
Mr. DELAHUNT. But we don't have any conclusive data at that point, right?
Mr. BAER. We don't. It is an individual transaction-by-transaction basis, and it really correlates with the degree of competition——
Mr. DELAHUNT. Right.
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Mr. BAER.—in the market being looked at.
Mr. DELAHUNT. Thank you. And I think that is a concern.
I just want to pick up on what I am hearing from Mr. Conyers about the problem. I think it was your testimony, Governor Meyer, that there have been 7,000 mergers over the course of the last two decades, approximately. It was interesting to listen to Mr. McCollum from Florida indicating with every merger there has been an independent bank charter. That has not been my experience in New England.
To the contrary, we have two major banks where we had maybe seven or eight previously, and there is a great concern that the community bank is on the verge of extinction.
But what I thought was fascinating about your testimony, Mr. Meyer, is that in terms of the power of the resulting entity—and we know, given H.R. 10 and the move toward deregulation that we probably will have to come up with a new name, as well as new statutes—that we have 75 percent of domestic assets now owned by 100 banks.
Mr. MEYER. Exactly.
Mr. DELAHUNT. And 25 percent of domestic bank assets owned by 10 banks. I mean, that is an incredible concentration of wealth. Compare that to where we were back in 1980, if you will.
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Mr. MEYER. It increased from 50 percent in 1980 to 75 percent among the top 100 banks in that period. So it is a very significant increase in national concentration, and, despite that, very little change in local market ratios, which is quite remarkable.
Mr. DELAHUNT. It is, but I think that is the concern that the ranking member expressed, and that is the unease that I have, because what I continue to see, and read, and hear from local bankers, is that we will end up with two or three national banks at some point in time, and that is really a very frightening prospect for those of us who have no particular expertise in economics. But, you know, we smell it; we kind of sense that there is a problem with that kind of concentration. And it sounds to me like you all agree that we have got to be vigilant, and that is really what we are here for.
I have asked this question of everybody before. I just hope you have the resources to do the kind of work that I know that you are capable of doing.
Mr. HYDE. The gentleman's time has expired, and I welcome him to the ranks of those who are going to fight for pluralism in our grammar school system, too. Competition is great.
Mr. DELAHUNT. Well, I will be there with you, Mr. Chairman, as I always am.
Mr. HYDE. Very good. Mark that down.
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The gentleman from Arkansas, Mr. Hutchinson.
Mr. HUTCHINSON. I thank the Chair, and I appreciate you holding this hearing that is being conducted.
I hail from Arkansas, and even though it is rural America, we see a number of mergers. It is interesting, just as a point of reference, and I think I am correct in saying that every member of the Arkansas and Oklahoma delegation voted against H.R. 10. I think it was really an expression of concern for rural America, community banking and what is happening.
I read with interest, Governor Meyer, your testimony, and you make the point that looking into the future, there will be a few very large organizations and an increasing number of smaller organizations as they move down the size scale. It seems reasonable to expect that a large number of small, locally-oriented banking organizations will remain.
And I try to think through this process, and I see these mergers and the local banks being taken over with banks that are located in New York or some other big city, and I think that, you know, the problem is not necessarily competition, because there are still plenty of banks that are competing with each other, but the problem is community orientation and the net effect of that.
And then I think, but as long as there are community banks, the marketplace will govern, and those community-oriented banks will get market share. And so I am just sort of thinking through this process.
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My question is, Governor Meyer, you indicate that you hope that there will be a large number of small, locally-oriented banking organizations in the future. What are the dangers to that? What if you are wrong? What are the factors that might erode community-oriented banking and give way to simply the megabanks that are national in scope?
Mr. MEYER. Well, I think one of the important points here is that while there were 7,000 mergers from 1980 to 1997, there were also 3,600 new banks begun during that period. That is part of that sort of dynamic. So it is not theory to say that there are opportunities for new banks to begin. We have a lot of evidence to suggest that that is an ongoing process.
Mr. HUTCHINSON. What are the threats to those new banks by the mergers?
Mr. MEYER. Well, if the banks became large and were able to engage in restrictive practices that limited these banks' ability to compete, but I am not sure what those would be. As long as consumers have choice, and if consumers prefer, or many consumers prefer, to avail themselves of the services of small banks, which continues to be the case today, then small banks are likely to prosper.
The main threat would be if it turns out that economies of scale are much more important than we believe, and those small banks simply aren't efficient enough to remain in the market. That would be a significant risk factor. But we don't believe that is the case.
Mr. HUTCHINSON. And would the potential anticompetitive activity of tie-in arrangements build into this factor with the megabanks and the increased services that are offered, the economy of scale and the danger of tie-in arrangements?
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Mr. MEYER. The purpose of antitying laws arrangements is to avoid restrictive practices like that, that give even further power to those larger organizations so that they restrict a consumer to buying other products from them if they want the products.
Mr. HUTCHINSON. So that is a concern?
Mr. MEYER. Yes.
Mr. HUTCHINSON. And going to the Deputy Attorney General, is the Antitrust Division looking at this area of tie-in arrangements and the potential anticompetitive effect?
Mr. NANNES. Well, I mean, we certainly are in the sense, Congressman, that if those practices are occurring, and we learn of them or they are brought to our attention, they are matters that we would look at.
Mr. HUTCHINSON. Do you have any current investigations going on regarding tie-in arrangements with financial services?
Mr. NANNES. I am not in a position to confirm that for you today. If it is a matter of some interest, I will endeavor to ascertain it.
Mr. HUTCHINSON. It sounds like it is rather insignificant compared to the larger picture of mergers and your review of those.
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Mr. NANNES. These days, yes, sir.
Mr. HUTCHINSON. Finally, I got the impression from your testimony that your review of mergers generally wind up with, if there is a problem, a request a divestiture of certain assets so that it removes the consolidation of power and anticompetitive behavior.
When is the last time a case was actually taken to court where you had some court guidance on financial services and mergers?
Mr. NANNES. I think it goes back quite some time. The parties have an interest, because of the banking statutes, in remedying concerns that the Fed or the Department of Justice have.
Mr. HUTCHINSON. But doesn't it leave—I mean, I sympathize with trying to avoid litigation, but it looks to me like you have got the regulators involved and you have got the Department of Justice involved, but you really don't have the guidance of the judicial branch on their interpretation of the anticompetitive acts.
And just a thought to leave with you: I think it is helpful from time to time to maybe push one to the limit. Thank you.
Mr. HYDE. The gentleman's time has expired.
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Governor Meyer has to leave for an airplane, so we have two more questioners left, but you certainly are free to leave. And we thank you for the contribution you have made to our hearing.
Mr. MEYER. I apologize for having to leave at this time.
Mr. HYDE. Not at all. We know well how that is.
The gentleman from North Carolina.
Mr. WATT. Thank you, Mr. Chairman. And I will try to be brief. I just have two questions that pick up where Mr. Gekas left off and get us possibly to the purpose of having a hearing of this kind; as always, to try to figure out whether there is some legislation that is deemed to be desirable or necessary. And there seems to be kind of a patchwork of antitrust enforcement that is some based on historical protocol and interagency agreements and so forth.
I am just wondering whether, if you were operating in an ideal world, and you were writing—that ideal world always is that you are writing the legislation, is there something that needs to be done insofar as the antitrust law is concerned that would make the evaluation of these mergers or the evaluation of—or the performance of your job easier in this merger context?
Mr. NANNES. Congressman, that is a very interesting question. It is hard to divorce the answer to the hypothetical question as if you were starting over from the practical realities of how things work today. I don't know if people were—that if people were starting from scratch that they would provide for concurrent jurisdiction to assess competitive issues, both with the banking agency and with the Antitrust Division.
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But having said that, I can tell you that over time, we have worked out an accommodation of interests between the Fed and the Department of Justice and we have a very good working relationship now, applying largely very consistent standards. And so I think the system is working quite nicely.
Mr. WATT. And that survives from administration to administration? I mean, it doesn't vary so that we have got to worry about that?
Mr. NANNES. I think it generally has. Obviously, the test will come if you enact far-ranging legislation and we have to push the envelope to see how that works, but I have no reason to think that it won't work well.
In the nonbanking area, I think similar observations could be made. We happen to have two—two Federal antitrust enforcement agencies, and the Department of Justice and the Federal Trade Commission work very well together. I think they work especially well together given the current heads, Joel Klein of the Antitrust Division and Bob Pitofsky at the FTC. And while, you know, we sometimes see things slightly differently, I think in the main it is quite an effective working relationship.
Mr. WATT. Some people would consider H.R. 10 to be far-reaching legislation of the kind that you talked about. Is there anything that is troubling in that legislation that would have any adverse bearing on your ability to evaluate and enforce antitrust laws and the implications of those laws in the financial services merger context?
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Mr. NANNES. I don't think that it does.
Mr. BAER. If I can just add one thought. I do think we need to be alert, and Congress needs to be alert, to the consumer aspects of——
Mr. WATT. Well, that was actually my next question.
Mr. BAER. Okay. I will let you ask it, and then I will answer it.
Mr. WATT. I was going to separate the antitrust aspects of this from the consumer aspects of it. And my next question actually was, on the consumer side are there things that we need to be looking at legislatively that are triggered or pushed forward by virtue of the mergers that are taking place and/or the revisions in the financial services area that we are contemplating under H.R. 10?
Mr. BAER. There is one specific that I mention in my prepared testimony and alluded to briefly in my oral summary. Right now the Fair Credit Reporting Act offers consumers some very meaningful protections. That applies if two unrelated entities share consumer information, the kind of credit histories that all of us have sitting in computers all across the country. As of September 1997, if two affiliated companies, for example if a bank and a subsidiary or affiliated insurance company decide to share consumer information, there is not the same protection for consumers that there is if those two are unrelated. There is a disclosure, but it is one of those fine print disclosures that we all get and we never read.
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And given the significance to consumers of providing information, for example, to a lending institution in order to get a loan, we need both notice and an opportunity to correct the information, if that information is being shipped over to an insurance company, when we apply for a life insurance policy or an annuity. That is something that we have testified previously that we think Congress appropriately ought to look at.
Mr. WATT. Would the appropriate place to look at that be in the context of H.R. 10 or in some other consumer——
Mr. BAER. It could be in that context or in terms of other legislation.
The other point is that it is generally part of our job to be on the lookout for the kinds of fraud or failure to disclose information that might happen as we get a changing industry, more consolidated services, and we need to be alert to the potential that there may be some need for some legislation to make sure consumers are adequately informed by these new megainstitutions about their rights and responsibilities.
Mr. WATT. Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Watt.
The gentleman from Utah, Mr. Cannon.
Mr. CANNON. Thank you, Mr. Chairman. I think we have about exhausted this panel, and I have just one question for both remaining members.
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Let me, first of all, reiterate my concerns that were expressed by Mr. Hutchinson about small, local, regional and community banking. I think that is very important. You, I think, both spoke a little bit to the attempt to look at the future in evaluating where competition would be or how competition would evolve.
Could you each speak a little bit to what you are looking at there in particular, given the kinds of volatile technologies and changes that we are facing on that front, and how that—how you factor that into your evaluation?
Mr. NANNES. Congressman, we try to take into account, when we are doing merger analysis, any factors that we learn of that affect the viability or the aggressiveness with which parties in the marketplace can compete.
Let me give you a bit of an example to try to put some context to that.
Market share calculation of the kind that we use for the merger screening process is really just the first step in identifying markets where we think a merger may be potentially competitively problematic. Once we have identified those markets, though, we try to go beyond market share numbers and look at the actual capability of the participants in that market to provide the range of products and services that are necessary to provide consumers in that market with a sufficient array of options to eliminate any concern we might have that the merging parties might be able to act anticompetitively.
To the extent that over time there are technological developments that favor one segment of the industry over another, and as a result may diminish the ability of certain segments, hypothetically thrifts or hypothetically credit unions or hypothetically community banks, to compete with larger banks, we would take that into account in evaluating the likelihood of competitive vigor in that marketplace if a proposed merger involving large banks were permitted.
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So to that extent, we will take into account technological developments as they impact the ability of marketplace participants to compete for customer service.
Mr. CANNON. Is that a relatively—I mean, do you have checklists or things that you have developed over time so that people are actually thinking in particular about certain technological trends, some of which happen very rapidly, like the movement to e-trading or e-mail trading or electronic trading of securities, for instance?
Mr. NANNES. I think—at least in the banking industry, I think Governor Meyer's prepared statement at least had an array of factors that we consider in addition to market share, and although he articulated that for the Fed, a similar array of factors are those that the Justice Department would consider, and technological developments would be very much an important component of that.
Mr. CANNON. Thank you, Mr. Chairman.
Mr. HYDE. Before releasing you, I just have a question. Too big to fail: I remember when the First National Bank in Chicago had some problems a few years ago and was deemed too big to fail, too many consequences would ensue if she went under. And so the government stepped in and made sure she didn't fail.
Now, if we create these mega financial institutions, and then they keep getting more mega, are we not creating an awful lot of places that will certainly be too big to fail and adding to the exposure, shall we say, the responsibilities of the Federal Government, namely, the people, the taxpayers? What is your comment on that, either or both?
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Mr. BAER. It is a legitimate concern. Mr. Nannes referenced the 1994 legislation that limited the percentage of a national market any of these large financial institutions can have, and I think that reflected the concern that the Chairman correctly identifies.
To some extent that may be more appropriately a congressional judgment. The antitrust laws, unless we can find a competitive impact from a particular transaction, don't give us the authority to go after that problem. But it is a legitimate concern to us all as consumers and taxpayers.
Mr. HYDE. Well, sure. We need to be mindful of it. I don't know what we can do about it unless you all take it as a consideration in evaluating whether this should fly or not.
I don't know what you would look at. It isn't a question of the local situation. It is a question of the big picture, and I know we are convinced we will never have a recession. We are convinced that it is onward and upward into the sunset. But I am old enough to know better, and I just wonder if we are not setting up some monsters here or watching them get set up and putting ourselves in a very serious situation.
Of course, if one of them goes bad, that is one thing. If more than some do, more than one, then we are all in deep yogurt.
Mr. BAER. This may be where it is unfortunate that Governor Meyer caught his plane.
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Mr. HYDE. Yes.
Mr. BAER. Because, in fact I can shift the blame totally to him. The issue of properly supervising our financial institutions, assuring that deposits are on hand, the reserve requirements are there, is why we have a Fed, a comptroller and other bank regulatory agencies. And they will, I am sure, and will have to be, quite vigilant to make sure that we don't run into this sort of experience.
Mr. HYDE. That is clearly the answer. The answer is in watching these organizations and making sure they have adequate reserves for a reasonable future economic bump.
Okay. Well, thank you very much. You have been most helpful and instructive, and we will feel free to reach out to you for more answers if the need arises.
Mr. NANNES. Thank you, Mr. Chairman.
Mr. BAER. Thank you.
Mr. HYDE. Our second panel consists of nine witnesses who will give us a variety of perspectives on the current mergers in the financial services industry and what laws should govern them.
I note that in passing we allowed each of our three pairs of merger partners to choose the method of presenting their statements that they thought most effective. We don't attribute any substantive significance to their having chosen different methods of presentation, nor should anyone else.
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First Citicorp and Travelers have chosen to present a joint statement. Presenting that statement will be Mr. John Roche, general counsel of Citicorp. Mr. Roche is a graduate of Manhattan College, the Harvard Law School, and the Cornell University Graduate School in Physics. Mr. Roche was with the New York firm of Sherman & Sterling for many years before joining Citicorp in 1989. Mr. Roche was to have been accompanied by a witness from Travelers Group, but that witness was called out of the country at the last minute and will be unable to appear today.
NationsBank and Bank of America also chose to present a joint statement, and presenting that statement will be Mr. Paul Polking, general counsel of NationsBank. Mr. Polking is a graduate of the University of Notre Dame and its law school. After tours in the Navy and the Office of the Comptroller of the Currency, he joined NationsBank in 1970. He has been with the company since then, becoming general counsel in 1988.
Mr. Polking is accompanied by Mr. Jim Roethe, the general counsel of Bank of America. Mr. Roethe is a graduate of the University of Wisconsin and its law school. He was with the San Francisco firm of Pillsbury, Madison & Sutro for many years before joining the Bank of America in 1992. He became general counsel in 1996, and he appears here today not for purposes of a statement, but to answer questions only.
First Chicago and Banc One chose to present separate statements. Presenting the statement of First Chicago will be Mr. Jim Foorman, its senior vice president for law. Mr. Foorman is a graduate of Yale University and the UCLA Law School. He has been with First Chicago since his graduation from law school, becoming senior vice president in 1986, and he has published several articles on banking law.
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Presenting the statement of Banc One will be Mr. Steve Bennett, its general counsel, who is a graduate of Notre Dame and the University of Kansas Law School. For many years, he was with the Dallas law firm of Shank, Irwin, Conant, Lipshy, and Casterline. He joined Banc One in 1989 and become its general counsel in 1994. He has also been a city councilman from Mesquite, Texas.
Our next witness is Mr. Bill McQuillan, president of the City National Bank of Greeley, Nebraska. Mr. McQuillan is a graduate of Creighton University, is a third generation community banker, currently serves as president of the Greeley Chamber of Commerce, and also serves on the board of the Federal Reserve Bank of Kansas City. He currently serves as president of the Independent Bankers Association of America, and he appears here today on their behalf.
Our next witness is Bill Flory, owner of Flory Farms, Inc. He is a fourth generation farmer and currently cultivates a 5,000-acre farm in northern Idaho. He served as chairman of the Lewiston Grain Growers, a $40 million grain and supply co-op. He has been active in the affairs of the National Association of Wheat Growers and currently serves as its president and appears here today on behalf of the association.
Our next witness, Mr. Frank Torres, legislative counsel for Consumers Union. Mr. Torres is a graduate of Georgetown University and the George Washington University Law School. Before joining Consumers Union, Mr. Torres was in private practice in Washington and also served as the director of the Governor of Guam's Washington liaison office.
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Our last witness, and, of course, not our least, is Professor James Brock, the Moeckel Professor of Economics at Miami University in Ohio. Professor Brock, a graduate of the of the University of Wyoming, earned his Ph.D. from Michigan State University. He has written and spoken widely on antitrust and economics topics and has published five books. He has been honored for his outstanding teaching skills.
We welcome all of you and look forward to your testimony.
Mr. HYDE. First will be Mr. Roche.
STATEMENT OF JOHN J. ROCHE, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, CITICORP
Mr. ROCHE. Mr. Chairman, I am John Roche, executive vice president/general counsel of Citicorp.
Mr. HYDE. Would you turn the mike on.
That is good. Thank you.
Mr. ROCHE. I am pleased to be here this afternoon to talk about the new company that we propose to create, Citigroup, and to answer any questions you may have regarding antitrust issues or otherwise about the merger.
There are three basic objectives in the creation of Citigroup: Increasing customer value and convenience; enhancing our financial strength and stability, and meeting the rapidly growing competitive challenge.
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Mr. Chairman, our merger involves a combination of separate businesses: banking, insurance and securities. The ultimate test for our new company will be simple. Will we provide a high level of value and convenience to our customers? We believe we will because of the quality and breadth of our products and services, and because of the new company's greatly expanded and innovative distribution channels.
Financial products manufactured in various parts of our company will be distributed through a broad range of facilities and methods, from the Internet and other technology-based methods, to branch office locations in 100 countries around the world, the fully individualized in-home service. Citigroup will also have the resources to rapidly design new products and services in response to changing customer needs, and to invest the funds necessary to keep up with the technology revolution sweeping across our industry.
The scope of our efforts will be key. Starting immediately, we hope to provide more kinds of financial products in more kinds of ways to more customers than any other company in the world. Of course, the test of whether or not we succeed will be in the hands of those customers who will decide whether the products and services we provide at the prices charged ultimately satisfy their needs and preferences.
Mr. Chairman and members of the committee, let me assure you that there is perhaps no other industry in the world as competitive as the financial services industry. Whether it is intraindustry competition among commercial banks or insurance companies, securities firms, or whether it is interindustry competition between banks, mutual funds, securities companies, whether it is between domestic companies or the increasingly active foreign companies, or whether it is between the traditional branch office network or the latest Internet web site, the competition for the customer and his or her business is fierce.
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In the new family of companies known as Citigroup, we will combine individual business units in a way that will enhance their competitive position. These individual units are strong companies, but not dominant or even the leading company in their respective industries. Citibank is not the largest bank in the United States. Salomon Smith Barney is not the largest securities firm in the United States; nor is Travelers Insurance the largest insurance company in the U.S.
And please remember the effect of foreign competition on the financial services industry. It is quite striking. While we in the U.S. grapple with modernizing legislation governing our financial services system, massive consolidation of financial services firms is taking place overseas.
Having long since put many of the arguments that trouble us behind, and unhampered by outdated and inefficient financial service laws, these new competitors will have a competitive advantage over U.S.-based companies if we are not prepared to compete on a global basis. We shouldn't squander the leading market position we now have through inattention and neglect. It is really in the national interest to provide the environment for our financial services firms to be well prepared for this challenge.
You asked about our views on the amendment to the Hart-Scott-Rodino Act that was included in H.R. 10. That amendment would require a financial holding company to make a Hart-Scott-Rodino filing to the FTC and Justice whenever it acquires another company engaged in activities that are, quote, financial in nature, such as an insurance company, a securities firm or an investment company.
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This amendment would shift the focus of the antitrust review from the Fed to the FTC and Justice for activities that are financial in nature. We have no objection to such a change.
I would like to mention our commitment to our communities. Citigroup is focused on delivering customer value and convenience. That is what it is all about. We are just as focused on demonstrating our commitment to the communities in which we are active. As our Fed application clearly shows, we believe both Travelers and Citicorp have been good corporate citizens and have done an excellent job in meeting our Community Reinvestment Act obligations. We intend to build on that record and do more in the future. The combination of our two companies will give us the opportunity to increase access to credit, deposit, investment and insurance offerings for customers of all income groups, and we intend to do so.
In closing, Mr. Chairman, let me reemphasize the importance of maintaining a leading U.S. position in financial services in the new global economy. Emerging markets, privatization and dramatic growth in savings and investments worldwide present a competitive challenge to U.S. financial services companies. We believe the Citicorp Travelers Group merger will create the leading U.S. global competitor.
Thank you for the opportunity to testify.
Mr. HYDE. I thank you, Mr. Roche.
[The prepared statement of Mr. Roche follows:]
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PREPARED STATEMENT OF JOHN J. ROCHE, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, CITICORP
Good afternoon, Mr. Chairman, I am John Roche, General Counsel of Citicorp. I are pleased to be here this afternoon to talk about the new company we propose to create—Citigroup—and to answer any questions you may have—regarding anti-trust issues or otherwise—about the merger.
There are three basic objectives in the creation of Citigroup: increasing customer value and convenience; enhancing our financial strength and stability; and meeting the rapidly growing competitive challenge. I will briefly discuss each in turn.
Customer Value and Convenience
Mr. Chairman, our merger involves a combination of separate businesses: banking, insurance and securities. The ultimate test for our new company will be simple: Will we provide a high level of value and convenience to our customers? We believe we will because of the quality and breadth of our products and services and because of the new company's greatly expanded and innovative distribution channels. Financial products ''manufactured'' in various parts of our company will be distributed through a broad range of facilities and methods, from the Internet and other technology-based methods to branch office locations in one hundred countries around the world to fully individualized in-home service.
Citigroup also will have the resources to rapidly design new products and services in response to changing customer needs and to invest the funds necessary to keep up with the technology revolution sweeping across our industry.
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The scope of our efforts will be key: starting immediately we hope to provide more kinds of financial products and services, in more kinds of ways, to more customers than any other company in the world. Of course, the test of whether or not we succeed will be in the hands of those customers, who will decide whether the products and services we provide, at the prices charged, ultimately satisfy their needs and preferences.
Strength and Stability
The size, resources and diversity of operations of the new company will provide the financial strength and stability necessary to survive and grow in today's rapidly changing world. Whether it is a country crisis, a real estate crisis, or any other crisis, it is clear that the financial services company of tomorrow must have the ability to withstand financial shocks. As companies become larger and more diverse, they are better able to withstand those shocks. Providing major financial services in 100 countries around the world will provide Citigroup a stable and predictable platform of revenues and profits. That stability is essential if we are to continue to serve our one hundred million customers.
Competitive Challenge
There is perhaps no other industry in the world as competitive as the financial services industry. Whether it is intra-industry competition among various commercial banks or among various insurance companies or among securities firms; or whether it is inter-industry competition between banks, mutual funds and securities companies; whether it is between domestic companies or the increasingly active foreign companies; or whether it is between traditional branch office networks or the latest Internet web site, the competition for the customer and his or her business is fierce.
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In the new family of companies known as Citigroup, we will combine individual business units in a way that will enhance their competitive position. These individual units are strong companies, but not dominant or even the leading company in their respective industries—Citibank is not the largest bank in the United States; Salomon Smith Barney is not the largest securities firm in the United States; Travelers Insurance is not the largest insurance company in the United States.
The effect of foreign competition on the financial services industry is particularly striking. While we in the U.S. grapple with modernizing the legislation governing our financial services system, massive consolidation of financial services firms is rapidly taking place overseas. Having long since put those arguments behind and unhampered by outdated and inefficient financial services laws, these new mega-competitors will have a competitive advantage over U.S.-based companies in the next century (now less than two years away) if we are not prepared to compete on a global basis. We must not squander a leading market position through inattention and neglect. It is in the national interest of the United States to provide the environment for its financial services firms to be well prepared for this challenge.
Other Issues
In addition to customer value and convenience, strength and stability, and meeting competition, there are a few other matters I would like to mention briefly. The first is the Citigroup's status under present law. The creation of Citigroup is expressly permitted by current law and regulations; no change in the law is necessary. We will be in full compliance with the law on the day we close our merger and will remain so. We do not seek—and do not require—any special legislative or regulatory accommodation to create Citigroup.
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At the same time, we strongly support financial modernization and urge the passage of legislation this year. The recent passage of H.R. 10 in the House of Representatives was truly an historic step toward that goal. It is now the turn of the Senate to act, and we are encouraged by the recent statements of Chairman D'Amato and Ranking Member Senator Sarbanes that the Banking Committee will turn to that task.
With regard to H.R. 10, you asked our opinion on the amendment to the Hart-Scott-Rodino Act that was included in Section 143 of H.R. 10. That amendment would require a financial holding company to make a Hart-Scott-Rodino filing to the Federal Trade Commission and the Justice Department whenever it acquires another company engaged in activities that are ''financial in nature,'' such as an insurance company, a securities firm, or an investment company. Currently, when the Federal Reserve Board reviews acquisitions of non-banking firms by bank holding companies it evaluates the impact of the acquisition on competition, including the potential for undue concentration of resources, decreased or unfair competition, and conflicts of interest. This amendment, therefore, would shift the focus of the anti-trust review from the Federal Reserve Board to the Federal Trade Commission and the Justice Department for activities that are ''financial in nature.'' We have no objection to such a change.
The second issue is regulatory oversight. We have long accepted functional regulation; indeed, virtually every aspect of each of our various businesses is, and has been, heavily regulated. Since the new Citigroup will not be engaged in any ''commercial'' activities, our regulators will all be very familiar to you—the Federal Reserve Board, FDIC, OCC, OTS and various state banking authorities to the SEC to the fifty state Departments of Insurance. Working with a variety of regulators in the most effective way is one of the challenges—one of the opportunities—created by our new company.
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The third issue I would like to mention is our commitment to our communities. Citigroup is focused on delivering customer value and convenience. We are just as focused on demonstrating our commitment to the communities in which we are active. As our Fed application clearly shows, we believe both companies have been good corporate citizens and have done an excellent job in meeting our Community Reinvestment Act obligations. We intend to build on this record and do even more in the future. The combination of our two companies will give us the opportunity to increase the access to credit, deposit, investment and insurance offerings for customers of all income groups, and we intend to do so.
In closing, Mr. Chairman, let me reemphasize the importance of maintaining a leading U.S. position in financial services in the new, global economy. Emerging markets, privatization, and dramatic growth in savings and investments worldwide present a competitive challenge to U.S. financial services companies. We believe the Citicorp Travelers Group merger will create a leading U.S. global competitor.
Thank you for this opportunity. We would be happy to answer any of your questions.
Mr. HYDE. Before we proceed, let me express the hope that you can hold your statements to about 5 minutes, simply because we have a big panel, and more members have a way of showing up when question time comes around. I don't know how that happens.
Mr. HYDE. Mr. Polking.
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STATEMENT OF PAUL POLKING, GENERAL COUNSEL, NATIONSBANK CORPORATION
Mr. POLKING. Thank you, Mr. Chairman, and members of the committee.
I am Paul Polking, general counsel for NationsBank Corporation. My partner, Jim Roethe, as general counsel of Bank of America Corporation, and I are pleased to be here this afternoon to discuss the effects of consolidation on the state of competition on the financial services industry.
Assessing the competitive effects of mergers involving financial institutions, it is important to keep in mind that each of the mergers before the committee today is unique. The merger of NationsBank and Bank of America is the combination of an east coast bank and a west coast bank to create the first truly nationwide banking franchise.
NationsBank holds approximately $311 billion in assets and $174 billion dollars in deposits. NationsBank is geographically diversified, with commercial banking operations in 16 Southeastern, Mid-Atlantic, Midwestern and Southwestern States and the District of Columbia. This diversification has enabled NationsBank to reduce credit risks associated with any one region or industry group and prosper and improve its capital and liquidity position in recent years.
Bank of America holds approximately $265 billion of assets and $174 billion in deposits. Like NationsBank, Bank of America is geographically diversified with commercial bank subsidiaries operating primarily in 11 Northwestern, Western and Southwestern States. The merger with NationsBank will bring much greater diversification with the combined franchise being focused in high-growth markets across the Nation.
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The new BankAmerica will hold approximately $576 billion in assets and $348 billion in deposits. Notwithstanding the overall size of the resulting institution, the proposed merger of equals between NationsBank and BankAmerica raises almost no competitive issues with respect to banking activities. For the most part the parties are complementary in geographic scope.
The commercial banking operations of our companies overlap locally only in two States, Texas and New Mexico. The safe-harbor thresholds for deposit market concentration, established by the Federal Reserve Board and the Department of Justice, are exceeded only in the Albuquerque, Clovis, and McKinley County markets in New Mexico and in Dallas, Texas. In the other overlap markets in New Mexico and Texas, the deposit concentration levels are within the 1,800-200 safe-harbor threshold.
In order to minimize the competitive concerns, we are discussing with Federal authorities the divestiture branches holding sufficient deposits and associated loans to bring market concentration in safe harbor levels in New Mexico markets of Albuquerque, Clovis and McKinley County. We believe that deposit market concentration based on 11-month-old data is overstated in the Dallas market and that substantial mitigating factors warrant the conclusion that no divestitures are required in the Dallas market.
We think it is particularly important to keep in mind that following the mergers that you will hear about today, there will still be thousands of banks and other financial services companies serving the consumers and businesses in the United States. In the NationsBank-BankAmerica merger, we believe that consumers will be the real winners. We will have the ability to offer our customers a new level of services with coast-to-coast branches and ATMs. Our presence across the Nation will translate into convenience and value. Scale and efficiency are already translating into lower prices.
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NationsBank has just recently passed on the advantages to scale of 5 million individual deposit customers by eliminating a number of fees and freezing monthly fees on our two most popular checking accounts through the year 2000. We estimate that these changes alone will result in annual savings in fees of approximately $24 million for our customers in 1998. These changes have also resulted in increased customer retention and new accounts.
Just as importantly, the combined company will have the financial resources to sponsor the development of superior technology to make banking increasingly convenient to our customers through telephones, personal computers, and even interactive television.
The time for developing alternatives to the branch delivery system is now. Today, NationsBank and BankAmerica customers conduct more transactions outside traditional branches than inside them over the telephone, at ATMs, through personal computers, and in grocery store banking centers.
The merger will also result in an institution that is better able to meet the credit needs of the communities it serves. NationsBank and BankAmerica customers and the communities in which they live will benefit from the most comprehensive community investment program ever to be offered. NationsBank and BankAmerica have announced a $350 billion 10-year commitment to community reinvestment activities. The merger is simply a reflection of the marketplace's drive to give customers what they want more efficiently and more effectively.
Mr. Chairman, this concludes my remarks. I thank you for the opportunity to appear before you.
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Mr. HUTCHINSON. [Presiding.] Thank you, Mr. Polking.
[The prepared statement of Mr. Polking follows:]
JOINT PREPARED STATEMENT OF PAUL POLKING, GENERAL COUNSEL, NATIONSBANK CORPORATION AND JIM ROETHE, GENERAL COUNSEL, BANKAMERICA CORPORATION
Mr. Chairman, members of the committee. I am Paul Polking, General Counsel of NationsBank Corporation. My partner, Jim Roethe, general Counsel of BankAmerica Corporation, and I are pleased to be here this afternoon to discuss the effects of consolidation on the state of competition in the financial services industry.
In assessing the competitive effects of the mergers involving financial institutions, it is important to keep in mind that each of the mergers before the committee today is unique. For example, the Citicorp/Travelers transaction is based on a product diversification model—a bundling of the broadest possible array of financial services, while the Banc One/First Chicago NBD transaction represents a regional geographic diversification—the merger of two midwestern banking organizations operating in contiguous markets to create a broad regional franchise.
The merger of NationsBank and BankAmerica is simply the combination of an east coast bank and a west coast bank to create the first truly nationwide banking franchise.
NationsBank holds approximately $311 billion in assets and $174 billion in deposits. NationsBank is geographically diversified with commercial banking operations in sixteen Southeastern, Mid-Atlantic, Mid-Western and Southwestern states and the District of Columbia. This diversification has enabled NationsBank to reduce the credit risk associated with any one region or industry group such that NationsBank has been able not only to weather regional recessions without significant problems, but to prosper and improve its capital and liquidity position in recent years.
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BankAmerica holds approximately $265 billion in assets and $174 billion in deposits. Like NationsBank, BankAmerica is geographically diversified with commercial bank subsidiaries operating primarily in eleven Northwestern, Western, and Southwestern states. The merger with NationsBank will bring much greater diversification, with the combined franchise being focused in high growth markets across the nation.
The new BankAmerica will hold approximately $576 billion in assets and $348 billion in deposits. Notwithstanding the overall size of the resulting institution, the proposed merger of equals between NationsBank and BankAmerica raises almost no competitive issues with respect to banking activities.
For the most part, the parties are complementary in geographic scope; the commercial banking operations of our companies overlap locally in only two states—Texas and New Mexico. The safe harbor thresholds for deposit market concentration established by the Federal Reserve Board and the Department of Justice appear to be exceeded only in the Albuquerque, Clovis and McKinley County markets in New Mexico and in Dallas, Texas. In the other overlap markets in New Mexico and Texas, the deposit concentration levels are within the 1800/200 safe harbor threshold.
In order to minimize competitive concerns, we are discussing with federal authorities the divestiture of branches holding sufficient deposits and associated loans to bring market concentration within safe harbor levels in the New Mexico markets of Albuquerque, Clovis and McKinley County. We believe that deposit market concentration, based on eleven-month old data, is overstated in the Dallas market, and that substantial mitigating factors warrant the conclusion that no divestitures are required in the Dallas market.
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Keeping in mind the nature of the NationsBank/BankAmerica transaction—the creation of the first nationwide banking franchise—and the fact that there is very little overlap of banking markets served by the two companies, we think it is clear that there are virtually no competitive issues raised by the proposed merger.
The idea that the combination of two large banks, or any other companies, results, solely because of their size, in a situation that is anti-competitive or otherwise bad for our customers, or consumers, businesses, and the economy generally, is simply not true. Following the mergers that you will hear about today, there will still be thousands of banks and other financial services companies serving consumers and businesses in the United States.
In the NationsBank/BankAmerica merger, we believe that consumers are the real winners. We will have the ability to offer our customers a new level of services with coast to coast branches and ATMs. Our presence across the nation will translate into convenience and value.
Scale and efficiency are already translating into lower prices, NationsBank has just recently passed on the advantages of scale to 5 million individual deposit customers by eliminating a number of fees and freezing monthly fees on our two most popular checking accounts through the year 2000. We estimate that these changes alone will result in annual savings in fees of approximately $24 million for our customers in 1998. These changes have also resulted in increased customer retention and new accounts.
Just as importantly, the combined company will have the financial resources to sponsor the development of superior technology to make banking increasingly convenient to our customers through telephones, personal computers and even interactive television. The time for developing alternatives to the branch delivery system is now. Today, NationsBank and BankAmerica customers conduct more transactions outside traditional branches than inside them—over the telephone, at ATMs, through personal computers and at grocery store banking centers.
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The merger will also result in an institution that is better able to meet the credit needs of the communities it serves. NationsBank and BankAmerica customers and the communities in which they live will benefit from the most comprehensive community investment program ever to be offered—NationsBank and BankAmerica have announced a $350 billion/10 year commitment to CRA activities.
The merger is simply a reflection of the marketplace's drive to give customers what they want more efficiently and effectively.
As for the impact of the merger on the overall economy, the combined company will act as a powerful engine by efficiently and effectively providing capital to a wide range of businesses—from the smallest to the largest. At the same time, the combined company will have tremendous stability as a result of its capital position and economic and geographic diversification.
The last point I would like to cover is the impact of our merger on competition both relative to small banks and in the international arena. As I mentioned earlier, despite the consolidation that the banking industry has undergone and the mergers we're discussing today, there are still thousands of banks and other financial services providers, including many small banks, serving consumers and businesses. In addition, more than two hundred new bank charters were granted last year alone. Most of these banks are community banks perceiving an opportunity to provide an alternative to the kind of companies represented here today.
Internationally, as evidenced by the recently announced mergers of UBS and Swiss Bank, Royal Bank of Canada and Bank of Montreal and Canadian Imperial Bank of Commerce and Toronto Dominion, consolidation is happening all around us. U.S. banks must be allowed to keep pace in order to maintain the preeminence of the U.S. financial services industry and to fuel economic growth.
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This concludes my remarks. Mr. Chairman and members of the committee, we thank you for the opportunity to appear before you.
Mr. HUTCHINSON. Now at this time we will hear from Mr. Foorman.
STATEMENT OF JIM FOORMAN, SENIOR VICE PRESIDENT FOR LAW, FIRST CHICAGO NBD
Mr. FOORMAN. Thank you. I am Jim Foorman, Senior Vice President in the Law Department of First Chicago NBD Corporation, headquartered in Chicago. I appreciate the opportunity to appear before the committee today to discuss the subject of merger activity in the financial services industry and its effect on competition.
What we are seeing today in banking is no different from what is occurring in other industries. Companies combine to achieve economies of scale, foster product innovation, and respond to the changing needs and preferences of their customers.
Just 2 1/2 years ago, First Chicago NBD Corporation was created in a merger of equals transaction between NBD Bancorp of Detroit and First Chicago Corporation of Chicago. At that time NBD and First Chicago were then the largest banks headquartered in Michigan and Illinois, respectively. The First Chicago-NBD merger has been, we believe, a success story for our customers, our employees, and our communities.
Further, we are confident that the consolidation on which we are now embarking can be accomplished while maintaining the competitiveness that has characterized the financial services industry.
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On this latter point, I would observe that the current process with reviews both by the Federal Reserve and the Department of Justice has been more than adequate to address matters of product overlap and geographic concentration. In our pending merger with Banc One Corporation, for example, we have publicly said that we would divest substantial assets in the State of Indiana where both organizations have a significant presence. All of the competitive aspects of our transaction will be reviewed and subject to approval by both the Department of Justice and the Federal Reserve.
Virtually everything we do as a business must consider the interests of our customers as primary. If they don't find our products and services valuable, we cannot succeed. In the case of bank mergers, it is not the size of the institution per se that is important, but rather how that size can more effectively and efficiently serve customers. Indeed, no matter how large a bank may be, it must remain close to its customers to be successful.
The ability to deliver a broader array of banking products and services across a broader geography is at the heart of this issue. Over the years our customers' needs and preferences have changed dramatically, and we expect that they will keep changing in ways that we cannot predict. Today's consumers want choices in the products they use and convenience in how they do business with their bank. Convenience and choice are equally vital to our business customers.
What enables us to serve these needs in large part is technology. Certainly technology is an important driver in bank mergers. The systems and technological infrastructure needed to serve our customers today and in the next century requires enormous economies of scale that can only be achieved by combining the resources and earnings potential of companies like First Chicago NBD and Banc One.
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The growth of the organization and its enhanced earnings power also benefit the communities we serve through the financial services we provide, as well as our philanthropic and civic involvement.
Finally, there is an additional benefit to the broader geographic presence that results from combinations such as the proposed merger of First Chicago NBD with Banc One. Our organization, particularly in its consumer, small-business and middle-market business, has been solidly grounded in the Midwest. We, along with our customers, have learned how to manage through the Midwest's often difficult business cycles. But we believe there is an advantage to the institution, to our customers, and indeed to the banking system, in the greater diversity associated with a broader geographic span.
In summary, we believe that bank mergers are necessary to the continued health of the financial services industry in the United States and that these combinations serve to benefit customers, employees, and communities.
Mr. Chairman, thank you for permitting me to share our views with the committee. I would be pleased to respond to any questions which you or your colleagues might have.
Mr. HYDE. [Presiding.] Thank you very much, Mr. Foorman.
[The prepared statement of Mr. Foorman follows:]
PREPARED STATEMENT OF JIM FOORMAN, SENIOR VICE PRESIDENT FOR LAW, FIRST CHICAGO NBD
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Mr. Chairman, I am James L. Foorman, Senior Vice President in the Law Department of First Chicago NBD Corporation, headquartered in Chicago, Illinois. My background includes some 24 years of experience in the banking industry.
I appreciate the opportunity to appear before the Committee today to address the subject of merger activity in the financial services industry and its effect on competition. What we are seeing today in banking is no different from what is occurring in other industries. Companies combine to achieve economies of scale, foster product innovation, and respond to the changing needs and preferences of their customers.
Just 2 1/2 years ago, First Chicago NBD Corporation was created in a merger of equals transaction between NBD Bancorp of Detroit, Michigan, and First Chicago Corporation of Chicago, Illinois. At that time, NBD and First Chicago were then the largest banks headquartered in Michigan and Illinois, respectively. The First Chicago-NBD merger has been, we believe, a success story for our customers, our employees and our communities.
We believe that all of these constituencies benefit from larger, stronger banks, and that ultimately the nation's economy in general will be strengthened. Further, we are confident that this consolidation will be accomplished while maintaining the competitiveness that has characterized the financial services industry.
On this latter point, I would observe that the current process, with reviews both by the Federal Reserve and the Department of Justice, has been more than adequate to address matters of product overlap and geographic concentration. In our pending merger with Banc One Corporation, for example, we have publicly said that we would divest substantial assets in the state of Indiana, where both organizations have a significant presence. All of the competitive aspects of our transaction will be reviewed and approved by both the Department of Justice and the Federal Reserve.
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In the final analysis, virtually everything we do as a business must consider the interests of our customers as primary. If they don't find our products and services valuable, we cannot succeed. In the case of bank mergers, it is not the size of the institution per se that's important, but rather how that size can more effectively and efficiently serve customers. Indeed, no matter how large a bank may be, it must remain close to its customers to be successful.
The ability to deliver a broader array of banking products and services across a broader geography is at the heart of this issue. Over the years, our customers' needs and preferences have changed dramatically—and we expect they will keep changing in ways we cannot predict. Today's consumers want choices in the products they use and convenience in how they do business with their bank.
Convenience and choice are vital to our business customers as well. Even the smallest businesses are demanding more sophisticated cash management vehicles as well as financing solutions. Small and mid-sized businesses are becoming more global, and look to their banks to help them manage multiple currencies and move money around the world.
What enables us to serve these needs, in large part, is technology. Certainly technology is an important driver in bank mergers. The systems and technological infrastructure needed to serve our customers today and in the next century require enormous economies of scale that can only be achieved by combining the resources and earnings potential of companies like First Chicago NBD and BANC ONE.
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The growth of the organization and its enhanced earnings power also benefit the communities we serve, through the financial services we provide as well as our philanthropic and civic involvement.
Finally, there is an additional benefit to the broader geographic presence that results from combinations such as the proposed merger of First Chicago NBD with BANC ONE. Our organization, particularly in its consumer, small-business and middle-market business, has been solidly grounded in the Midwest. We—along with our customers—have learned how to manage through the Midwest's often difficult business cycles. But we believe there is an advantage to the institution, to our customers, and indeed to the banking system, in the greater economic diversity associated with a larger geographic ''footprint.'' In that sense, the same forces that allow customers to access our services over a wider area also serve to help protect the franchise itself.
In summary, we believe that bank mergers are necessary to the continued health of the financial services industry in the United States, and that these combinations serve to benefit bank customers, employees, and communities.
Mr. Chairman, thank you for permitting me to share our views with the Committee. I would be pleased to respond to any questions you or your colleagues might have.
Mr. HYDE. Mr. Bennett.
STATEMENT OF STEVEN A. BENNETT, GENERAL COUNSEL, BANC ONE CORPORATION
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Mr. BENNETT. Thank you, Mr. Chairman, members of the committee. I am Steve Bennett, the general counsel of Banc One Corporation, and I am pleased to be representing the company in the critical discussions you have initiated with the industry today. My remarks will be brief and, I hope, to the point.
The Banc One-First Chicago NBD merger appears rather modest compared with the august combinations represented here today. Although our merger is within a single geographic region, the Midwest, the only significant market overlap is in the State of Indiana; and we plan to handle this overlap with the adroit sensitivity incumbent upon any experienced and enlightened institution which intends to maintain customers and community goodwill.
Although this merger may look like more of the same to the regulators and our competitors, it does represent some historic changes for Banc One. First and foremost, it will mean moving our headquarters to Chicago from Columbus, Ohio, which means we will be a powerhouse in the financial center of the Midwest, but saddens some of us who are now and always will remain loyal to Ohio. It will give us a high-profile opportunity in this context to demonstrate our commitment to our nonheadquarters marketplaces.
Since the enactment of the Bank Holding Company Act of 1956, the Federal Reserve Board and the Justice Department have worked together to apply the Nation's antitrust laws to the merger activities of bank holding companies operating in multiple States. There is no reason for this critical oversight role to change as a result of mergers like ours or any financial modernization legislation being considered by the Congress. Indeed, the combined oversight of the Federal Reserve Board and the Department of Justice has been more than adequate to ensure a free, open and competitive market for financial services. This oversight, coupled with the national deposit caps embodied in the Riegle-Neal legislation, prevent the creation of monopolies in the financial services industry.
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Our experience in merger activity to date is that the regulators are tough, and the competition, especially from smaller community banks, is tougher. You cannot help but notice that each announcement of a merger is reported in local newspapers along with attendant articles outlining how smaller banks and their people are planning to cannibalize the merged institution's retail and customer base during and after the transition period. Those banks mean it. Similarly, we mean to hold onto those same customers. We win some, we lose some, and that is how the free market works.
Banc One has sought out merger partners in order to compete with the full spectrum of financial services providers. Others may prefer to specialize in one or several niches customized to their selective customer bases. We hope to develop the economy of scale necessary to support the technological systems and expertise required of a premier provider of the complete range of financial services products at a very competitive price.
The competition gets fiercer every day, and we are dedicated to meeting the challenge in the growing number of communities where the bank branch is our signature, as well as the national and international marketplace.
The balance of my remarks are contained in the statement previously submitted, which I would ask be made part of the record. If you have any questions, I will be happy to answer them.
Mr. HYDE. Thank you very much, Mr. Bennett. And, of course, your statement and all the statements will be made a part of the record and will be noted, believe me.
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[The prepared statement of Mr. Bennett follows:]
PREPARED STATEMENT OF STEVEN A. BENNETT, GENERAL COUNSEL, BANC ONE CORPORATION
Mr. Chairman and Members of the Committee:
I am Steve Bennett, General Counsel of BANC ONE CORPORATION, and I am pleased to be representing the company in the critical discussions you've initiated with my industry today.
My remarks will be brief and, I hope, to the point.
The BANC ONE/First Chicago NBD merger appears rather modest compared with the august combinations represented here today. Although our merger is within a single geographical region—the Midwest—the only significant market overlap is in the State of Indiana which we plan to handle with the adroit sensitivity incumbent upon any experienced and enlightened institution which intends to maintain customers and community good will.
It would be a mistake, however, to deem the new BANC ONE a Midwestern bank given our significant assets and growth in Texas, Arizona, Louisiana, Utah, Oklahoma and Colorado.
Although this merger may look like ''more of the same'' to the regulators and our competitors, it does represent some historic changes for BANC ONE.
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First and foremost, it will mean moving our headquarters to Chicago from Columbus which means we'll be a powerhouse in the financial center of the Midwest but saddens some of us who are now and always will remain loyal to Ohio. It will give us a high-profile opportunity to demonstrate our commitment to our non-headquarters marketplaces.
Our Chairman, John B. McCoy, will become the President and CEO while First Chicago NBD's Chairman will become the Chairman of the new BANC ONE.
Since the enactment of the Bank Holding Company Act of 1956, the Federal Reserve Board and the Justice Department have worked together to apply the nation's anti-trust laws to the merger activities of bank holding companies operating in multiple states. There is no reason for this critical oversight role to change as a result of mergers like ours or any financial modernization legislation passed by Congress. Indeed, the combined oversight of the Federal Reserve Board and Department of Justice has been more than adequate to ensure a free, open and competitive market for financial services. This oversight, coupled with the national deposit caps embodied in the Riegle-Neal legislation, prevent the creation of monopolies in the financial services industry.
Our experience in merger activity to date is that the regulators are tough and the competition, especially from the smaller, ''community'' banks, is tougher. You cannot help but notice that each announcement of a merger is reported in local newspapers along with the attendant article outlining how smaller banks and their people are preparing to cannibalize the merged institution's retail and commercial customer base during and after the transition. And they mean it! And we mean to hold those same customers. We win some and we lose some and that's how the free market works.
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But banks and other insured depository institutions are not our only competitive concern. The insured certificate of deposit is no longer America's investment product of choice. Today the customer demands access to higher yields and broader options. Many folks make decisions regarding their financial services over the phone and the choices of products and suppliers are virtually unlimited. If recent history is any indicator, soon most investment and other financial services decisions will be made via personal computers. Currently it is estimated that nearly 5 million investors trade stocks online and that number grew 150% in the last half of 1997 alone.
BANC ONE has sought out merger partners in order to compete with the full spectrum of financial service providers. Others may prefer to specialize in one or several niches customized to their selected customer targets. We hope to develop the economy of scale necessary to support the technological systems and expertise required of a premiere provider of the complete range of financial services products at a very competitive price.
If we restrict the conversation to just the banking industry, 1/3 of all the nations' banks are now offering PC home banking. Three years ago there were less than 1 million customers. Today there are over 7 1/2 million. In three years it is anticipated that there will be well over 15 million banking computer customers.
These customers know no geographic limitations. They are not interested if their bank or broker or insurance agent is down the street or around the world. BANC ONE wants to be their bank, broker and agent.
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The competition gets fiercer every day and we're dedicated to meeting the challenge in the growing number of communities where the bank branch is our signature as well as the national and international marketplace.
Again, thank you for this opportunity and I look forward to your questions.
Mr. HYDE. Mr. McQuillan.
STATEMENT OF WILLIAM L. McQUILLAN, PRESIDENT, CITY NATIONAL BANK, ON BEHALF OF THE INDEPENDENT BANKERS ASSOCIATION OF AMERICA
Mr. MCQUILLAN. Thank you, Mr. Chairman and members of the committee. Good afternoon. I am Bill McQuillan, president of the Independent Bankers Association of America, and president of the City National Bank, an $18 million bank located in Greeley, Nebraska. It is an honor and a pleasure to appear before this committee to discuss the timely issue of megamergers in the banking and financial services industry and the potential for any competitive effect. We appreciate the committee's attention to this very important issue.
Mergers both among large banks and between banks and nonbank entities raise serious issues of anticompetitive effect. In the case of mega-interbank mergers, including those said to have involved entities in separate geographical markets, we question whether geography really remains a good criterion of market definition.
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Modern banking is no longer bound by local and isolated markets. Consequently, the argument that the consolidation of behemoths with operations concentrated on the east and west coast cannot have an anticompetitive effect is conveniently myopic. The evidence shows that increased concentration in the banking industry has not benefitted bank customers. The economies of scale that supposedly justify large bank mergers either do not materialize or are not passed on to customers.
Please consider the following issues. Larger banks charge higher fees. According to Bank Rate Monitor, none of the top 50 banks in the U.S. offer the least expensive checking accounts. In fact, those offering the most expensive checking accounts are banks involving the latest megamergers, Citibank and NationsBank. The lowest pricing deals are offered by smaller regional and community banks. A 1997 study found a widening gap between large and small bank fees.
A Federal Reserve study found the average fees charged by multi-State banks are significantly higher than those charged by single-State banks, even accounting for locational or other factors that might explain away the differences.
Bank mergers have an adverse effect on consumer deposits pricing. A Boston Federal Reserve study of 499 bank mergers found the combined banks lowered interest rates paid on deposits regardless of the amount of competition in the market.
The evidence also suggests that the optimal size for a bank in terms of economies of scale, profitability and efficiency is between $100 million and $1 billion, quite a bit smaller than the 300 to $600 billion behemoths that will be created from the latest mergers.
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A Harvard study showed that instances of improved operating results after a merger were due primarily to higher repricing, not economies of scale, suggesting the use of increased market power to raise prices. Given sufficient market power, large banks could then price smaller competitors out of the market with below-market-rate loans or above-market-rate deposits.
Small business lending receives short shrift in a world of ever larger banks. Generally the percentage of small business lending is inversely proportional to bank size, and mergers involving small banks tend to increase small business lending, while mergers of large banks tend to reduce it.
Large interbank bank mergers will also have negative effects on competition in the ATM network markets and in credit card markets. ATM network mergers typically follow big bank mergers, and the current merger mania is paving the way for an oligopolistic ATM network market owned by a small handful of the Nation's largest megabanks. Essentially, these banks control the pricing, policies, and functionality of the Nation's ATM networks. Given this control, large banks could limit access for community banks and their customers by imposing anticompetitive and discriminatory pricing, membership requirements, operating rules, or technological barriers.
Access at a fair price to ATM and other electronic financial services networks is mission critical for community banks to ensure their customers also have fairly and competitively priced access to these networks to transact their business.
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The IBAA has urged the Federal Reserve to consider the electronic banking market issue when determining whether proposed bank merger passes antitrust tests. Our concerns in this regard parallel those faced by the settlers of Nebraska and other Midwest States early in this century. A few railroads essentially controlled the rural economy, unfortunately. A few megabanks should now not be allowed to control the electronic payment system railroads, to the detriment of those consumer payment services.
Large bank mergers are creating an oligopoly of credit card issuers led by Citibank, Citicorp, Banc One, and NationsBank. Today, under the Visa-MasterCard joint venture umbrella, thousands of community banks are issuers of credit and debit cards, set their own pricing terms, and have the national worldwide acceptance essential for their customer card viability. Unfortunately, we believe that increasingly the large banks will produce their own brands to the detriment of Visa and MasterCard, and as the Visa and MasterCard brand names are undermined or destroyed, this will be to the detriment of competition and to the thousands of financial institutions and their customers who will then be back in the tightly controlled card environment, detrimental to both customers, consumers, and small merchants.
The committee should also take a hard look at proposed conglomerate mergers, which is epitomized by the application pending before the Federal Reserve Board to merge Travelers and Citicorp.
As an aside, Mr. Chairman, we also find it totally incongruent that current antitrust analyses as applied to small community bank mergers frequently result in merger denials, even as regulators consider and approve mergers of ever larger banks.
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Finally, in pursuit of an antitrust policy that advances the public good, the committee should examine the recent experiences of other developing economies and the extent to which their economies may have suffered because of their flawed financial structure. Japan certainly comes to mind.
In conclusion, Mr. Chairman, we urge the Congress to undertake a more formalized study of the effects that banking and financial services consolidation has on competition and the availability of better pricing and services to our customers. We suggest this committee take a hard look at the Citicorp-Travelers merger application now pending before the Fed. We further urge your serious attention both to the effect that interbank mergers have on ATM access and credit card competition.
Thank you, Mr. Chairman, for my time here.
Mr. HYDE. Thank you Mr. McQuillan.
[The prepared statement of Mr. McQuillan follows:]
PREPARED STATEMENT OF WILLIAM L. MCQUILLAN, PRESIDENT, CITY NATIONAL BANK, ON BEHALF OF THE INDEPENDENT BANKERS ASSOCIATION OF AMERICA
Good afternoon, Mr. Chairman. I am Bill McQuillan, president of the Independent Bankers Association of America and president of The City National Bank, an $18 million bank located in Greeley, Nebraska. I also serve as an elected director on the board of directors of the Federal Reserve Bank of Kansas City.(see footnote 33) It is an honor and a pleasure to appear on behalf of the IBAA before the House Judiciary Committee, and to discuss the timely issue of bank mergers and their potential for anticompetitive effect. In particular, Mr. Chairman, the IBAA appreciates the opportunity to set forth on the record a brief summary of our concerns about recent bank mergers and the trends they reflect and augur. We appreciate that this Committee, under your leadership, is taking a hard look at the recent wave of mergers. Although banks and banking have not been a core concern of this Committee, we believe that a number of proposed bank mergers that currently await regulatory approval raise issues of concentration and competition that have long been central to this Committee's work. We appreciate that the Committee is deploying its considerable antitrust background and expertise to look into these developments.
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I want to organize my remarks today in terms of two ostensibly separate types of bank mergers: those between existing banks, and those between banks and nonbank entities. Both are, of course, subject to section 7 of the Clayton Act.(see footnote 34)
BANK-BANK MERGERS
The first of these—mergers between existing banks—falls easily into traditional patterns of antitrust analysis, generally that concerned with so-called ''horizontal mergers.'' The assumption has been that such mergers between competitors present obvious dangers of restraining competition. On the other hand, at least two factors are relied on by the proponents of interbank mergers to dismiss those dangers. First, we are told, many recent and proposed bank mergers have principally affected markets in which competition is and will remain robust, thanks to a large number of competitors; consequently, the argument goes, the loss of a number of competitors to interbank mergers will have no appreciable anticompetitive effects, such as a diminution in accessibility and quality of banking services and an increase in fees.
Second, we will be told, many of the very largest interbank mergers, including that proposed between NationsBank and Bank of America, involve large banks that have not generally competed in the same geographic markets. In fact, we may be told that such transactions are not really horizontal mergers at all, but conglomerate mergers involving non-competing (albeit huge) entities in discrete markets. Consequently, the argument continues, the consolidation of behemoths, whose operations are concentrated on the east and west coasts respectively, can entail few legitimate fears of anticompetitive effect.
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We believe this argument to be conveniently myopic. We must look behind such gross generalities advanced to excuse all manner of interbank mergers. For example, it is time to reexamine the relevance geography has to market definition in the modern banking industry. Modern banking is no longer bound by local and isolated markets. We are dealing with a global, 24-hour market in currencies, securities and funds, linked by computers and, as a practical matter, accessible to all. Clearly credit card and debit card marketing and usage know no geographic boundaries. And large bank mergers impact the already limited ownership of the crucial electronic payment networks. Accordingly, the fact that each of two large merger candidates maintains brick-and-mortar retail banking outlets primarily in disparate geographical localities is irrelevant in terms of potential anticompetitive impact. The question is: What is the nationwide effect of truly nationwide banking?
Effect on Prices, Small Business Lending and Economies of Scale
We should examine empirically the economic impacts of recently-consummated interbank mergers. What have been their real effects, on access to banking services by consumers, and on convenience? What have been their observable effects on the level of fees and charges, and related phenomena such as minimum balance requirements? Have fees gone down and services expanded, as the proponents of these mergers would have us believe? Or, have fees to consumers gone up as large banks have become increasingly bureaucratized and oblivious to the needs of their customers?
In fact, the body of evidence shows that increased concentration has not benefitted bank customers, who correctly perceive an across-the-board increase in fees and charges. According to a March 1998 Checking Account Pricing Study of 350 banks nationwide conducted by Bank Rate Monitor, none of the top 50 banks in the U.S. offer the least expensive checking account. The best deals are offered by smaller regional and community banks. Ironically, the banks offering the most expensive checking accounts turned out to be none other than the banks involved in the latest round of proposed megamergers: Citibank, San Francisco; Barnett Bank, Tampa (merging into NationsBank); NationsBank, Tampa; and NationsBank, Orlando.
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The Federal Reserve Board's Annual Report to the Congress on Retail Fees and Services of Depository Institutions (June 1997) found that the average fees charged by multistate banks are significantly higher than those charged by single-state banks, even accounting for the role of locational and other factors that might explain differences in the level of fees charged. And a 1997 study by the U.S. Public Interest Research Group, Big Banks, Bigger Fees, found a widening fee gap between large and small banks as fees climbed at big banks, while dropping at small ones. In the previous two years, fees at large banks had risen 3 percent, but fell 2 percent at small banks.
A recent paper by two economists (Simons and Stavins) at the Federal Reserve Bank of Boston questions whether antitrust enforcement has been sufficiently vigorous since mergers have an adverse effect on consumer deposit pricing. Their study of 499 bank mergers found the combined banks lowered interest rates paid on deposits regardless of the amount of competition in the market. In short, there is reason to believe that the vaunted ''efficiencies'' to be realized by interbank mergers are not in fact being passed along to the consumers. If not to consumers, then to whom?
The effect of interbank mergers on small business lending is also of concern, as small business lending receives short shrift in a banking world of ever larger entities. Generally, the percentage of small business lending is inversely proportional to bank size. According to another Federal Reserve Bank of Boston analysis (Peek and Rosengren), banks under $100 million involved in bank mergers on average had 16 to 19 percent of their loan portfolios in small business loans, while banks over $1 billion involved in bank mergers had on average 6 percent of their loan portfolios in small business loans. And interestingly, small bank acquirers tend to increase small business lending while large acquirers tend to reduce it. Peek and Rosengren note that several recent studies have found small business lending is also growing faster at small banks than large, and that large acquirers are less likely to expand in this sector. They found that banks with less than $100 million or more than $3 billion of assets each had asset growth of about 24 percent from June 1993 to June 1996, yet growth in small business lending (loans under $1 million) was 42 percent at the small banks but only 3 percent at the large banks.
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Equally important, we question whether interbank mergers really present the opportunities of increased efficiency that their proponents claim. One recent study indicates that, except below a relatively low threshold in terms of combined assets, bank mergers do not in fact result in the realization of increased efficiency through economies of scale—a common economic rationale for horizontal mergers in any industry. Several other studies (including those conducted by the Harvard Business School and the Federal Reserve Bank of Atlanta) found no significant cost savings or profit improvement (measured as return on assets or gross operating income) as a result of mergers. Ironically, in the Harvard Business School study of New England bank mergers, instances of improved operating results (such as improvement in net interest margin) was due primarily to higher repricing rather than economies of scale, which strongly suggests the use of market power to raise prices, and again raises antitrust concerns. Given sufficient market power, large banks could price smaller competitors out of the market with below market rate loans or above market rate deposits.
We suspect that economies of scale may actually become negative once a merged banking entity exceeds some critical mass, because the increased costs of management and bureaucratization will at some point overwhelm any theoretical economies of scale. The evidence suggests that the optimal size for a bank in terms of economies of scale, profitability and efficiency is between $100 million and $1 billion. An analysis of the largest 100 banks in the May 1998 issue of USBanker shows that as a general rule the largest banks have poorer asset quality, lower profitability, less efficiency and weaker capitalization than the smaller banks on the list.
In sum, Mr. Chairman, the recent trends favoring consolidation in the banking industry are coupled with widely-held suspicions that (i) realized efficiencies are overstated or non-existent, and/or (ii) the benefits of such efficiencies as may be realized are not being shared with bank customers, and (iii) increased market power is used to raise prices. We believe that the historical expertise and focus of the Judiciary Committee should be engaged to illuminate these issues promptly.
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Effect on ATM Network and Credit Card Markets
ATM Network Markets: A key concern in large interbank mergers, and one that does not get the attention it warrants, is the effect on ATM networks. Market concentrations resulting from bank mergers and acquisitions have potential anti-competitive implications for ATM network markets (specifically control of ATM switches).
ATM networks are joint ventures between competing banks. ATM networks are self-regulated, private sector entities, owned and controlled in the majority of cases by large banks, that set their own pricing and related operating rules subject only to the constraints imposed by the antitrust laws. Given the structure of ATM networks, certain anti-competitive aspects are inherent. For community banks, these anti-competitive aspects are more pronounced as they generally have little influence over network fees, bylaws or operating rules. Access at a fair price to ATM and other electronic financial services networks is critical for community banks to insure their customers also have fairly and competitively priced access to these networks to transact their banking business.
Big bank mergers affect ATM networks in two ways. First, ATM network mergers typically follow. For example, NationsBank and First Union acquisitions in the South prompted the merger of the Honor and Most ATM networks (NationsBank owns 30 percent, the largest single share, of the Honor network). NationsBank's purchase of Boatmen's Bancshares of Missouri prompted Honor's acquisition of the BankMate network in St. Louis formerly owned by MasterCard and three smaller networks. Currently, First Chicago owns 30 percent of the Cash Station network and 25 percent of Magic Line. Banc One owns 20 percent of Electronic Payment Systems, Inc. which operates the MAC network. The pending Banc One/First Chicago merger could result in mergers of all of these networks. (Interestingly, EPS/MAC entered into a consent decree with the Department of Justice in 1994 agreeing to cease certain anti-competitive practices that caused over 1,000 banks, particularly small banks, thrifts and credit unions, to pay higher, noncompetitive prices for ATM transaction processing.)
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In the short term, the industry's merger mania is rapidly paving the way for an oligopolistic ATM network market owned by a handful of the nation's largest banks. Essentially, these banks control the pricing, policies and functionality of the nation's ATM networks. Given this control, large banks could limit access for community banks and their customers by imposing anti-competitive and discriminatory pricing, membership requirements, operating rules or technological barriers. Since network policies directly affect the ability of community banks and other small financial institutions to offer competitive ATM services for their customers, they must be allowed to participate fairly in the governance of ATM networks in order to protect these interests.
We note that under current law, the Federal Reserve has the authority to approve or veto ATM network mergers or mergers of other payments processing entities owned by banks. In the past, IBAA has urged the Federal Reserve to consider the electronic banking markets when determining whether a proposed bank merger/acquisition passes antitrust tests. We have urged the Federal Reserve to ensure that its competitive impact analysis evaluates: 1) the market power of a network brand, 2) fees, 3) routing rules, 4) third-party processing requirements, and 5) other factors that could be used to disadvantage community banks.
The second way big bank mergers can effect ATM networks is that, over the long term, large banks could transfer their transaction processing from regional ATM networks to their in-house operations. BankAmerica Corp. is currently the largest ATM owner, and its merger partner NationsBank is second. Together they control more than 15,000 machines—a number that is comparable to multibank shared networks such as Pulse or NYCE. The Banc One/First Chicago merger will result in the nation's second largest ATM owner with almost 10,000 machines. (By contrast, all community banks combined own fewer ATMs than NationsBank/Bank of America.) Excess capacity could be created in existing regional electronic networks as large banks pull transactions out of the network as a consequence of mergers. If this excess capacity is not shifted to smaller financial institutions, the consumer of electronic payment services will have less and less choice. And the customers of community banks, savings and loan associations and credit unions could be forced out of electronic commerce by pricing and other decisions of the fewer and fewer network owners.
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Our concerns in this regard parallel those faced by the settlers of Nebraska and other Midwest states early in this century. A few railroads essentially controlled the rural economy. A few banks should not be allowed to control the electronic payment system ''railroads'' to the detriment of consumers of those payment services.
Credit Card Markets: We have a major anti-competitive concern in the credit card area. Large bank mergers could create an oligopoly of credit card issuers led by Citicorp, Banc One and NationsBank. Citibank is currently the largest issuer of credit cards with 65 million cards outstanding. Banc One/First Chicago combined will hold the number two spot with 53 million cards. NationsBank/Bank of America combined will have 24 million cards outstanding. Once the pending mergers are consummated, the top ten credit card issuers will control 72 percent of the credit card market, according to Robert McKinley of RAM Research in Frederick, Md.
Under today's rules of the game, by using the Visa or MasterCard umbrella, thousands of community banks are issuers of credit and debit cards and set their own pricing and terms. Thousands of community banks and their credit and debit card customers can tie into the Visa and MasterCard brands, which confers on the cards the national and worldwide acceptance essential for the cards' viability. Like ATM Networks, the two card associations, Visa and MasterCard are joint ventures and all competing member banks enjoy the strength of two brands that are recognized and accepted around the world.
We have already heard the ad ''Don't think Visa, think Citibank Visa'' (i.e., it's not just a Visa Card, it's a Citibank Visa Card). It is our concern that down the road the ad you hear from Citibank or Banc One will jettison the Visa or MasterCard brand name in favor of a credit card or debit product that they exclusively own and control. And with the destruction of the Visa or MasterCard brand names, combined with large banks' long-term goal to destroy the FDIC symbol now on every bank door, enormous financial concentration to their benefit and to the detriment of thousands of community financial institutions and their customers will have been achieved. And then the consumer will suffer because we will be back in the brave new world where every credit card issuer charges a $35 annual fee and a 19.6 percent interest rate regardless of market interest rate fluctuations. And the taxpayer will suffer when the inevitable occurs, and a large financial conglomerate Titanic goes down.
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At best, the card brands will be systematically weakened to the detriment of smaller issuers forcing them out of the business because they will not have the marketing budgets to compensate. Historically, Visa and MasterCard have offered baseline marketing and enhancement packages that virtually any size member bank could take advantage of. Increasingly the large issuers will not be willing to support such product parity preferring instead to use their considerable influence to assure their own cards stand out. This in turn, will hinder cooperative brand advertising serving to obscure the message to consumers that other Visa and MasterCard offers are available, not just a ''Citibank Visa.''
Consumers will not only be disadvantaged by choice limits and higher pricing, some will find themselves ''de-marketed'' from the card product entirely. With increased consolidation and less competition, large issuers will begin to look for other ways to improve profits. For example, some issuers are already ''de-marketing'' by eliminating value-added enhancements, changing terms, assessing inactive fees and using other disincentives to discourage transactors, those consumers who pay off their balance each month to avoid finance charges. In addition to simply not offering the card product or raising annual fees, the grace period will be reduced or eliminated as the large card issuers focus on the more profitable revolvers, those who maintain a balance from month to month and pay finance charges, in a sort of reverse discrimination. In Canada today, where only a few large banks exist, most cards carry a high annual fee, $25 to $39, and reduced grace periods, from no grace period to just over 17 to 21 days (Office of Consumer Affairs of Industry Canada, Feb. 1998). Revolvers on the other hand will be held captive with higher annual percentage rates (APRs) applied using the highest possible compounded calculation methods and no grace periods along with higher late fees, over-limit fees and risk-based pricing.
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Small merchants will also be affected. Already, the core interchange rates that form the basis for merchant pricing favor large merchants which are generally contracted with large banks. Just a few years ago, most of the large banks had bailed out of the merchant business leaving it fragmented and primarily in the hands of non-banks and small community banks. Now the big banks are back with a vengeance and have the clout to win market share. In today's electronic world and with linkages to other commercial services, it will become increasingly difficult for smaller players to compete. With large card bases, the mega banks can also offer special, targeted promotions that will further tie merchants and consumers forcing out the smaller players, primarily community banks. Once the competition is eliminated, merchants, especially small businesses, will have little choice but to pay whatever rates are charged.
CROSS INDUSTRY (BANK-NONBANK) MERGERS
The second type of bank merger involves the merger of a commercial bank and securities firm under a bank holding company format and the proposed, and we believe highly questionable and probably illegal, proposed takeover of Citicorp by Travelers Group, Inc. through a newly organized holding company called Citigroup. This application is pending before the Board of Governors of the Federal Reserve System and is intended to create an entity, Citigroup, with combined total assets of $697.5 billion.
As you know, Mr. Chairman, the House of Representatives after a three year struggle has just passed legislation, H.R. 10, the purpose of which is to permit the common ownership of commercial banks, securities firms and insurance companies. It would be an enormous stretch of the Bank Holding Company Act for the Federal Reserve to give a go-ahead to this merger proposal without the enactment of H.R. 10. We share Chairman Leach's concern, as reported by Reuters on May 7, that ''this is not a deal that is contemplated under current law.''
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In traditional Section 7 analysis, mergers such as the Travelers/Citicorp merger have been referred to as ''conglomerate mergers.'' Some will argue, Mr. Chairman, that the current wave of cross-industry mergers are in substance akin to mergers of horseshoes and potato chips, and are therefore devoid of anticompetitive effect.
At least with respect to such extraordinarily huge and complex transactions, Mr. Chairman, we suggest that a relaxed antitrust posture vis-á-vis conglomerate mergers is inappropriate, for at least two reasons.
In the first place, such conglomerate mergers may in fact be a far cry from what have been called ''pure'' conglomerate mergers, defined as one in which no similar or related products are involved, and one which would present little opportunity for reciprocal dealing in derogation of competition.(see footnote 35) To refer specifically to the proposed Travelers/Citicorp merger, one may reasonably ask whether the products involved are so disparate and whether reciprocal dealing is so remote a danger as proponents of these transactions would have one believe.
The proponents have stated their intention to foster ''cross-marketing'' or ''cross-selling'' between the merged banks and other lines of business and ''bundling'' of various financial products and services, including those that would be divested in the absence of passage of legislation; and that such cross-marketing would survive a required divestiture.
Such ''cross-selling'' or ''bundling'' will not be entirely benign. If the entity resulting from a proposed bank-non-bank merger is a dominant force in allegedly discrete markets such as, for example, customer banking, stock brokerage and both life and casualty insurance, it is not difficult to imagine ''bundles'' with alarming anticompetitive effects in the financial services industry. Why, for example, might an auto loan not be ''bundled'' with automobile insurance? Why might brokerage not be ''bundled'' with money market management and checking privileges, perhaps through a ''bundling'' arrangement that discounts fees to customers who purchase related financial services? Such bundling by the gargantuan end-product of a Travelers/Citibank merger, of course, could enable the combined entities to assert overwhelming market impact, and, indeed, control, to the detriment of the consumer and free competition. Such proposed ''bundling'' may be demonstrably anticompetitive, as we have seen recently in other industries with sound analogies to the banking industry. The ''bundling'' of personal computer operating systems and Internet browsers comes readily to mind.
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Second, Mr. Chairman, and relatedly: cross financial industry mergers may not really be conglomerate mergers in the first place, let alone ''pure'' conglomerate mergers. I refer to the fact that a national market in financial products and services may be the relevant market for purposes of Section 7 analysis, not a congeries of dissimilar and separate submarkets. It is undoubtedly true that many of the so-called ''products'' proposed to be marketed by merged bank-nonbank entities are not traditional banking products, and may therefore have been presumed to exist in discrete markets. But, importantly, many of these products are in fact competitive, in that they are all alternative repositories of private assets. This would be true, for example, of (i) savings accounts, (ii) life insurance and (iii) a 401(k) plan. If a bank-nonbank merger results in a financial services Godzilla, active in all such segments of the market, we suspect it could have profound anticompetitive effects.
ANTITRUST ANALYSIS OF COMMUNITY BANK MERGERS
Mr. Chairman, I would also like to take the opportunity to briefly address another aspect of antitrust analysis as applied to bank mergers that concerns us—namely, community bank mergers—even though this topic is not being directly considered by the Committee today.
Ironically, as regulators consider and approve mergers of ever-larger banks that approach the deposit concentration limits of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, mergers of community banks in local markets are being prohibited on antitrust grounds. For example, in 1996, the Federal Reserve Board denied an application by BancSecurity Corp. of Iowa, which controlled $415 million of deposits (1.1 percent of total deposits in the state) to acquire Marshalltown Financial Corp., which controlled $103 million in deposits (less than 1 percent of total deposits in the state). The combined entity would have controlled 1.4 percent of the deposits in the state. And it would have had 13 other depository institution competitors in its local market.
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Many other community banks are dissuaded from even applying to make local acquisitions because they are told up front by bank regulators that the deals will not be approved on antitrust grounds. Recently, we were apprised that a bank with $41 million in deposits will be prohibited from acquiring a bank with $15 million of deposits because of antitrust considerations. Yet the merger of two small community banks can often strengthen competition by creating a stronger competitor to a ''small'' local branch of a large out-of-area bank. The current rules have the perverse effect of encouraging community banks to merge with out-of-area large banks, rather than merge with each other to increase efficiencies and competitiveness. The consequence could be the loss of all community banks in a particular market and the loss of local focus so critical to the ability of communities to survive and thrive.
These results seem absurd and are a clear indication that the framework of antitrust analysis, particularly as applied to mergers of community banks, should be revisited. Specifically, in analyzing the competitive structure of a particular market:
i) All thrift deposits and credit union deposits should be accorded full weighting. Currently, thrift deposits are weighted at 50 percent and credit union deposits are not weighted at all. Thrifts and credit unions are full equal competitors for deposits. In many rural communities, credit unions are often the biggest deposit competitor that community banks have. And today, thrifts and credit unions alike make commercial loans.
ii) Nonbank and out-of-market competition must be taken into account. This includes deposit-like services (e.g., money market mutual funds with checking features, Merrill Lynch cash management account), securities firms brokering deposits to out-of-market banks or thrifts, and nonbank small business and consumer lenders (e.g., finance companies, equipment lenders, mortgage companies). Internet banking also changes the local competitive landscape.
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CONCLUSION
In conclusion, Mr. Chairman, the ultimate goal of antitrust policy is to serve the public good. We urge that the Committee view these proposed megamergers in that context as well, and we recommend that the Committee consider lessons to be drawn from developments in other countries. To take one example, Japan's banking industry is in grave crisis—a crisis brought on, according to many, by the very intra- and cross-industry combinations we see occurring in our own country. The German economic system has dominant universal banks (which it is trying to move away from) and has been wrestling with a less than vibrant economy and a very high unemployment rate. We do not believe that the problems of any economy can be divorced from the country's banking system.
In general, we do not believe that the current wave of mergers, planned and proposed, affecting the banking and financial services industry has been examined thoroughly in terms of traditional antitrust theory, specifically that developed under Section 7 of the Clayton Act, and especially by this Committee. We urge you to undertake a more formalized study or investigation of the effects that bank and financial services consolidation has had on competition, and the availability and pricing of services. We suggest that this Committee involve itself with the Citicorp/Travelers merger application now pending before the Federal Reserve Board at the very time that historic legislation permitting such a merger is pending before the Congress. We further urge your attention both to the effect that interbank mergers have on ATM network and credit card competition and to the application of completely outdated antitrust guidelines to deny small bank mergers.
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Finally, we do not understand why anyone would want to radically change our current banking system. It is the envy of the world, with good reason. It has fostered the most successful and dynamic economy in the world. We appreciate your consideration of the antitrust implications and uncharted waters of a financial services world characterized by huge conglomerates which are being created as the Japanese model on which they are based is discredited.
Thank you, Mr. Chairman.
Mr. HYDE. Mr. Flory.
STATEMENT OF BILL FLORY, OWNER, FLORY FARMS, INC., CULDESAC, IDAHO, ON BEHALF OF THE NATIONAL ASSOCIATION OF WHEAT GROWERS
Mr. FLORY. Thank you, Mr. Chairman and the members of the committee. I am Bill Flory, a diversified grain farmer from Idaho. And I have the honor of serving as president of the National Association of Wheat Growers, an association comprised of 23 members, State organizations, that represent wheat in a wide variety of policy issues, including ag credit.
Note that as a stockholder of the large banks, that has served me well, but as a sizable consumer of credit and the services around that, I certainly have some concerns about the community orientation, concentration, and competition.
The importance of this issue to production agriculture can be easily explained by a brief examination of the magnitude of ag borrowing from various credit sources that lend to farmers. Prior to the early 1970's, total farm business debt for both real estate and operating loans never exceeded $50 billion. The promise of expanded ag demand, dramatically improved price expectations, a relatively high level of credit availability, and inflationary pressure on nearly all types of assets encouraged a dramatic increase in borrowing during the past 25 to 30 years. From its peak of nearly $200 billion in outstanding farm debt in the early to mid-1980's to a level of around $150 billion today, farmers in the aggregate are now significant consumers of credit. Today interest paid to all credit sources on this indebtedness exceeds $11 billion annually. Production ag has a strong vested interest in ensuring that adequate levels of credit remain available to the industry, and in the structure of financial services industry that will provide financial services in the future.
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The National Association of Wheat Growers, and farmers in general, are not predisposed to opposing mergers and consolidations in the financial services industry or other economic sectors that impact ag. In fact, throughout our Nation's agricultural history, farms themselves have tended to grow in size as producers have sought levels of efficiency lower production costs, and enhanced income through economies of scale. That trend continues today and, in fact, may accelerate in the future.
For the most part, however, the Nation's individual farms and ranches are still ''small businesses'' compared to those ag sectors that provide inputs or are involved in processing and/or merchandising. While business consolidation appears to be a fact of life, we are not concerned that the increased level of concentration within many segments of the industry is not producing either the benefits of scale economies or improved levels of service. In fact, we would suggest that in many instances the opposite is true. It is our belief that many of the consolidations in the past 5- to 10-year period have served to reduce competition to the point where various service sectors can engage in what are effectively monopolistic business practices.
For example, mergers within the rail industry recently have served to increase a number of captive shippers, failed to provide the improved service levels that were promised and needed, increased the overall cost of transportation to many customers, and likely have been able to pass their added costs of the consolidation to customers through the higher prices rather than demonstrating the expanded operating efficiencies that would allow for consumer savings.
Certainly supply in the transportation sector as well as the crop protection and other sectors of ag is often not as price-elastic as generally assumed. Relationships and business familiarity often take precedence over price alone.
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Mr. Chairman, we are concerned that a similar impact is manifesting itself within the financial services industry as an increased level of both horizontal and vertical integration occurs. Our fear is that the horizontal mergers within the banking sector may not only reduce the availability of credit to farmers in rural America, but also diminish the level of attention and needed expertise available to production ag. This is particularly true when bank management becomes so removed from its customer base that corporate decisions fail to appreciate the impact of changes to its investment strategy on those customers.
At the same time, the cost of mergers to borrowers is likely to increase through high interest rates, additional service charges and inconvenience. Although financial institutions may operate 24 hours a days and exist in a national and even global marketplace, most farms, ranches and other rural businesses are incapable of operating in that environment. While I cannot presume to identify the nationwide impact of further large bank consolidation, experience suggests that the local or regional impact will be negative as competition is reduced.
In addition to the bank-to-bank mergers, a number of consolidations of banks with other commercial enterprises have been proposed. Again, Mr. Chairman, I am not going to suggest that all such mergers and anticompetitive. In fact, some such arrangements do, in fact, enhance the availability of services and level of competition in rural America. However, the potential for such merged entities to engage in practices and effective requirements that reduce competition and choice are troublesome at best. This is particularly true when both parties already have significant market influence in their respective markets. I do not believe that the so-called product bundling that could occur from the creation of large conglomerates with interests in a wide range of financial products is a beneficial proposition for farmers if the result is a further reduction in competition in those markets. We are concerned that the customers may be ultimately tied to a basket of financial services dictated by an institution or run the risk of being able to access these services at all.
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Mr. Chairman, I appreciate the opportunity to provide an agricultural and farmer perspective to your deliberations concerning the consolidations in the financial services industry. We believe that this committee should utilize its expertise and authority to ensure that proposed mergers prior to their consummation are subject to a thorough review that address company, customer and public interest.
I will be happy to respond to later questions. Thank you.
Mr. HYDE. Thank you Mr. Flory.
[The prepared statement of Mr. Flory follows:]
PREPARED STATEMENT OF BILL FLORY, OWNER, FLORY FARMS, INC., CULDESAC, IDAHO, ON BEHALF OF THE NATIONAL ASSOCIATION OF WHEAT GROWERS
Mr. Chairman, Members of the Judiciary Committee, it is an honor to have this opportunity to appear before this Committee today to discuss the impact of bank consolidations and mergers on wheat producers and other U.S. farmers.
I am Bill Flory, a diversified grain farmer from Culdesac, Idaho. This year, I have the honor of serving as the producer president of the National Association of Wheat Growers (N.A.W.G.), a trade association comprised of 23 member state organizations that represent wheat producers on a wide range of public policy issues, including agricultural credit. Mr. Chairman, before I begin my summary of remarks to the Committee, I would like to note for the record that I am not the recipient of any federal grant, contract, or subcontract funding, except for payments received under federal farm programs that are exempt from disclosure. Additionally, the National Association of Wheat Growers does not participate in any grant, contract, or subcontract programs of the federal government.
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While it is unusual for farmers or their organizations to appear before this Committee, the importance of this issue to production agriculture can be easily explained by a brief examination of the magnitude of agricultural borrowing from the various credit sources that lend to farmers.
Prior to the early 1970's total farm business debt for both real estate and operating loans never exceeded $50 billion. The promise of expanded agricultural demand, dramatically improved price expectations, a relatively high level of credit availability, and inflationary pressure on nearly all types of agricultural assets encouraged a dramatic increase in borrowing during the past 25 to 30 years. From its peak of nearly $200 billion in outstanding farm business debt in the early to mid-1980's, to a level of around $150 billion today, farmers, in the aggregate, are now significant consumers of credit. Total interest paid to all credit sources on this indebtedness exceeds $11 billion annually. Production agriculture has a strong vested interest in ensuring that adequate levels of credit remain available to the industry, and in the structure of the financial services industry that will provide financial services in the future.
The N.A.W.G., and farmers in general, are not predisposed to opposing mergers and consolidations in the financial services industry or other economic sectors that impact agriculture. In fact throughout our nation's agriculture history, farms themselves have tended to grow in size as producers have sought new levels of efficiency, lower production costs and enhanced income through economies of scale. That trend continues today, and may in fact accelerate in the future.
For the most part, however, the nation's individual farms and ranches are still ''small businesses'' compared to those agricultural sectors that provide inputs or are involved in processing and merchandising. While business consolidation appears to be a fact of life, we are concerned that the increased level of concentration within many segments of the industry is not producing either the benefits of scale economies or improved levels of service. In fact, we would suggest that in many instances the opposite is true. It is our belief that many of the consolidations in the last 5-10 year period have served to reduce competition to the point where various sectors can engage in what are effectively monopolistic business practices.
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For example, mergers within the rail industry have served to increase the number of captive shippers, failed to provide the improved service levels that were promised, increased the overall cost of transportation to many of their customers, and likely have been able to pass their added costs of the consolidations to customers through higher prices, rather than demonstrating that expanded operating efficiency would allow for customer savings.
Mr. Chairman, we are concerned that a similar impact is manifesting itself within the financial services industry as an increased level of both horizontal and vertical integration occurs. Our fear is that horizontal mergers within the banking sector may not only reduce the availability of credit to farmers and rural America, but will also diminish the level of attention and expertise available to production agriculture. This is particularly true when bank management becomes so removed from its customer base that corporate decisions fail to appreciate the impact of changes to its investment strategy on those customers. At the same time, the cost of mergers to borrowers is likely to increase through higher interest rates, additional service charges, and inconvenience. Although financial institutions may operate 24 hours a day, and exist in a national or even global marketplace, most farms, ranches and other rural businesses are incapable of operating in that environment. While I cannot presume to identify the nationwide impact of further large bank consolidations, experience suggests that the local and regional impact will be negative as competition is reduced in all markets.
In addition to the bank-bank mergers, a number consolidations of banks with other commercial enterprises have been proposed. Again, Mr. Chairman, I am not going to suggest that all such mergers are anti-competitive. In fact, some such arrangements do in fact enhance the availability of services and level of competition in rural America. However, the potential for such merged entities to engage in practices and ''effective'' requirements that reduce competition and choice are troublesome at best. This is particularly true when both parties already have significant market influence in their respective product markets. We do not believe the so-called product ''bundling'' that could occur from the creation of large conglomerates with interests in a wide range of financial products is a beneficial proposition for farmers if the result is a further reduction in competition in those product markets. We are concerned that customers may be ultimately ''tied'' to a basket of financial services dictated by the institution or run the risk of being unable to access any services at all.
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Mr. Chairman, I appreciate the opportunity to provide a farmer perspective to your deliberations concerning consolidations in the financial service industry. We believe that this Committee should utilize its expertise and authority to ensure that proposed mergers, prior to their consummation, are subject to a thorough review that addresses company, customer, and public interest needs.
I will be happy to respond to any questions you or other Committee members may have at the appropriate time. Thank you.
Mr. HYDE. Mr. Torres.
STATEMENT OF FRANK TORRES, LEGISLATIVE COUNSEL, CONSUMERS UNION
Mr. TORRES. Mr. Chairman, members of the committee, on behalf of Consumers Union, thank you for the opportunity to discuss with you our views on consolidation in the financial services industry and in particular on how mergers may affect consumers.
Today consumers are faced with larger banks that are charging higher fees and requiring higher minimum balances to avoid fees, and there are more types of fees being charged. Consumers get hit using ATM machines or visiting tellers. The record profits that banks have made in the past few years, around $60 billion last year alone, have been attributed to income from fees.
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After the latest rounds of mergers were announced, newspapers around the country ran accounts of consumers expressing fears about an even further decline in customer service. Some consumers may be confused or even misled about the risks associated with the various products banks now offer, including whether those products are federally insured. These concerns may be compounded as the merging banks offer a new variety of products through relationship accounts or one-stop shopping. Even though these accounts might be convenient on the one hand, they might be a nightmare for consumers if they lead to hard sales tactics as banks are pressured and the sales force are pressured to try to sell loans, insurance, securities through their bank branches.
One aspect of a truly competitive financial services marketplace is that it should yield some benefits for consumers through lower prices, increased innovations, and better service. But failure to apply and enforce antitrust laws designed to promote competition would be devastating to consumers and their pocketbooks. It is up to the regulators and Congress to ensure that this does not happen.
I think members of the committee today have expressed an uneasiness with what is going on in the mergers, and it is difficult sometimes to put our hands on it. But maybe it is because on the one hand the marketplace is supposed to be so competitive, yet at the same time we are seeing all of these adverse effects on the customers on whom these businesses rely on for their livelihood.
Consumers Union is concerned that overly permissive exceptions to traditional antitrust analysis are leading to a dangerous pattern of banking consolidation that could raise prices for consumers, especially if the market power of the merging institutions is underestimated. And this is where the definition of what markets we are taking a look at or presumed deficiencies come into play.
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There is also some difficulty in the antitrust analysis. If you look at presumed efficiencies and other things that are supposed to happen in the future and they do not happen, will the mergers actually be undone if these efficiencies do not come about?
At the same time, some other aspects of mergers may not be fully examined. The notion that potential competitors should perhaps be competing rather than merging was raised earlier today. Congress recognized that banks are important to our economy in a different way from other industries when it passed the Bank Holding Company Act. It required that banks consider any detrimental impact to the public interest when assessing a merger between two banks.
How is this mandate carried out today, and what weight are consumers' concerns given in the merger approval process? One way that Consumers Union thinks that public interest can be addressed is that during the consideration of a bank merger application, that the Fed works to ensure that a bank will meet the financial needs of consumers and communities; that the Board should carefully assess how these companies will serve these communities in which they operate. Addressing such questions, including whether low- and moderate-income households will be shut out as banks move to increase technology and some households do not have access is one example.
Banks should also provide affordable banking services in part through offering basic banking accounts. Despite record profits, banks have argued that they need to charge higher fees because they have not diversified their business enough or are losing ground to competitors. We hope that mergers will have targets to lower or freeze fees.
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Protecting against abusive and deceptive sales practices is also important to consumers. Privacy concerns need to be addressed. And there is also this question about passing on cost savings to consumers. While there has been much discussion about efficiencies that will benefit consumers, to the extent that there are efficiencies, the Board should make sure that a share of the cost savings are passed on to consumers.
There also has been some talk about making sure that there are some obligations that these merging institutions will have on meeting their CRA requirements, and those considerations are under current review by Consumers Union and other groups, and comments will be offered on the merger application.
Certainly, jurisdiction of the Federal Trade Commission is another positive step. H.R. 10 clarified that the Federal Trade Commission has jurisdiction over banks and nonbank mergers. We think this is important as banks consolidate because the FTC has authority to address certain anticompetitive practices harmful to consumers, but not otherwise be covered by antitrust laws.
There should be competition and access for all bank services, and we think the Congress should be sure that mergers involving banks in no way harm the expansion of competition for such services as credit cards and ATM networks. Some of those concerns were addressed earlier by other participants in the panel.
Regulators have also indicated that they would fully protect uninsured depositors, creditors, and even shareholders in response to the failure of a very large bank. We share the chairman's concern that this doctrine of ''too big to fail'' is of even greater concern for some of these bigger mergers when they happen.
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In conclusion, thank you for the opportunity to express these concerns and offer some ideas about how to protect consumers in this changing financial marketplace. Mergers in themselves may not be bad, but consumers will only benefit if the public interest is served, the antitrust laws are enforced, and the marketplace is made more competitive in their wake. Thank you.
Mr. HYDE. Thank you, Mr. Torres.
[The prepared statement of Mr. Torres follows:]
PREPARED STATEMENT OF FRANK TORRES, LEGISLATIVE COUNSEL, CONSUMERS UNION
Mr. Chairman and members of the Committee, Consumers Union(see footnote 36) appreciates this opportunity to discuss our views and concerns about the recent wave of mergers in the financial services industry, the effects of those mergers on competition, and the impact on consumers. Given the rapid move by banks to merge over the last few years, and most notably in the last two months, Congressional review of the effects of consolidation in the financial services industry is warranted. This hearing is also timely, as H.R. 10, the Financial Services Modernization bill, passed last month, opens the door to new types of mergers. Even without legislation, the Federal Reserve Board is poised to permit Citicorp and Travelers to join, the largest merger on record.
Since the 1980's the U.S. banking industry has experienced extreme consolidation , with the number of banking organizations nationwide declining by more than 40 percent, from about 13,000 in 1988 to 9,000 in 1997. That number is expected to decline even further in the next decade. The decline in the number of banks has been accompanied by a substantial increase in the share of total banking assets controlled by the largest banking organizations. Nearly seventy-five percent of domestic banking assets are held by the 100 largest banks. The top five banks hold twenty-five percent of the assets, and the top ten banks hold thirty-three percent. The new BankAmerica will control 8 percent of all U.S. bank deposits.
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Consolidation May Be Unhealthy for Consumers.
Competition should yield many benefits for consumers: lower prices, increased innovation, better service, quality, and variety. But failure to apply and enforce antitrust laws designed to promote competition would be devastating for consumers' pocketbooks. Consumers are already feeling ''bounced'' by the merger wave:(see footnote 37)
Bigger banks charge higher fees,(see footnote 38) and more of them.(see footnote 39)
Large banks require higher minimum balances to avoid fees.(see footnote 40)
Customers complain about dwindling services.(see footnote 41)
The wide array of products and services being offered could lead to confusion for consumers and coercive practices. Consumers' life savings are at risk if they are not informed of the risks of products being sold, misled into believing a product is federally insured, or convinced to buy a product they don't need or can't afford.
Nationwide consolidation of the banking industry also intensifies the risks borne by deposit insurance and ultimately by U.S. taxpayers, as the merged banks become ''too big to fail.''(i.e., allowing an enormous bank to fail would ''cost'' more for the economy than a taxpayer bailout of the bank).
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Given consumer concerns about the impact mergers could have on fees, quality of service, and market power, the Federal Reserve Board (which has primary authority over approving mergers involving bank holding companies) should take strong action to ensure the public interest is served by the mergers and the convenience and needs of consumers are met, as required under the Bank Holding Company Act.(see footnote 42)
Regulatory Interpretation of Antitrust Laws Lenient on Bank Mergers
Application of antitrust laws to bank mergers have been less than effective in addressing competitive and consumer fears. Consumers Union is concerned that overly permissive exceptions to traditional antitrust analysis are leading to a dangerous pattern of banking consolidation that could raise prices for consumers. These exceptions are contained in overly generous merger guidelines, relied on by the Board, and issued by the Justice Department.
The guidelines state that a banking merger resulting in an increase in the market concentration above a certain level (as measured by the Herfindahl-Hirschman Index (HHI)) in a given market may be subject to challenge on antitrust grounds. The levels for banking are more lenient than for other industries to account for competition from nonbank financial service providers, such as finance companies and credit unions. In addition, the Board includes 50 percent of the deposits held by nonbank thrift institutions in a market when making this calculation. Mergers violating these guidelines are frequently approved, often because of the presence of some other factor determined by the regulators, such as potential competition from other types of financial institutions. These tolerances have been criticized as going to far, and thereby potentially underestimating the market power of the merging institutions.(see footnote 43)
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The Bank Holding Company Act sets concentration limits for total amount of deposits of insured depository institutions at ten percent nationwide and thirty percent for a state. States are allowed to set limits on the percentage of the total amount of deposits of institutions in the state.(see footnote 44)
A study by Board staff concluded that ''it does not appear that the antitrust laws are a significant impediment to consolidation in the banking industry'' as currently implemented under the Department of Justice Merger Guidelines.(see footnote 45) In fact, the banking system could theoretically have as few as six banks.(see footnote 46) Yet, antitrust issues, such as market concentration, exercise of market power, and restrictions on entry, with resulting effects on competition, raise significant concerns.(see footnote 47) It is not because there are no antitrust concerns, but because of the way the antitrust laws are interpreted under the Merger Guidelines, that antitrust laws may be less effective when it comes to bank mergers as opposed to other industries.(see footnote 48)
The Merger Guidelines allow predicted efficiencies to be balanced against the anticompetitive effects of a merger. Yet, there is mixed evidence that any efficiencies exist at all.(see footnote 49) Even where there is risk of monopoly, the Justice Department's guidelines permit mergers that could have operating efficiencies. If, as the studies show, efficiencies do not exist, allowing a merger between two competitors to move forward may lead to a loss of competition. If efficiencies do not exist, there may be pressure from shareholders to make up for losses, resulting in higher fees charged to consumers. On the other hand, if efficiencies do exist, consumers should receive some significant benefit from the cost savings.(see footnote 50)
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One way to address the concern about inadequate antitrust enforcement is to reassess how mergers are analyzed. For example, perhaps the Board should be exploring why, instead of merging, these already large banks are not competing. Would the marketplace be better served if the merging firm entered by internal expansion or by a ''toehold'' acquisition of a small existing competitor in that market? An acquisition by the probable entrant of a leading firm in the market would diminish the chance of a future entry that might increase competition in the market. In the current merger climate, analysis of potential competition should be given greater weight in antitrust review.(see footnote 51)
Consumers Can Be Harmed by Increasing Market Power.
The ability of firms to exercise market power by setting inflated prices harms consumers. Many banking markets are already highly concentrated, including both metropolitan and rural markets.(see footnote 52)
A recent study examined the price effects of bank mergers that substantially increased local market concentration found that deposit rates declined after the merger by local market rivals.(see footnote 53) The study concluded that there was evidence that these mergers led to increased market power.
There is also some research which suggests that there are barriers to entry in retail banking markets. That research also found that any possible public benefit from bank mergers in the aggregate may be offset by adverse effects on competition.(see footnote 54)
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Congress has Given the Board a Mandate to Act in the Public Interest and Ensure Mergers Meet the Convenience and Needs of Consumers.
In analyzing the competitive aspect of a merger, the Board is to consider the effect on the public interest. A merger is not to be approved unless the agency ''finds that the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.''(see footnote 55)
The legislative history of the Act is clear in showing that Congress gave specific and unique authority to the Board ''to measure whether each application should be granted or denied in the public interest.''(see footnote 56) Moreover, Congress specifically noted that:
The factors required to be taken into consideration by the Federal Reserve Board under this bill also require contemplation of the prevention of undue concentration of control in the banking field to the detriment of public interest and the encouragement of competition in banking. It is the lack of any effective requirement of this nature in present Federal laws which has led your committee to the conviction that legislation such as that contained in this bill is needed.(see footnote 57)
The Board should reassert its role in rejecting mergers that are not in the public interest and that fail to meet the convenience and needs of the community. At a minimum, the Board can ensure that merging banks:
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Meet the Financial Needs of Consumers and Communities: The Board must assess how merging banks serve the communities in which they operate or sell products. Greater commitment to communities should be a condition of any approval.
Provide Affordable Bank Services: Despite record profits in the banking industry, nearing $60 billion last year, banks continue to charge higher fees. Banks should be required to provide low-cost basic banking to all their customers throughout the country.
Protect against abusive and deceptive sales practices: While ''one-stop shopping'' and cross-selling are touted as the answer to consumers' financial needs, consumers may be in danger of being misled and deceived into losing their life savings or pressured into buying overpriced products they do not need or want. To help ensure consumers derive benefit from one-stop shopping, companies should be required to comply with a package of consumer protections, including: protections against confusion over products; privacy protections; suitability standards; protections against high pressure sales tactics; and a redress mechanism for people to recover losses.
Pass on Cost Savings to Consumers: A share of the cost savings generated through any of the touted efficiencies should be passed on to consumers through lower fees or at least a moratorium on increasing fees charged by banks.
Investing in Communities: Merging banks should help meet the financial services needs of communities. The bank affiliates should make Community Reinvestment Act (CRA) commitments involving specific programs and dollar goals to the communities. Just as banks must comply with the CRA, the insurance and securities business should be responsible to the communities in which they operate.
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Other Issues:
FTC Jurisdiction: H.R. 10 retained most of the existing structure related to the antitrust review of bank mergers. The bill clarifies that the Federal Trade Commission (FTC) has jurisdiction over bank and nonbank mergers. Bank regulators are required to notify and share data on mergers involving nonbank activities.(see footnote 58) The FTC should have this authority to assess, investigate and take action when there are unfair and deceptive practices in any affiliate. As banks consolidate with other financial services entities the risk for consumers from anti-competitive practices is great. This is important because the FTC has the authority to address ''anti-competitive'' practices harmful to consumers that may not otherwise be covered by antitrust laws.
Ensure Competition and Access for All Bank Services: The Department of Justice is investigating certain exclusionary practices that involve the credit card industry. Rules imposed by VISA and MasterCard on financial institutions that limit their ability to issue other cards may create serious barriers to competition and cause harm to consumers.(see footnote 59) Congress should ensure that mergers involving major banks such as Citicorp, or BancOne, major issuers of VISA and MasterCard, in no way harms the expansion of competition in the credit card business. Concerns have also been raised about the effect of the mergers on the control of the ATM network.
Too Big To Fail: Regulators have indicated that they would take extraordinary steps in response to the failure of a very large bank, including full protection for uninsured depositors, creditors, and suppliers of funds to the bank's holding company, even shareholders, without regard to the cost to the FDIC. This practice became known as ''too-big-to-fail.'' There is a fear that the large institutions created by these mergers will exacerbate the ''too big to fail'' doctrine, should one of the merged companies fail, prompting a bailout.(see footnote 60) Additionally, there is concern that too much government protection encourages banks to shift funds into riskier practices.(see footnote 61)
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Banking and Commerce: Permitting banking and industrial firms to merge could lead to a huge concentration of economic power. Rather than promoting increased competition, this would allow consolidation across markets. Such economic consolidation is likely to lead to inflated prices and diminished innovation. Concentration of economic power could have a disastrous impact on the economy if decisions affecting banks were made by a few commercial entities or if the financial condition of those entities weakened. Many argue that the ''basket approach'' will prevent excessive concentration of economic power.
Mixing banking and commerce also give banks that extend credit an incentive to make credit decisions based on what is good for affiliated businesses rather than what is creditworthy. Banks could deny credit to competitor of their commercial entities, hoping to gain an advantage in the market. For consumers and small businesses, this may make it difficult for them to get loans if they are not part of the bank's overall business strategy. Moreover, consumers may feel the effects when businesses in their areas close and concentration of ownership increases, forcing consumers to pay higher prices or limiting consumer choice in the marketplace.
Conclusion
The rapid changes and ongoing consolidation in the financial services industry gives cause for concern if banking regulators fail to adequately assess the effect that consolidation will have on consumers. Failure to fully assess how a merger impacts competition may allow firms to gain market power. Congress should ensure, in the face of the changing financial marketplace, that consumers are protected.
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Mr. HYDE. Lastly, again certainly not in the quality of presentation, Professor Brock.
STATEMENT OF JAMES W. BROCK, MOECKEL PROFESSOR OF ECONOMICS, MIAMI UNIVERSITY
Mr. BROCK. Thank you very much, Mr. Chairman. Thank you for inviting me to be here today as well. The views I express today are my own. I represent no person, organization nor interest other than myself.
Mr. Chairman, quite frankly, I came here thinking there was one big problem in banking, but after listening to the first panel, I have decided there are two big problems in banking, and I would like to address that as I go along here briefly.
As I listened to the first panel, I think it is fortunate they do not serve on the Federal Emergency Management Administration because they might be dispatched to a tornado site and, finding a blade of grass still standing, would conclude everything was perfectly fine. And I do not mean to make light of the people in South Dakota who have suffered from tornadoes.
There is an incredible consolidation movement taking place in banking. There is no questioning that. It exists. It is unprecedented in magnitude. I am not going to bore you with the details. Let me give you a couple of comparisons.
The Citicorp-Travelers combination represents a combination of assets almost four times larger than the assets of General Motors or Ford Motor Company and some seven times larger than the assets of Exxon Petroleum Company. That is the magnitude of the consolidation that is taking place here. And it is a highly concentrated field. We have heard a lot of hand-wringing here about, oh, gee, if we knew this and we knew that. The fact is that the 10 largest banks account for 34 percent of all bank assets in the United States right now, and the 25 largest, which their presidents could easily fit around this table, account for two-thirds of all the banking assets in the United States. That is a very high level of concentration in my book. And the magnitude of these mergers pose, I think, four very serious problems that warrant your attention.
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First, they are anticompetitive, and this is not theoretical. We see the evidence all around us, and it has been touched on by the other panelists that preceded me here. Higher interest rates charged for loans. Lower interest rates paid on deposits. Declining interest in serving the financial needs of businesses other than the Fortune 500 and individual consumers. Sharply rising fees conventionally charged for various services, such as checking accounts. And the unilateral imposition of a plethora of new fees, which, according to some trade reports, have more than doubled during the current decade, including the infamous ''talk to a teller and pay'' fee that you mentioned earlier.
Beyond this, the giant financial conglomerates that are being put together pose a variety of unique anticompetitive problems in their own right: their capacity to cross-subsidize operations in one field with profits and funds drawn from another, their capacity to engage in reciprocal dealing and privileges with suppliers, their capacity to tie the provision of one service to the purchase of other services.
Some concern has been raised about whether it matters if one bank is in California and another is in Florida. It matters a great deal. It seems to me it defeats the whole purpose of financial deregulation to allow the largest entities to merge together in the hopes that they will compete after you deregulate. It seems pointless to me.
These kinds of problems are not captured by focusing solely on the question of narrow overlaps of merged operations in narrowly-defined, relevant markets. The Justice Department boasted about its antitrust enforcement. In the case of the NationsBank-Barnett bank merger, the Justice Department forced the merged entity to divest 1.4 percent of the combined assets, and now it seems to boast about that as some kind of achievement. I would think that would be a shameful sort of thing.
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We hear about the role of foreign competition, yet yesterday it was announced that the Travelers Company has bought a 20-percent interest in Nikko Securities in Japan. So there goes that potential foreign competition.
The evidence is that beyond a certain size—I don't care whether Governor Meyer looks at it in the 1990's, the 1980's, the 1970's, the 1960's, or the 1950's—there are no discernible, observable economies of large scale on the magnitude of the scale that we are seeing here. In fact, a variety of publications, such revolutionary publications as Barron's, have argued that these mergers do not make sense.
The third problem, Mr. Chairman, is there is a huge opportunity cost to all of this. It is not costless. The money, the funds, the time, the energy that is being devoted to mergers is not being devoted to other things; it is not being plowed into the industrial base of the country; it is not being used to buy research and development to build new plants, to put new production methods into those plants. It is simply shuffling paper shares of ownership to what already exists rather than creating new productive capacity.
Finally, there is, in my opinion, a serious too-big-to-fail problem that is being built up here. Mr. Chairman, in the mid-1980's, Continental Illinois Bank had to be bailed out because it was considered too large to be allowed to fail. At that time, its assets were $40 billion. Compare that with the magnitude of the assets being merged together today, and you see the expanding list of too-big-to-fail situations or bailouts that we are building up for ourselves.
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Indeed, seven of the eight largest banks, Mr. Chairman, are in Japan, as are seven of the eight largest banking problems in the world and seven of the eight largest bailouts of the financial sector. And I think that is something that merits consideration.
So, in conclusion, as you contemplate megamergers in banking, Mr. Chairman, I would invite you and your colleagues to recall Lenin's admiration of financial consolidation and organizational giantism. A century ago he believed that consolidation of banks would provide advantages for the whole people. The benefits, he said, would be enormous; the savings would be gigantic.
It is bizarre to me, Mr. Chairman, that this failed Leninist-Stalinist vision should be repudiated by the formerly Communist countries only to be resuscitated in the hallowed halls of Wall Street. Perhaps, Mr. Chairman, it is time to call a halt to the Sovietization of American finance; and perhaps it is time to reengineer the antitrust agencies, which seem incapable of comprehending the issue, much less addressing it.
Thank you.
Mr. HYDE. Thank you very much, Professor.
[The prepared statement of Mr. Brock follows:]
PREPARED STATEMENT OF JAMES W. BROCK, MOECKEL PROFESSOR OF ECONOMICS, MIAMI UNIVERSITY
Mr. Chairman, Members of the Committee:
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I thank you for the privilege of being invited to testify before the Committee, and commend you for scheduling this important series of hearings examining the magnitude and consequences of mergers and concentration in key sectors of the American economy.
My testimony today, on the topic of banking mergers, is drawn from my study of the field, as well as a number of my publications addressing the issues of mergers, market power and antitrust policy more generally, including The Bigness Complex (1986), Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street (1989), Antitrust Economics on Trial: A Dialogue on the New Laissez-Faire (1991), and The Structure of American Industry (1995)—all co-authored with Walter Adams, Distinguished Professor of Economics and Past President, Michigan State University.
The views I express are my own; I represent no person, organization or interest other than myself.
I. DIMENSIONS OF MERGER-MANIA IN BANKING
As the Committee is well aware, the American economy is ensnarled in an epic merger mania. In 1997, a record $1 trillion of mergers and acquisitions occurred, with 1998 on pace to shatter even that unprecedented total. To put this magnitude in context, there are only seven nations in the world whose gross national product exceeds $1 trillion; it is an amount roughly equal to the GNP of nations like Italy and Great Britain.
Banking is caught up in this merger fever. In fact, financial firms have been in the forefront of the merger and consolidation movement for two decades: In the 1980-1994 period, more than 6,300 bank mergers were recorded, involving nearly 80 percent of all domestic U.S. banking assets.(see footnote 62) The bulk of this consolidation has been engineered primarily by the nation's very biggest banks: The twenty-five largest banks accounted for nearly one-half of all bank assets acquired over the 1980-1994 period.(see footnote 63)
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More recently, the magnitude and pace of financial merger-mania has accelerated sharply: The value of mergers and acquisitions involving U.S. banking firms has leaped 166 percent over the past four years, rising from $70 billion in 1995, to $123 billion in 1996, and reaching $186 billion in 1997.(see footnote 64) As Table 1 shows, eight of the ten very biggest financial mergers in American history have occurred just in the past year and a half.
The tremendous concentration of power and control over financial resources cumulatively resulting from this succession of ever-larger combinations is apparent in Chart 1, which traces the merger-based evolution of this emerging money trust.
CHART 1—MERGER-BASED GROWTH OF BANKING GIANTS
58762c.eps
Source: Business Week, Apr. 27, 1998, p. 35.
At the same time, the number of banks in the country has dropped by more than a third since 1980.(see footnote 65) And while some 9,000 banking firms remain in operation, the level of concentration in the field is high and rising: The 25 largest banks currently control more than half of the nation's total commercial banking assets, with the largest 50 together controlling 66 percent. Concentration of banking within individual states is even higher, as Table 2 shows.
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II. DANGERS OF MERGER-MANIA IN BANKING
Is this massive financial merger-mania cause for jubilation? Is it the price we must pay to obtain economies, efficiencies, and greater global competitiveness for America in the new millenium—not only in banking, but throughout an economy dependent on the lifeblood of financial capital? Is it, at worst, merely a benign phenomenon offering the nation the chance for great gains but without any problematic downside risk?
Regrettably, experience and the evidence strongly suggest the contrary, on at least four important grounds:
1. Anticompetitive Consequences. As market concentration rises, and as fewer financial firms collectively control larger shares of markets, the vigor of competition declines and the discipline of the competitive marketplace is subverted. The reason, as one bank analyst candidly confides, is that ''Oligopolies are a wonderful form of business for banks. . . . You can control your deposit prices and leverage your market share.''(see footnote 66) Another analyst urges that ''the key motivation for mergers and acquisitions among banks is, or at least should be, exerting more control over pricing of financial services offerings.''(see footnote 67)
''Fortune 500'' firms can, of course, shop the globe for their financial needs. And individual consumers can choose from among thousands of mutual funds in investing their personal funds. But the vast majority of consumers and American businesses are far more dependent on local markets for the bulk of their banking needs, and, thus, they are more easily exploited as financial consolidation constricts the competitive options from which they can choose.
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Under these circumstances, the consequences of high—and rising—concentration in banking are predictable and observable on a variety of fronts: Higher interest rates for loans;(see footnote 68) lower interest rates paid on deposits;(see footnote 69) declining interest in serving the financial needs of smaller businesses and individual consumers;(see footnote 70) sharply rising fees conventionally charged for various services (such as checking accounts(see footnote 71) and the use of automated teller machines(see footnote 72)); and the unilateral imposition of a plethora of new fees which, according to industry trade reports, have more than doubled during the current decade.
Beyond this, the giant financial conglomerates that are being merged together can undermine competition in a variety of additional ways that are divorced from competitive merit in any meaningful sense:(see footnote 73) By virtue of their ''deep pockets'' the banking behemoths can outbid, outspend and outlose their smaller, more specialized financial rivals by utilizing profits and resources drawn from less competitive segments and regions to cross-subsidize their expansionary campaigns in other areas. By engaging in various forms of reciprocal dealing, they can exploit the economic leverage of their massive buying power to compel suppliers to patronize their financial services side. In a closely related vein, they can leverage their size in one field in order to enhance their position in other fields by tying the provision of one service to the client's purchase of other services.(see footnote 74) And as fewer, larger financial firms stake out dominant positions in particular geographic and service product lines, they become superpowers versed in the art of peaceful coexistence and respect for the status quo.
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Mergers between banks with operations located in different geographic regions also undermine the central goal of deregulation efforts to break down artificial barriers to competition. Particularly when the merging banks are large and well-known, these trans-geographic and trans-service consolidations enable merging firms to eliminate their most likely potential competitors. Put differently, it is futile to undertake the enormous effort required to reduce regulatory barriers to competition in financial services if the most important potential competitors merge together in advance.
Finally, it is important to emphasize that these latter, larger anticompetitive problems are not captured by focusing solely on the question of overlaps of merged operations in narrowly-defined ''relevant markets''. Nor are they addressed by antitrust settlements requiring merging financial giants to spin off relatively inconsequential operations where a few such overlaps might be found.(see footnote 75)
In the $16.6 billion CoreStates/First Union merger, the number of branch offices ordered divested by Justice represented 1.3 percent of total number of offices being merged. Department of Justice, Press Release, ''Justice Department Approves First Union/CoreStates Merger After Parties Agree to $1.1 Billion Divestiture in Pennsylvania,'' Apr. 10, 1998.
2. Adverse Impact on Economic Performance. Remarkably, the overwhelming weight of the evidence from a mountain of statistical studies fails to support the grandiose claims concerning the benefits alleged to flow from big bank mergers. There is no credible evidence that financial mega-mergers are being forced by the dictates of technology or by any autonomous economies of even greater scale.
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To the contrary, whether analyzed in terms of various measures of profitability, or in terms of various measures of costs and expense ratios, or in terms of the performance of stock prices before and after merger, the overwhelming weight of the evidence suggests that mega-mergers fail to improve the economic performance of the merged entities. Instead, more often than not, the weight of the evidence strongly suggests that mega-mergers and excessive organizational size tend to undermine good economic performance. As summarized by one of the nation's leading students of the field, ''evidence from studies of the economies of scale and scope, the effects of mergers, the relative growth and market share gains of large and small banks, and the adoption of electronic technology does not indicate that there are scale economies or any other operating imperative requiring large size for success in the community banking industry.''(see footnote 76) In fact, the very biggest banks typically exhibit less efficiency, higher operating cost ratios, and lower profitability.(see footnote 77)
Of special significance are the results of a recent study of the stock price performance of big bank mergers undertaken by the financial analysis firm Keefe, Bruyette & Woods. Examining the eight largest bank mergers occurring in 1995, this study finds that, three years later, the ''Class of '95'' performed miserably: Six of the eight largest merged banks underperformed an index of bank stocks generally, with three of them falling short by 40 percent or more; the very best of the ''superior'' performers turned in stock price gains only 1.3 and 0.1 percent better than the average for all banks.(see footnote 78) Obviously, mega-mergers in the financial sector have failed to meet the stock market test of success.
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Rather than delivering better services more efficiently, bank mega-mergers seem to generate lower-quality, higher-cost services, as the elephantine organizational structures being created succumb to the inefficiencies of excessive size—misplaced deposits, good checks mistakenly bounced, funds incorrectly withdrawn from some accounts and put into others, more and longer automated phone messages for customers, a babel of computers incapable of communicating—in short, all the hallmarks of the diseconomies of excessive scale.(see footnote 79)
Banks and financial firms are not unique in this respect. Instead, evidence of the adverse impact of mega-mergers on economic performance is found for American industry generally. See Walter Adams and James W. Brock, Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street (1989).
The debacles following the Union Pacific Railroad's acquisition of the Southern Pacific Railroad, and those stemming from Boeing's acquisition of McDonnell Douglas and the defense and aerospace operations of Rockwell, are the latest manifestations of the problem.
In the former case, the firm's president declared at the time of the merger that the Union Pacific/Southern Pacific combination would produce ''improvements that truly deserve the term 'unprecedented'.'' So far, the merger's only ''unprecedented'' result has been massive congestion tying up rail traffic throughout a large portion of the continental United States. See Peter Coy, ''The Antitrust Cops Should Ride the Rails,'' Business Week, Mar. 2, 1998, p. 48, and Brien O'Reilly, ''The Wreck of the Union Pacific,'' Fortune, Mar. 30, 1998, pp. 102.
In Boeing's case, the firm suffered its first financial loss in a half century following its latest acquisitions, and its chief executive concedes that the mergers distracted too much attention from Boeing's own operations. See Frederic M. Biddle and John Helyar, ''Behind Boeing's Woes,'' Wall Street Journal, Apr. 24, 1998, p. 1.
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In fact, the debilities of giantism in financial services are a matter of general recognition, with objective experts suggesting that it may be ''Time to Break Up the Banking Behemoths.''(see footnote 80) Or as Barron's puts it in assessing Citicorp's $80 billion merger with Travelers, ''if the history of mergers is any guide, the smart thing for Citicorp shareholders to do may be to sell immediately, or shortly after the Travelers deal is completed''(see footnote 81)—hardly a stirring testimonial to the enduring benefits of mega-mergers.
3. The Opportunity Cost of Merger-Mania. Merger-mania also inflicts an immense opportunity cost on the nation.(see footnote 82)
The time, energy, attention and multi-billion dollar sums being devoted to mergers and acquisitions are, at the same time, energy, effort and multi-billions of dollars not being invested directly into the nation's economic base. They are scarce resources not being invested directly in the research and development of genuinely new products and services. They are human and financial resources not being invested directly in the construction of new plant and equipment. And they are time, energy and billions of dollars not being invested directly in constructing new state-of-the-art production techniques—much less addressing the daunting ''Year 2000'' computer problems faced most prominently by the nation's financial firms.
Put more concretely, the $1 trillion spent on mergers and acquisitions last year is roughly twice the amount spent on research and development by all of American industry ($113 billion) plus the combined net new investment by all American firms ($432 billion) in the 1996-1997 period.(see footnote 83) The $123 billion spent on banking and financial mergers in 1996 is four times greater than the total amount spent on all basic research ($30 billion) in the United States by government and business in the same year.(see footnote 84)
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Instead of being invested in the kind of creative capitalism that enhances the real wealth of the nation, these multi-billion dollar sums—and the energy, attention, effort and talent behind them—are being devoted to the economically sterile game of reshuffling paper ownership shares of organizations and operations that already exist.
4. Government Bailouts and the ''Too Big To Fail'' Problem. The financial bigness complexes being created by these mega-mergers subverts the discipline of the private enterprise system in an even more fundamental way, by rendering society increasingly vulnerable to a government bailout problem of growing proportions.
Once any organization is allowed to attain disproportionately large size, its fortunes unavoidably reverberate throughout the economy. Once any organization attains disproportionately large size, its private mistakes and errors become public catastrophes. As Lockheed and Chrysler show, once corporations are allowed to become disportionately large, they are considered too big, too important and too influential to be allowed to fail.
Then, society becomes a hostage to bigness. And when corporate bigness complexes manage their way into trouble, they do not meekly sacrifice themselves on the altar of private enterprise. Instead, they assault Washington and confront a democratic, private enterprise society with an intractable dilemma: (a) Rescue corporate giants from the consequences of their self-inflicted injuries, thereby subverting the essential discipline of a competitive, free enterprise economy; or (b) allow ailing giants to fail, thereby inflicting possibly catastrophic consequences on society while, at the same time, rendering government less accountable to the concerns and fate of the citizenry. The ''flunk insurance'' accorded giant firms produces ''reverse'' economic Darwinism—giant firms survive, not because they're better but because they're bigger—not because they're fitter, but because they're fatter.(see footnote 85)
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The problem is especially acute in the financial sector, where firms not only control the financial lifeblood of the entire economy, but where they repeatedly have demanded—and obtained—multi-billion dollar government bailouts from the consequences of their own decisions: Continental Illinois in the mid-1980s (Continental's assets of $40 billion at the time pale in comparison with the assets of the behemoths being merged together today); bad loans made by the biggest banks to third-world and developing countries, including Mexico; and most recently, the big banks' exhuberance in pouring their funds into risky East Asian ventures. In each of these cases, the American government—and the American taxpayer—have been forced to contribute billions to rescue financial giants from the adverse consequences of their own actions.
Mega-mergers, of course, exacerbate the magnitude of this bailout dilemma. In fact, some experts estimate that the number of American banks too big to be allowed to fail has doubled over the past decade(see footnote 86)—a list that grows with each announcement of a new record-breaking merger among banking firms.
In this connection, it is relevant to note that a listing of the world's very biggest banks (Table 3) reveals the majority of them to be headquartered in Japan—which also is the location of the developed world's biggest banking problems and the biggest challenge in bailing out collapsing financial giants.
These facts are not coincidental. Big organizations, like all organizations, make mistakes. None are infallible. The crucial difference is that because of their disproportionate size and impact, the mistakes made by giant firms are also disproportionately large and, as a result, pose equally large problems for an entire society, including its elected representatives in government.
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III. CONCLUSION
In examining mega-mergers in banking, Mr. Chairman, I invite you and your colleagues to recall V.I. Lenin's admiration of financial consolidation and organizational giantism. A century ago, he devoutly believed that consolidation of banking would provide ''advantages accruing to the whole people.'' He declared—in terms eerily similar to those heard today—that the benefits of financial bigness ''would be enormous. The saving in labour would be gigantic . . . making the use of banks universal, increasing the number of their branches, putting their operations within easier reach,'' and greatly enhancing the ''availability of credit on easy terms for the small owners. . .''(see footnote 87)
Lenin's faith—and that of Stalin—in the virtues of organizational giantism, coupled with their criticism of the competitive market as a duplicative, wasteful and inefficient system, was the foundation on which the centrally planned Soviet economy was built.
It is bizarre, and more than a little incongruous, that that failed delusion has been repudiated by the formerly communist countries, only to be resuscitated in the hallowed halls of Wall Street.
Perhaps it is time to call a halt to the sovietization of the American financial system.
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Mr. HYDE. Let me, before we open for questions, announce that I intend to write several of you a letter with some serious questions seeking additional information. I do not intend to have 1 day's hearing and just take a swipe at this. This is very critical, very important; and we just are looking for answers to some of the questions.
I do not want to carry this hearing on into the evening hours. You all are very busy people, and it would be helpful for you to have time to look at the questions and try to answer them. But we, as a committee, are going to pursue this and try to get some answers to the questions that have been asked. So you will be hearing from us in due course.
Meanwhile, Mr. Conyers.
Mr. CONYERS. Thank you very much, Mr. Chairman. I want to thank the panel. And I would like to ask Messrs. Bennett, Foorman, Roethe, Polking, and Roche how they feel about the comments of Professor Brock and Mr. Torres, Mr. Flory, Mr. McQuillan. We have a great divide here, don't we?
And, Mr. Bennett, you were smiling the most at Professor Brock's dissertation and also the one that imposed the $3 fee for seeing a human being as a teller. So I would like to start with you. And we won't be able to probably ever get people of this magnitude together again.
What advice would you have for Members of the Congress who might be tempted to be swayed by the deep concerns that have been heard here about the merger mania that nobody has mentioned from this side? What do you think?
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Mr. BENNETT. Representative Conyers, I think the first thing I would say as far as my smile at Professor Brock's comments, I have been called a lot of things, but a Leninist is not one of them.
Frankly, much of what is being said on the opposite side of the table is very attractive at a surface level. It is very misleading when you get into the details. Let me give an example.
There is a lot of concern expressed about tying products together. For years and years the banking agencies have had very strict limits on the way in which products can be tied together in a fashion that forces you as a loan customer to necessarily buy something else to get the extension of credit, and those rules are still in existence. So I think those concerns are overwrought.
There is a lot of discussion, too, about these mergers giving rise to institutions that are too big to fail. That is long ago and far away, at least in this sense: Today, having had the experience, frankly, of Continental Illinois, which the professor makes reference to, we have risk-based capital requirements which we did not have in the same sense that we have them now. Banc One pays a staff of 15 full-time Comptroller of the Currency examiners who stay on our site in our facilities throughout the year, and we are undergoing constant examination both by the Office of the Controller with respect to our national banks and by the examiners operating through the Federal Reserve Board.
So I think much of what is said is a little bit misleading, although it is very attractive at its most surface level. I would urge the Congress not to act just because of that invective.
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Mr. CONYERS. Professor Brock, do you apologize for your Leninist comment?
Mr. BROCK. No. I, too, am flattered. I have not been called very attractive for a long time, so I am happy to take that compliment.
Mr. BENNETT. Professor, you and I need to get together after this is over.
Mr. BROCK. The bank bailouts aspect is not just ancient history with Continental Illinois. It seems to me just a few years ago we went through this with the case of Mexico. And I believe that was about a $50 billion special arrangement through the IMF in order to enable Mexico to repay its debts to a number of banks, which included, not limited to, but included, the largest American banks.
Currently we have the same situation going on in East Asia, in the Far East, with what we might call the exuberance with which our largest financial organizations poured funds into countries like Indonesia and Malaysia and Singapore and South Korea, certain, I am sure, that those were sound investments, and that they could not help but succeed, and that they were not risky. But it did not prevent the problem from happening, the financial meltdown that has taken place. And, of course, then they are up to their ears in that whole thing. And then we have the crisis in this country about the IMF being used to bail them out. So I do not think that we have solved the problem. I just don't see it.
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But I do thank you for calling me very attractive.
Mr. CONYERS. Well, let me ask some of you here at the far end of the table about the studies that show that the fees for banking are higher at the big banks than at the smaller banks. And let me bring to your attention that the large bank mergers invariably result in branch closings, leaving lower-income and urban neighborhoods, already poorly served by the banking industry, even more harmfully affected. A Federal Reserve Board study found that large banking companies make very few commercial loans to small business borrowers.
Now, do you consider these consolidations in the banking industry result in reduced small business lending? It seems that it does. What do you think? Because the first panel was noncommittal about the questions that we raised, Mr. Chairman. The second panel here now is almost evenly divided between the first five witnesses assuring us that this is healthy, all is well, mergers are necessary, good, and beneficial, and then the other half of the panel raises very troubling questions, which, as you say, we will not solve this afternoon.
But how do you, Mr. Roethe and Mr. Foorman, Mr. Polking, Mr. Roche, how do you address the concerns that I have raised and the things that you heard from the other half of the panel?
Mr. ROETHE. If I could address that for a moment, Mr. Conyers. With respect to small-business lending, I think you would find that Bank of America and NationsBank are two of the leaders in small-business lending in the United States. Bank of America, prior to the announcement of the merger had made an unprecedented $140 billion commitment to lend to various community groups including small business. Among that $140 billion, $80 billion was to consumer small businesses and government-guaranteed SBA loans.
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Since the merger has been announced, we have increased that commitment to $350 billion. That is more than doubled. If you look at it proportionately, it is greater than the combined would have been for Bank of America and NationsBank.
Mr. CONYERS. I am impressed. I do not have any other figures. You are telling me, and I accept. But have you ever heard of bank red-lining, for real?
Mr. ROETHE. Have I ever heard of it? I certainly know the concept.
Mr. CONYERS. Anybody here at the table not heard of bank red-lining? Okay, everybody has heard of it. But you know what, we have had no mention, not even from the Consumers Union. Nobody is talking about this. It is harder to get a loan. The bigger you get, the harder it is to get loans. And I am going to check your figure, Mr. Roethe.
Mr. ROETHE. Sir, if I could touch on the red-lining issue. If you look at what Bank of America is doing in an inner city such as Los Angeles, where we have the largest, I think, inner-city program of any major bank, we introduced in 1991 what we call our neighborhood advantage program for low-income housing in Los Angeles. We have since made loans of $15 billion under that program.
Mr. CONYERS. Let's stipulate, in the absence of Ms. Waters, that there is no red-lining in Los Angeles. She is going to hear about this.
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Mr. ROETHE. I have had this discourse before with Ms. Waters.
Mr. CONYERS. Oh, you have? Well, you see, the problem is that the bigger these institutions financially get, the less concern. All the studies show that it goes the wrong way in terms of taking care of the little guy. And it is not just banks. It also happens in shipping and transportation and farming. I am glad that there are some wheat farmers around now that farmers are being put in pretty difficult circumstances, at least the family farmers.
So what do you have to say, Mr. Roche? You were the one that led this panel off with the good tidings about mergers.
Mr. ROCHE. Well, I think, sir, these mergers are good. I think they are healthy. If I could give you an example from the Travelers-Citicorp merger. Travelers brings to the group a very significant small loan lender named Commercial Credit. It also brings a very innovative distribution system, PFS, that actually deals with people on a face-to-face basis.
What we think this merger is about is reaching out to people. We want to get more customers, not less. We want to serve customers regardless of their race or creed. And we think that these new distribution channels that are coming together with this merger are one of the ways that we are going to do it.
So I look around and I see, sir, intense competition from nontraditional banking forms. Mutual funds have more assets in the United States than the whole banking system has.
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Mr. CONYERS. Could Mr. Polking and Mr. Foorman just assure me, for the record, that you are anti-bank-red-lining and that you are doing everything in your power along with Mr. Roethe and Mr. Roche to make sure that this does not happen? I just want to get that on the record so when I start checking you out, I will go back to these statements of support for the point I am trying to get to.
Mr. POLKING. Mr. Conyers, on behalf of NationsBank, yes, I think I can assure you that we do not participate in red-lining activities. We have significant commitments to the Community Reinvestment Act. Mr. Roethe just mentioned the combined commitment we have just made to the new Bank of America, the $350 billion, 10-year commitment. Our record, I think, is outstanding. Clearly our Community Reinvestment Act examination record is outstanding. Bank of America's record is outstanding. And we clearly would not have enjoyed that kind of record if we participated in red-lining activities.
Mr. FOORMAN. Congressman, I can also unequivocally assure you that First Chicago NBD Corporation does not, would not, and, as far as I know, has not participated in the practice you referred to as red-lining. And let me just add that we are in constant touch with our community groups on issues of concern to them. We are not just in our communities, we are part of our communities, and we are committed to all parts of our communities. And we do that not just because of the requirements of CRA and the rest of it, because that is the right thing to do.
Mr. CONYERS. I thank you very much, and I thank you, Chairman Hyde.
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Mr. HYDE. Thank you.
The gentleman from Virginia Mr. Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Mr. Roche, can you tell me how the size of the largest banks in the United States compares with the largest banks in Europe and Asia?
Mr. ROCHE. I will be happy to get that information for you, but I do not have it at the tip of my tongue.
Mr. GOODLATTE. Anybody have some general knowledge of that?
Mr. BROCK. Yes, sir, I do. Congressman, in my statement I have table 3 at page 17 that is a list of the 10 largest banks worldwide as of December 1997.
Mr. GOODLATTE. Are any of those U.S. banks?
Mr. BROCK. Not a one, sir.
Mr. GOODLATTE. Not a one.
Do U.S. banks compete with those banks?
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Mr. BROCK. Absolutely. Because 8 of the 10 are in Japan, one is in Hong Kong, and given their condition, I would think they would be easy pickings for American banks right now.
Mr. GOODLATTE. And how do we compare with European banks, which don't even make that list?
Mr. BROCK. There is only one on that list.
Mr. GOODLATTE. And how far down the list do you have to go before you start finding American banks in significant numbers?
Mr. BROCK. I would have to get that information for you Mr. Congressman.
Mr. GOODLATTE. I guess the point is U.S. banks with the biggest customers for credit in the world are in competition with behemoths that are in many instances much larger than our banks; is that not correct? You had the first answer. You get to answer the next one.
Mr. BROCK. Could you repeat it again?
Mr. GOODLATTE. Sure. When our banks are looking to lend money, they are in competition with banks that are much larger than they are and have the ability to put together larger financial packages, so that, in some instances, the largest business deals in the U.S. and elsewhere in the world are often financed by foreign competition because our banks either can't do it or have to reach an agreement with somebody else in order to put that together.
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Mr. BROCK. Congressman, I could not agree with you. I think our bankers are first rate, and I think they are clearly capable of competing on the merits; and I think it is not the size of the organization, it is the performance of the organization that counts.
Mr. GOODLATTE. But the availability of capital is certainly a factor in that; is it not?
Mr. BROCK. Congressman, I would say I would much prefer to see the capital being used to finance those kinds of things rather than to simply shuffle paper shares of ownership. That is to say, rather than Citicorp and Travelers spending $70 billion to marry one another, I would rather see them spend $70 billion lending the money out to the rest of the American economy and firms.
Mr. GOODLATTE. Mr. Roche, do you want to respond to that?
Mr. ROCHE. Well, this is not a cash transaction, as I am sure the professor recognizes. This is a merger for stock. We will be a larger organization, but not in terms of banking business, not in terms of the insurance business, and not in terms of the securities business. We are bringing those things together. It is not about combining two banking organizations for cash.
Mr. GOODLATTE. And would you, Mr. Polking or Mr. Foorman or Mr. Bennett or Mr. McQuillan, have anything to say about the relative size of U.S. banks and their ability to compete with these large foreign banks?
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Mr. FOORMAN. Perhaps I can respond to that, Congressman.
I think you might be interested to know that in our headquarters city of Chicago, two of our largest competitors are owned by large foreign banks, banks which are larger today than Banc One and First Chicago will be after we merge, and the services that they provide in that market are broad and deep, and they have a large capital base behind them and a large technological base behind them with which we have to compete. So it is not just in what we generally think of as the global arena that this makes a difference, it also makes a difference in downtown Chicago and middle-market Chicago.
Mr. GOODLATTE. And does the size of your institution enable you to compete better if you are larger?
Mr. FOORMAN. Based on the experience of our merger 2 1/2 years ago between NBD and First Chicago, we have found strength in that merger, strength through the greater geographic span of our presence, greater diversification, and the greater capital base, yes, sir.
Mr. GOODLATTE. How many banks are there in the United States today? Are there about 10,000?
Mr. BENNETT. Nine thousand plus.
Mr. GOODLATTE. So there is plenty of competition amongst domestic banks as well. But different banks meet different needs; am I not correct in saying that? Certain smaller banks have a much more local flavor and may have in some cases a stronger contact with the community, and they meet a need of consumer and small business lenders. But you also have a need to have large banks with the financial ability to compete with massive foreign competition. When they make a loan in downtown Chicago, the profits derived from that loan are going back to Japan or Germany or someplace else rather than pumped back through the local economy, as is done when you have a major U.S. bank that is based and headquartered in a U.S. city, and the benefits of the profitability of that bank generally will flow locally. Is that not correct, would you say?
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Mr. FOORMAN. Yes, I would not take issue with anything you said.
Mr. HYDE. Would the gentleman yield? I just want to remind the gentleman that his time is up. But I wonder if the gentleman has not heard of smaller banks combining on a big loan? If you have a big deal, it does not mean you have to have a big bank to finance it. It means you can put several banks together who can finance it. So I do not quite think that one follows the other inexorably, that without big banks we will not be able to compete.
Mr. GOODLATTE. Mr. Chairman, if I can reclaim my expired time, I would say, yes, I understand that is exactly the case. But in my conversations with some of the bankers in my district, which are certainly not of the magnitude of some of the banks nationally, they say that that is done, but it is a problem. It is a competitive disadvantage to try to put those deals together relative to having one bank do it.
I am not advocating that we go to having just a handful of banks in this country. But we are a long, long way from doing that and having some very large banks to meet the size of foreign competition, and thousands of other banks that are in there competing with them for all other types of loans and making services available in inner cities and other parts of the country are being met as well, as is that need being met by a whole host of other sources of credit that are not banks. So I think there is a place for all of them.
Mr. HYDE. I am glad to have the gentleman's comment. I thank the gentleman.
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The gentleman from Virginia.
Mr. SCOTT. Thank you, Mr. Chairman.
My question is whether or not there is a critical mass of banks that would provide sufficient competition where more numerous banks would not add to the consumers' advantage through competition? Is there a number of banks in the community—6 banks, 10 banks, 15 banks—where over that number the consumer does not really benefit by additional competition? Anybody want to respond?
Mr. ROETHE. I don't really know that you can say for sure. I think the smaller communities probably do not require as many banks, and it obviously depends on the capitalization of those banks, the number of potential customers within a particular community.
But I think when we are talking in terms of 6-, 7-, 8-, today we do have, as has been mentioned, maybe 10,000 or so banks, and we do have many banks in most communities. This is why the Justice Department and the Federal Reserve look at and analyze these mergers on a community-by-community basis to see if the absence of a particular bank in a particular community is going to make a difference. And where it does, we cooperate, and we divest assets if that is required. I am not sure you can actually put a number to that.
Mr. MCQUILLAN. Congressman, it seems to me, the more players out there the better, as far as the consumer is concerned when it comes to competition. And again, it is very difficult to put a number on it. But certainly whether 14,000 banks was good, or is 9,000 good, or will 3,000 be good, it seems to me that as those numbers get ratcheted down, the customer does not have the opportunity that he or she once had, to go to different banks to get these services. It seems to me as bank numbers are ratcheted down, the consumer probably does not benefit quite as much because they have less banks to select from.
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Mr. MCQUILLAN. I just wanted to respond to the Congressman's comments earlier, real quickly. I don't understand why he was so worried about, you know, playing in the international marketplace. I would respect Mr. Hyde, the chairman's views on that, that we as a small bank certainly participate a lot of our loans. And we don't necessarily want to be the biggest in the world and there is a reason for that. Safety and soundness is very inherent in that, so we do a lot of loan participations and overlines.
I am sorry to get off of the question there, but I wanted to answer. Thank you.
Mr. TORRES. And, Congressman, if I could address this, it might go to some of the bank red lining questions, too, if you bring in the bank closings, the branch closings and the fear that some of the branch closings that may occur as the mergers happen, if those go on in lower and middle income neighborhoods rather than other areas, where the branches may have some overlap, there is a fear of cutting off service to certainly the parts of our community that need access to some of these services the most.
Mr. BROCK. Congressman, I would respond to your question also in terms of emphasizing the shape of the merger and consolidation movement that we are seeing here today. That is, what we are seeing is not primarily small banks joining with one another in order to more equally offset or compete against the very biggest. What we are seeing is the very biggest merging with the very biggest and getting even bigger yet. And as a result, we are exacerbating and aggravating the high degree of concentration in the industry. And let me reemphasize that today the 10 largest banks account for a third of all of banking assets in the United States. The 25 largest together account for some two-thirds of all the banking assets.
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If you look at state by state, the five largest banks typically account for two-thirds to 80 percent of all banking assets in individual States.
Mr. SCOTT. Mr. Roche, did I understand you to say that your view under current law is that the Citibank-Travelers merger is legal?
Mr. ROCHE. Yes, it is. It is.
Mr. SCOTT. And that you do not need the passage of H.R. 10 for that merger to be legal?
Mr. ROCHE. That is correct. We are——
Mr. SCOTT. What is the status of that merger legally?
Mr. ROCHE. Well, as I think you know, Citicorp is being merged into a subsidiary of Travelers. That gives the resulting company, Citigroup, two years to conform its activities to the Bank Holding Company Act and then for three 1-year extensions that the Federal Reserve Board can grant. If during that time the law is not changed, then Citigroup would have to conform its activities to the law.
The area that is of principal interest is the underwriting of insurance, what we call ''manufacturing'' the insurance policies. But this accounts for less than 20 percent of the overall business. It is something that we have closely looked at. We believe that we can distribute insurance policies, whether they are manufactured internally or outside, under present law and can continue to do so with respect to policies manufactured outside beyond 5 years and on into the indefinite future. So we feel comfortable with the legality and the practicality of the situation now.
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Clearly, we would welcome the passage of H.R. 10.
Mr. TORRES. Congressman, if I could comment on that because we have commented on it before, we wonder if the use of this exception in the law, this waiver in the law, with—at least early on in the merger process, kind of an indication that it was based upon an intention to try to get H.R. 10 through, if that is a proper use of the waiver unless there is a real move to divest that. And it seems to me, with the way the marketplace is working today, that now would be a good time to move to divest things under that waiver like it was originally intended to do.
Mr. HYDE. The gentleman from North Carolina, Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman. Let me ask two related questions. First, to the gentleman on this end of the table.
Mr. Brock has in his written presentation a listing of the top 10 banks size-wise in the world. It looks like seven or eight of them are in Japan. Would either of you have any estimate of what dealings, if any, these Japanese banks or these top 10 banks from around the world have in the United States? Are they substantial players in the United States?
Mr. POLKING. Mr. Watt, yes, I would say they absolutely are. We see them every day. We run into them every day in connection with the—in competing for loan transactions for our customers. They are very significant competitors in the United States.
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Mr. WATT. Okay. Now, some of them are having, I presume—I am told that some of them are having problems because of concentration in Japan. By comparison to the United States, what would be the number of banks, smaller banks, in Japan?
Do these banks dominate the banking industry? Do they have 98 percent of the deposits there or is it—would the level of concentration there be essentially equivalent to what we have in the United States?
Mr. POLKING. I don't know precisely, Mr. Watt. But I am certain the concentration in Japan is significantly higher than it is in this country.
Jim, maybe you know.
Mr. ROETHE. No. I think that is the case, but I can't give you any figures.
Mr. WATT. What kinds of things in the United States would these big banks be able to finance that U.S. banks—I mean, you are running into them as competitors, but can you give us some kind of feel, either domestically or globally, the kinds of things they can do that the biggest U.S. banks can't do?
Mr. ROETHE. Well, these big banks do a lot of the things that we do. For example, corporate—lending to large corporates and we are bumping heads with them all over the world with respect to loans to large corporates. They are also involved on the retail side, and particularly in California, they have got fairly aggressive in the retail business and consumer businesses, although they have started to pull back in recent months because of problems that are occurring in Japan. But to the extent that foreign banks are not constrained by Glass-Steagall, to the extent that they have the opportunity to do equity underwritings, which banks in the United States are limited in the ability to do equity underwriting, then they do have an advantage.
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They are not constrained by the kinds of regulatory constraints that are placed upon us, either with respect to securities operations or insurance operations.
Mr. WATT. So basically, you are saying they are doing a lot more of the kind of equity investments than U.S. banks are allowed to do?
Mr. ROETHE. Well, they are certainly allowed to do more and we have—we are very much constrained in our ability to compete and for many years, until recently, have not been doing it at all.
Mr. WATT. Okay.
Mr. BENNETT. I think it is also clear, Representative Watt, that their sources of funding may well be different as they are able in less competitive environments at home to obtain deposits at lower rates. In the City of Columbus, where Banc One hails from, certain debt of the City of Columbus is underwritten by foreign banks because they are able to offer a more favorable rate than any of the locals.
Mr. WATT. Mr. McQuillan, is it troubling in any respect to you that we don't have a competitor on this list from the United States? I mean, shouldn't that be something that we are concerned about in trying to foster, not saying that all banks ought to be big, obviously, but is there something undesirable about that, from your perspective?
Mr. MCQUILLAN. Representative Watt, there are a lot of things that concern me. I represent 5,500 community banks that aren't too concerned about lending in Japan.
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Mr. WATT. I understand that.
Mr. MCQUILLAN. They are worried——
Mr. WATT. But I am asking a more global question than that. And I think you all do a wonderful job and I obviously have been a big supporter of community banks, but when I look at the top 10 banks in the world, size-wise, and I hear that there are things that these banks can do that U.S. banks can't do, then I start to wonder whether that is something that we should be concerned about on the other end of the spectrum, not so much from the community end of the spectrum.
Mr. MCQUILLAN. I guess my concern would be, number one, as you look at those international banks, as indicated by the professor and others, a lot of those banks are having some financial difficulties, as some people have indicated. And if that—that is a big concern to me as a participant in the FDIC fund here in this country, and the taxpayers, I think, have a great concern about that if we allow this in this country.
So how do you regulate something the size of $700 billion? I mean, the first thing the regulators have done in the last panel, that they didn't talk about, is to determine how many of those new specialist regulators they have to go out and hire that understand what these guys do. And I would venture to guess, if you talk to them face-to-face, they probably have no idea of some of the derivative products that are out there. And is there a need for lending and competition around the world? Probably, to keep the other—the Japanese banks, et cetera, honest and so that the customer gets the lowest price for that product.
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But I worry that we would—could easily get into a world that could end up looking like those banks over there. That is what I worry about, bottom line. So I am not worried about competition over there. I sit down every day and worry about my little community and make sure that I can make a loan to the guy down the street, a small business, an ag loan or a hundred dollar loan so they can buy Christmas gifts.
Mr. ROCHE. If I may just add a comment. I think that we are getting a little bit off the track here in talking about absolute size as an indication of something that is either good or bad. It can be helpful. It can be harmful.
I think that from my company's point of view, what we are talking about is a broader expansion of products for both consumers and corporations. I think for the farmers, for the exporters in the United States, this is a global economy. We depend quite heavily in the United States today on exports. Who do you think is going to finance those? Who has the contacts abroad to deal with those?
Citicorp operates in 100 countries. We serve America in that way. We also serve it in the reverse way, because there are companies exporting goods to the United States as well.
We want to be able to help those companies, not just with their banking needs but with their securities needs, if they want to come to market; with their insurance needs. The boundaries are blurring. We are not going to be able to live in a conventional world in which a bank is a bank is a bank. That is not true anymore. What we are looking at is financial services. It is the customer need.
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Put yourself in the position of the consumer, the customer of these services. They do not care what you are called. What they are interested in is what you can do for them. And that is what we are trying to do.
Mr. WATT. Well, I think that is what I am trying to do, too. And, you know, Mr. McQuillan is saying he is putting himself in the position of the local customer, the community customer, and to some extent I guess what I am saying is I am prepared to put myself in that position, but we also have to put ourselves in the position of the customers who are operating internationally.
Mr. HYDE. Before the gentleman's time expires, will the gentleman yield to me?
Mr. WATT. I will be happy to yield, yes.
Mr. HYDE. I agree with you, Mr. Roche, and there is sure a need for that type of bulk in the world market, but the customer needs an alternative when he gets turned down by you.
Mr. ROCHE. Certainly.
Mr. HYDE. And if you have swallowed them all up, he is really up the creek. Isn't he?
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So that is another aspect of the customer's need that may get lost in the shuffle. But in any event, that——
Mr. ROCHE. May I just ask if the professor could substantiate his comment the 10 largest banks control 50 percent of the deposits in the country? That surprises me a great deal. Citibank is the 8th largest bank in the U.S. in terms of domestic deposits and we have less than 2 percent. Something doesn't compute here.
I don't know, perhaps my numbers are wrong, perhaps they are being measured in some other way, but there is something not quite right about that number, and I would ask if someone could really check that and substantiate it, because it could give the committee an incorrect feeling for concentration in the United States.
It is not that. There are many, many alternatives if you get turned down by Citibank.
Mr. BROCK. Well, the point is, we keep hearing the figure that there are 9,000 banks as if every corner in the country had 9,000 banks. That is not the case.
Mr. ROCHE. Of course.
Mr. BROCK. What we are getting is a system that is dominated by a few gargantuan organizations, with a lot of little guys who are dwindling and disappearing in the process.
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Mr. HYDE. Well, this is a debate that could go on, and is very useful and very helpful, but the clock does drive us.
Mr. WATT. Mr. Chairman, I yield back the balance of my time.
Mr. HYDE. I certainly thank the gentleman's courtesy.
The member from Texas, Ms. Jackson Lee.
You are yielding to Mr. Delahunt?
Ms. JACKSON LEE. Yes. He was here ahead of me.
Mr. HYDE. Well, I understand but I have a system in this committee of going by seniority because it is too complicated to find out when someone got here and preceded somebody else. I am a simple person and I like to just go by seniority.
Ms. JACKSON LEE. I understand.
Mr. HYDE. Thank you.
Ms. JACKSON LEE. I just wanted to extend him the courtesy.
Thank you very much, Mr. Chairman. Let me thank you very much for this very important hearing and the very profound panel that has joined us.
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Ms. JACKSON LEE. As I listened to the comments, there are many at the table that I agree with.
Mr. Roche, I do believe that it is the availability of services that is key. When a consumer of any size looks for the kind of service they need, they are looking for the best service. At the same time, I very much agree with my chairman about availability of opportunity, and I thank Mr. Hyde as well for his insight in adding or at least providing some opportunity for review in H.R. 10 in terms of review of certain aspects of mergers in financial institutions.
I happen to have been one that supported the nonfinancial type properties that a bank could engage in, and I guess I say that, Mr. McQuillan, because I know that coming from the State of Texas, where I am very proud to say, looking at Professor Brock's listing here, he has a page that talks about percentages of banking concentration by state, I think Texas has the right kind of balances. He says that the top five banks' share of deposits in the State of Texas is 45 percent. That means that 65 percent is scattered among so many of our other banks. We are a State that has many banks.
And I note, however, in places like Hawaii, 99 percent, and Idaho, 87 percent, New York, 61 percent, so there is sort of a choice made across the country about who dominates and who doesn't. I think a balance is appropriate. But let me—moving on with that premise, I think that we need to live with, all of us, banks that are smaller and large conglomerates, if you will.
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My comment on the 10 largest internationally, I don't find much either sadness because, as I understand, the Japanese banks are filled with real estate portfolios that rise and fall with the market and any minute they are down in the dumps and the next minute they are up. I would rather have something that stays around and can survive.
But I would like to ask any of you banking on the larger end of the scale, to tell me how much of your business is consumer credit business, meaning not the smaller consumer portfolio? And I say that because I recall from some of my banks in Texas that a couple of years ago they said to me we are turning toward the consumer market. I think it was during the downfall of the late eighties, maybe into the nineties. Can you tell me how much of that you have?
Can I also hear from my larger banks about the issue of the Community Reinvestment Act and whether or not you have supported its diminishing or demise or revisions?
I will ask another question so that in case the clock runs. I also have statistics before me that suggest that, in fact, blacks more so, Hispanics less so, but still collective have a difficult time getting mortgages and business loans and in fact have been turned down by the larger banks and may find the smaller banks may be their only hope, but even that is a difficult posture. So I would like to know where you are going on that issue. Even though I know we are talking about oversight on mergers and the antitrust question, it bears on what kind of banking institutions we would like to have.
Mr. McQuillan, if I can follow up with you, in Texas, though I am urban, in Houston, a lot of rural communities and rural banks, and I would like to hear your insight as to why you want to be left alone to do your banking business as you would. Can I start with either Mr. Roethe or Mr. Polking on issues that I started out with?
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Mr. ROETHE. I will address as many as I can. I think on the consumer side, I think that over 50 percent of our business is considered to be retail or consumer. That would include the branches, all the deposit gathering activities and it would include various types of consumer loans, including credit card, mortgages, home mortgages, and other types of consumer lending; second mortgages and auto loans, et cetera. I do believe that that accounts for just over 50 percent of our total operations.
On the CRA question, we have certainly heard people suggest that there ought to be revisions made to CRA. I am not prepared to discuss specifics with you today. We have always indicated our willingness to sit down and talk about revisions to CRA and try to come up with something that makes sense. But I am not sure I can discuss the specifics.
With regard to lending to minorities, we certainly do make an effort to lend to minority groups, including the African American community. And, we have done quite well, I believe, in certain places, particularly in Los Angeles and in the Chicago area, and we have been—we have received some awards in Los Angeles for lending—first mortgage lending to African American groups, and I think if you talk to some of the people at South Shore Bank in the South Shore of Chicago, which is a black-owned bank that we financed and helped create, I think they would say that our record is quite spectacular in that area.
I will have to confess that in some areas it has been more difficult, in some locations it has been more difficult than others but we do continue to reach out.
Ms. JACKSON LEE. Mr. Roche.
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Mr. ROCHE. Well, about half of our business worldwide is consumer, and as I think you probably know, Citibank is the largest credit card issuer in the United States and, as a result, we have an enormous number of relationships with people borrowing on an unsecured basis. That is what a credit card basically is.
I think I would echo Mr. Roethe's comment with respect to CRA. We are happy to sit down with you and talk about the issues to see if there is something more that can be done, but we are certainly trying very hard. Someone made a point earlier, which I thought I would like to address, and that is the provision of technology for poor people, for minorities. And one of the things that we have committed to, as part of our Community Reinvestment Act initiative, is real concentration on education for people in how to use the new technologies; how to become more financially sophisticated; how to use the new things that are going to—that are here already, PC banking and so on.
We opened a very upscale technology-oriented branch in an affluent area of California. We are going to duplicate that in a low income area in the Bronx. And we think that these sorts of initiatives will be very important in making availability of financial products easier and more convenient for all people.
Ms. JACKSON LEE. Mr. Polking.
Mr. POLKING. Well, I would really echo Mr. Roethe on behalf of NationsBank. I really don't know what percentage of our credit business is on the consumer side, but I know it is very, very significant and has increased in the last number of years as we have expanded into the States of Florida and Texas and other States. It is a significant portion of our business.
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As far as the CRA Act is concerned, and do we support the act, we certainly do. We have always been very supportive of it. I think our CRA commitment that we have had in the past and the new commitment that we have announced certainly demonstrates our commitment to that.
With respect to the difficulty in making—or difficulty of African Americans being able to obtain mortgages and other lending products, that is obviously a concern to us. Our ratios of rejections for African Americans, yes, are higher than they are for whites. We think that is significantly caused because of our affirmative steps to go out and seek African Americans to come in and make application for loans. We work on it very hard, and as a result of that, you know, although our rejections are higher than we would like them to be, the volume of mortgage loans that we make to African Americans in most of the markets that we are in are higher than our competitors.
So I think we are doing a good job in that area.
Ms. JACKSON LEE. Mr. McQuillan.
Mr. MCQUILLAN. Thank you.
With respect to your question, left to do what we do best, I think my biggest concern, again, is the risk to the insurance fund as it relates to that particular issue. We are going back to what we really do, and again we lend in our communities and, by the way, we don't have any $3 fees for teller access. We serve our communities very well because we feel it is a partnership. And if we do well, our small communities do well and only then do we do well. That is basically who we serve day in and day out, and it is repeated 5,500 times across this country every day and many times during the day.
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So one of the concerns that I do have as it relates to antitrust that nobody has brought up, that is control of the ATM networks and the electronic highway in this country. I, as a community bank, don't own any ATMs. I am in a very small community. The way I get access for my customers, is to provide them a card through another bank. And obviously there are fees associated with those cards, as my customers access those networks.
Right now, the larger banks control those networks and/or the switches do. As these consolidations go forward, there are going to be fewer and fewer of these switches, and less and less banks involved in that electronic railroad. That concerns me greatly. Right now what happens is when I offer this product to my customer, I am getting assessed a two, two and a half, five dollar fee for them accessing that network. I basically eat that fee so that my customer will stay with me as opposed to going down the road to a larger bank where they say, if you bank with us we won't charge you a fee. So it is being used against us.
I feel it is very unfortunate, and I would hope that the committee looks into that because that is the way the world is moving, at least in my environment. Our younger customers do everything by electronic cards. They don't keep track of anything. They basically plug the card in and hope they get money out of it and if they don't, they call their dad and have them throw some more money in the account.
But right now my customers don't have access for the same price that the big banks' customers do, because we brought those customers to this electronic railroad over the last 15 years and now we are being told that you can have access, but now your customers are going to have to pay for it. It is a big concern of mine. That is where the world is moving. And we feel that it is very critical for our banks to be able to access that for our customers.
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Ms. JACKSON LEE. Thank you, Mr. Chairman.
Thank you.
Mr. HYDE. Thank you. The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Thank you, Mr. Chairman. Let me just extend to the chairman my thanks for this hearing. I think there is a critical need for these kind of oversight hearings into every segment of the economy, not just financial services. I applaud him for his leadership.
Mr. Foorman, as a result of your merger, were there any employees who were furloughed, laid off, downsized?
Mr. FOORMAN. Well, we have—we are in the process of implementing our merger, and those decisions, for the most part, have yet to be made.
What we have said is that we expect that there will be some job loss in some locations.
Mr. DELAHUNT. I have witnessed this in the greater Boston area. It really creates havoc and instability, a morale problem, you know, for employees, and really has a negative impact on people's lives.
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Mr. FOORMAN. Let me speak to our recent experience in the merger between First Chicago and NBD Bank Corp two and a half years ago, and that was that there was job loss. A good amount of it occurred by attrition, over a period of time.
Mr. DELAHUNT. How many layoffs did you have, if you have that from memory?
Mr. FOORMAN. I don't have the figures, but we can certainly provide them to you.
What we found after that, though, was that there was pretty quickly after the merger a growth, a significant growth, in certain of our lines of business and there was also job growth, and in many cases——
Mr. DELAHUNT. Was it a net growth?
Mr. FOORMAN. Yes, it has been more than net growth over the two, two and a half year span of time.
So while we are very——
Mr. DELAHUNT. A net growth between both institutions that were merged?
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Mr. FOORMAN. Correct, in that particular situation.
Mr. DELAHUNT. I am going to interrupt you and I apologize, but I have limited time and my chairman reminds me of my seniority all the time, or lack thereof.
But I just wanted to get to the point too, since I think it was Mr. Goodlatte who brought up the issue about the 10 banks, in terms of size. I think it is fascinating that the 10 on that list, at least the Japanese banks are facing some difficulty.
And, Professor, maybe you can help me with this. To get on that top 10, so to speak, did they go through a merger and consolidation phase similar to what we are seeing or were they just born that way? Or does anybody know that answer?
Mr. BROCK. I can't speak to that in specific, but I want to go back to this top 10 list since it seems to be the culprit here.
Mr. DELAHUNT. Right.
Mr. BROCK. They are the top 10. Seven of the top 10 are Japanese banks.
Mr. DELAHUNT. Right.
Mr. BROCK. It is these Japanese banks that are not merely encountering some difficulties. They confront collapse.
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Mr. DELAHUNT. Right.
Mr. BROCK. This is not a minor glitch.
Mr. DELAHUNT. Well, I mean, this goes to the ''too big to fail'' issue.
Mr. BROCK. My point—but the other side of it is that when you allow consolidation to proceed, and you get yourself in that jam, then the whole society is a hostage really. There is—you have no practical alternative. You——
Mr. DELAHUNT. I concur.
Mr. BROCK. You can throw every one——
Mr. DELAHUNT. I concur with that and I do share that concern, but at the same time, it is my understanding that the 10 banks in this country control 25 percent as opposed to—as opposed to 50 percent.
But let me ask this side of the table, the left side, if you will, at least if you are looking from this vantage point, how would you feel about 50 percent? Would that create a different level of discomfort, given the experience that we are seeing with the top 10 in Japan.
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Mr. ROETHE. Alot has happened with the top 10 list. Not that many years ago, Bank of America was the largest bank in the world and CitiCorp may have enjoyed that distinction at one point in time. And because of the restrictions that were placed upon American banks as far as branching into other States and because of other restrictions, we have slowly seen that erode away to the point where I believe now that only 9 of the top 25 banks are U.S. banks, and that is down from a few years ago. So——
Mr. DELAHUNT. But that really does argue then for the kind of restrictions that have been part of the policy debate regarding H.R. 10. You know, these walls that we are talking about——
Mr. ROETHE. I think it is the walls that have created—it is the walls that have prevented the banks from growing naturally as they would have grown for years.
Mr. DELAHUNT. But my point, Mr. Roethe, and again I am very cognizant of that red light, the chairman looking over my shoulder, the reality is that you are doing very well. I mean, you know, this has been——
Mr. ROETHE. Well, we are——
Mr. DELAHUNT. This has been a boom time for the financial services industry. I mean, I wish I had bought some of your stock.
Mr. ROETHE. Well, you should have. But it is—we are——
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Mr. DELAHUNT. You are safe and you are dependable and you can participate in larger loans.
Mr. ROETHE. Perhaps I can give you one example of why we think it is important for us to get bigger, and why we think it is important to have a certain core number of large big banks. One of the things that Bank of America does is to process checks. It is part of the payments, our payments activities. I think we are the largest check processor in the world outside of the Federal Reserve. We process about 20 million items a day, not just for Bank of America but for many other financial institutions here in the United States and elsewhere.
Now, that payments processing business is going to be changing radically over the next 10, 15 years as we move from paper payments to electronic payments. We view our competitors in the electronic payments world to be Citibank, a few other large banks, only a few, and people like Microsoft and other companies that are developing software that will be used in this activity.
We are putting money into many different electronic ventures in the hopes of being one of the successful ventures in the payments business. Otherwise, we are not going to be a player in payments anymore.
Mr. DELAHUNT. You might not be a player in payments but you are certainly still going to be a player in the traditional concept of banking in America.
Mr. ROETHE. A huge percentage of revenue comes from this payments activity.
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Mr. DELAHUNT. Okay.
Mr. ROETHE. We are basically going to be cut out of a market which has been the core of the banking market—the banking world forever.
Mr. DELAHUNT. Okay. But you know we have a nice number right now, but would you—can anybody on the left side of the table guarantee to me that if all of these mergers are consummated that there won't be a continuing drive toward further mergers? I mean, I think that is really where we are at. I understand that you are all employees and you are here to advocate from your perspective and specifically for your institution.
Let me just conclude with one final question, and I address that to Professor Brock. In your judgment, do you think this is—you said there were two problems, and one is the enforcement problem. And maybe there is a culture out there, and maybe when you are constantly looking at issues on an every day basis, you become part—I don't want to say part of the problem—but you become part of that culture. Is that the problem, or do you feel that Congress, and specifically this committee, should begin to revisit the antitrust laws and related existing statutes to accommodate what is really a changing world, a changing economy, with, you know, the globalization upon us?
That is my last question, Mr. Chairman.
Mr. BROCK. Congressman, I think our problem with antitrust is that it has been accommodated almost out of existence. I would like to see it show some signs of life, and I don't see how we can come up against a merger mania of this magnitude and not be able to see anything on the radar screens at least at the Justice Department and the Federal Reserve System. I think the radar screen needs some work.
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Mr. HYDE. Well, the gentleman's time has expired, and I want to thank him and every member of this committee here and not here for, I think, a very spirited and a very instructive, illuminating hearing, that didn't give us any answers but it helped us formulate questions, and that is halfway to a solution.
We intend to take what you have told us very seriously and to pursue it, and that means we will reach out to you for additional information and try to spare you the physical inconvenience of coming back. But very fundamental questions have been raised here as to the efficacy of our antitrust laws in this situation. This is very consequential. We could be heading toward a new era of prosperity for everybody, or we could be walking off into the abyss. And I think it is our responsibility to study that question and to see whether or not we are doing everything we can from the perspective of the consumer.
Mr. CONYERS. Mr. Chairman.
Mr. HYDE. The individual. Not the banks, not the—not academe but the consumer, and our economy. And I yield to the gentleman from Michigan.
Mr. CONYERS. I would like to thank Chairman Hyde for calling this hearing, because I concur with him that this is extremely important.
I, along with Mr. Delahunt, with whom I have had several conversations about this matter, believe that this is probably the most significant part of our jurisdiction and we would pledge to work with you for further hearings and examinations of the questions that have been touched on today. I thank all of the witnesses for coming.
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Mr. HYDE. You really, every one of you, have been great and I know it is a considerable sacrifice in time and convenience, but you did make a great contribution. Thank you. The committee stands adjourned.
[Whereupon, at 4:45 p.m., the committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
| Independent Bankers Association |
| of America (IBAA), |
| Washington, DC, May 24, 1999. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: On June 3, 1998, the Independent Bankers Association of America (IBAA) testified before the House of Representatives' Committee on the Judiciary regarding the effects of consolidation on the state of competition in the financial services industry and cautioned about declining competition in the credit card industry. Specifically, we noted our concerns that large banks may one day jettison the Visa or MasterCard brands, which community banks rely on for marketing and card acceptance, in favor of a credit card or debit card product they each exclusively own and control. Under such a scenario, we warned, smaller bank issuers will be forced out of the business to the determent of consumers and small businesses alike. Our views have not changed. However, our fears have heightened.
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We have attached the article entitled ''A Credit-Card Revolt At The Banks?'' that appeared in the July 27, 1998, Business Week which states in part that ''for the majority of the banks, these services [Visa and MasterCard] are well worth the price. But now as the card business moves towards a few Goliath banks, the calculus is changing. The top five card-issuing banks—Citibank, MBNA, Bank One/First USA, Chase Manhattan and Household International—have 52% of the business. With their own national brands, marketing budgets and sophisticated processing systems, these megabanks don't need or want much marketing assistance from the associations.''
Visa and MasterCard provide community banks the entry vehicle to provide vital credit card services. Visa and MasterCard are joint ventures that provide systems, marketing and worldwide acceptance. Today Visa prohibits banks that issue Visa from also issuing American Express. The press has reported that the Department of Justice is near a decision that would force Visa to permit banks that now issue Visa or MasterCard to also issue American Express. Such an action could lead to the weakening of Visa and MasterCard as larger banks seek new alliances and become less and less willing to invest in a level playing for others that Visa and MasterCard now provide. Weakening of the card brands will further concentrate the credit card business, leaving both consumers and small businesses, who rely on smaller banks for merchant processing, with fewer choices and higher pricing.
As we noted in our testimony, ''consumers will not only be disadvantaged by choice limits and higher pricing, some will find themselves 'de-marketed' from the card product entirely. With increased consolidation and less competition, large issuers will begin to look for ways to improve profits. For example, some issuers are already 'de-marketing' by eliminating value-added enhancements, changing terms, assessing inactive fees and using other disincentives to discourage transactors, those consumers who pay off their balance each month to avoid finance charges. In addition to simply not offering the card product or raising annual fees, the grace period will be reduced or eliminated as the large card issuers focus on the more profitable revolvers who maintain a balance from month to month and pay finance charges. In Canada today, where only a few large banks exist, most cards carry a high annual fee, $25 to $39, and reduced grace periods, from no grace period to just over 17 to 21 days.''
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We share your concerns about the growing consolidation of the credit card business. Our community banks are working hard to assure that consumers continue to have choices, but without the vital assistance of Visa and MasterCard, their viability will surely be at risk. We stand ready to provide any further information that you may feel helpful. We ask that you share your thoughts with the Department of Justice.
Thank you.
Sincerely,
| Kenneth A. Guenther, Executive Vice President |
58762a.eps
58762b.eps
(Footnote 1 return)
First Union Corporation, Board Order dated April 13, 1998, pp. 17 and 18.
(Footnote 2 return)
NationsBank Corporation, 84 Federal Reserve Bulletin 129 (1998), p. 134.
(Footnote 3 return)
The term ''depository institution'' refers generally to commercial banks, bank holding companies, savings banks, savings and loan associations, savings and loan holding companies, and credit unions.
(Footnote 4 return)
The responsible agency is determined by the type of resulting institution, with the Federal Reserve Board and the Comptroller of the Currency most often involved in the larger banking transactions.
(Footnote 5 return)
Acquisitions by bank holding companies of non-banking activities, while requiring FRB approval, are not subject to the antitrust immunity and automatic stay provisions. Under current law, these non-banking activities are defined by the FRB but must be closely related to banking. Further, acquisitions of financial services companies through a bank's operating subsidiary (''op sub''), instead of through the holding company, do not require OCC approval under the Bank Merger Act and accordingly are subject to HSR filing requirements.
(Footnote 6 return)
U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) 13,104 (April 2, 1992), as amended, April 8, 1997.
(Footnote 7 return)
The written testimony represents the views of the Federal Trade Commission. My oral presentation of the testimony and responses to any questions are my own and do not necessarily represent the views of the Commission or any individual Commissioner.
(Footnote 8 return)
15 U.S.C. §45(a)(2), 46(a).
(Footnote 9 return)
When one bank merges with another bank, jurisdiction is shared by the Antitrust Division of the Justice Department and the federal banking agencies.
(Footnote 10 return)
The FTC retains its general jurisdiction over consolidations involving nonbank firms.
(Footnote 11 return)
First Data Corp., C–3635 (April 8, 1996). First Data and First Financial were also two of the largest participants in the credit card merchant processing business. The Commission conducted an extensive investigation of that market but took no enforcement action respecting it.
(Footnote 12 return)
In addition, the Commission and its staff have examined competition issues in both merger and nonmerger investigations in many other financial services markets and related fields—industries that may well merge or collaborate with banks under the proposed financial services modernization bill, H.R. 10. See, e.g., LandAmerica Financial Group, Inc., C–3808 (May 20, 1998) (real estate title plants); Ticor Title Ins. Co., 112 F.T.C. 344 (1989), aff'd sub nom. Ticor Title Ins. Co. v. FTC, 504 U.S. 621 (1992) (title search and examination services); American General Ins. Co., 97 F.T.C. 339 (1981) (merger of insurance companies); Remarks of Chairman Pitofsky on Competition and Consumer Protection Concerns in the Brave New World of Electronic Money, Department of Treasury Conference on Electronic Money & Banking (Sept. 19, 1996); Comments of Staff of the Bureau of Economics, jointly with the Antitrust Division, to the Commonwealth of Virginia regarding limitations on who may handle closings of real estate purchases and financing, home equity loans, and refinancings (Sept. 20, 1996, and Jan. 3, 1997).
(Footnote 13 return)
These are the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Truth in Lending Act, Consumer Leasing Act, Fair Credit Billing Act, Electronic Fund Transfer Act, Women's Business Ownership Act, Fair Credit and Charge Card Disclosure Act, Home Equity Loan Consumer Protection Act, Competitive Equality Banking Act, and Home Ownership and Equity Protection Act.
(Footnote 14 return)
Citicorp Credit Services, Inc., 116 F.T.C. 87 (1993).
(Footnote 15 return)
United States v. Shawmut Mortgage Co., 3:93CV–2453AVC (D. Conn. Dec. 13, 1993).
(Footnote 16 return)
United States v. J.C. Penney Co., CV964696 (E.D.N.Y. Oct. 8, 1996).
(Footnote 17 return)
Sears, Roebuck and Co., C–3786 (Feb. 27, 1998).
(Footnote 18 return)
Commission staff participates in numerous task forces and groups concerned with, for example, fair lending, leasing, subprime lending, electronic commerce, and commerce on the Internet, all of which have an impact on the financial services industry.
(Footnote 19 return)
The Commission and its staff have provided comments and studies about financial services industries, as well as telecommunications, trucking, electric utilities and other industries undergoing deregulation. Regarding financial services, see, e.g., Testimony of the Commission concerning H.R. 10, before the Subcommittee on Finance and Hazardous Materials, House Commerce Committee, July 17, 1997; Comments of the Staff of the Bureau of Economics to the SEC on Regulations Governing Registration and Reporting Disclosures of Small Business Issuers (1992); Bureau of Economics Staff Report, Minimum Quality Versus Disclosure Regulations: State Regulation of Interstate Open-ended Investment Company and Common Stock Issues (1987).
(Footnote 20 return)
See United States v. Philadelphia National Bank, 374 U.S. 321, 336 n.11 (1963) (''the exclusion of banks from the FTC's jurisdiction appears to have been motivated by the fact that banks were already subject to extensive federal administrative controls'').
(Footnote 21 return)
See Bank Merger Act of 1996, 12 U.S.C. §1828(c); Bank Holding Company Act, 12 U.S.C. §1842–43; and Home Owners' Loan Act, 12 U.S.C. §1467a(e).
(Footnote 22 return)
Time Warner Inc., C–3709 (Mar. 11, 1997).
(Footnote 23 return)
Questar Corp., 2:95CV–1127S (C.D. Utah Dec. 27, 1995) (transaction abandoned).
(Footnote 24 return)
A settlement package includes a crown jewel provision when it requires divestiture of a more valuable asset if the agreed-upon divestiture is not accomplished within a set time period.
(Footnote 25 return)
See Prepared Statement of the FTC on Home Equity Lending Abuses in the Subprime Mortgage Industry, before the Senate Special Committee on Aging (Mar. 16, 1998).
(Footnote 26 return)
For example, in January 1998, the Commission filed a complaint in the United States District Court for the District of Columbia against Capital City Mortgage Corporation, a Washington, DC-area mortgage lender, and its owner, alleging numerous violations of federal laws resulting in serious injury to borrowers, including the loss of their homes. FTC v. Capital City Mortgage Corp., No. 1:98–CV–00237 (D.D.C. filed Jan. 29, 1998).
(Footnote 27 return)
In 1997, the FTC conducted joint law enforcement sessions on home equity fraud with state regulators and law enforcers in six different cities.
(Footnote 28 return)
See, e.g., FTC Facts for Consumers brochures such as ''Home Equity Scams: Borrowers Beware!''; ''Home Equity Loans: The Three Day Cancellation Rule''; ''Reverse Mortgages–Cashing In On Home Ownership.''
(Footnote 29 return)
For example, the Commission and its staff have issued reports describing various consumer privacy concerns in the electronic marketplace. These include FTC Report to Congress: Individual Reference Services, December 1997; FTC Staff Report: Public Workshop on Consumer Privacy on the Global Information Infrastructure, December 1996; FTC Staff Report: Anticipating the 21st Century: Consumer Protection Policy in the New High–Tech, Global Marketplace, May 1996. In addition, the Commission presented testimony on September 18, 1997, on the Implications of Emerging Electronic Payment Systems on Individual Privacy before the Subcommittee on Financial Institutions and Consumer Credit, House Committee on Banking and Financial Services; on March 26, 1998, on Internet Privacy before the Subcommittee on Courts and Intellectual Property, House Committee on the Judiciary; and on May 20, 1998, on Identity Theft before the Subcommittee on Technology, Terrorism and Government Information, Senate Committee on the Judiciary.
(Footnote 30 return)
Under the FCRA, the transactions or experiences between a consumer and a company may be communicated among affiliated companies without restriction. The communication of other information to an affiliate may be made if a disclosure is made to the consumer and the consumer is given the opportunity to direct that the information not be communicated.
(Footnote 31 return)
This report focuses on the effectiveness of self-regulation as a means of protecting consumer privacy online. The Commission summarizes and assesses the findings from its March 1998 comprehensive survey of commercial Web sites. The report also includes the Commission's analysis of existing industry guidelines and principles on the online collection and use of consumers' personal information.
(Footnote 32 return)
The House-passed bill recognizes that continued Commission oversight of mergers and acquisitions in the financial services industries would help to insure that the policies behind the antitrust laws will be effectively applied as those industries undergo sweeping restructuring. Title I, Subtitle E of H.R. 10, titled ''Preservation of FTC Authority,'' is designed to confirm that nonbank companies, even if affiliated with banks, continue to be subject to the FTC's jurisdiction. In particular, Title I, Subtitle E ensures that, in financial holding company mergers, those portions not subject to federal banking agency approval are subject to standard premerger review under the Hart–Scott–Rodino provisions of the Clayton Act. This will assure review by the federal antitrust agencies of the new affiliations permitted under H.R. 10. These provisions will enable the Commission to receive notice of mergers and acquisitions in financial services industries, so that it can take timely enforcement action to protect consumers and competition.
(Footnote 33 return)
I note for the record that I am not the recipient of any federal grant, contract or subcontract funding. Additionally, neither City National Bank nor the IBAA is the recipient of any federal grant, contract or subcontract funding.
(Footnote 34 return)
15 U.S.C. Section 18. Section 7 prohibits mergers or combinations where ''. . . the effect of such acquisition may be to substantially lessen competition, or to tend to create a monopoly.'' Section 7 applies to bank mergers. United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 LED 2d 915 (1963).
(Footnote 35 return)
See, e.g., 2 Von Kalinoski on Antitrust, Section 32.07[1] at 32–64 (1998).
(Footnote 36 return)
Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived form the sale of Consumer Reports, its other publications and form noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports, with approximately 4.5 million paid circulation, regularly carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.
(Footnote 37 return)
''Customers Say Bank Mergers Deal Them Out,'' Washington Post, pg. A 1, April 19, 1998.
(Footnote 38 return)
Big Banks, Bigger Fees: 1997 PIRG Bank Fee Survey, USPIRG, July 1997.
(Footnote 39 return)
''How Good is Your Bank,'' Consumer Reports, March 1996.
(Footnote 40 return)
''Fees for Checking Accounts Vary Widely,'' NY Times, December 25, 1997.
(Footnote 41 return)
''Will Deals Deliver Better Services,'' WSJ, April 14, 1998.
(Footnote 42 return)
Section 3(c)(1)(B)(C) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.)
(Footnote 43 return)
Thomas G. Krattenmaker & Robert Pitofsky, Antitrust Merger Policy and the Reagan Administration, 33 Antitrust Bull. 211 (1988).
(Footnote 44 return)
Section 3(d)(2) of the Bank Holding Company Act.
(Footnote 45 return)
Stephen. Rhoades, Consolidation of the Banking Industry and the Merger Guidelines, 37 Antitrust Bulletin 689 (1992).
(Footnote 46 return)
Rhoades, Consolidation of the Banking Industry and the Merger Guidelines, 37 Antitrust Bulletin 689 (1992).
(Footnote 47 return)
Steven Rhoades, Have Barriers to Entry in Retail Commercial Banking Disappeared?, 43 Antitrust Bulletin 997 (1997).
(Footnote 48 return)
The Merger Guidelines have been described as ''astonishingly cavalier'' in their disregard for the legislative purposes underlying Section 7 of the Clayton Act. For example, they fail to consider as a factor working against a merger whether it would occur in a market that has recently experienced a trend toward increased concentration. The legislative history behind Section 7 leaves no doubt that Congress meant to apply harsher merger standards to such industries. Thomas G. Krattenmaker & Robert Pitofsky, Antitrust Merger Policy and the Reagan Administration, 33 Antitrust Bull. 211 (1988), citing Derek Bok, Section 7 of the Clayton Act and the Merging of Law and Economics, 74 Harv. L. Rev. 226 (1960).
(Footnote 49 return)
Governor Laurence Meyer, of the Federal Reserve Board, testified that Board staff recently examined nine bank mergers that seemed most likely to yield efficiency gains, but only found efficiency gains in four. Furthermore, even Governor Meyer admits that evidence on the relative efficiency of mergers is mixed. See, Testimony of Governor Laurence Meyer before the Committee on Banking and Financial Services, U.S. House of Representatives, April 29, 1998.
(Footnote 50 return)
Joseph Brodley, Proof of Efficiencies in Mergers and Joint Ventures, 64 Antitrust L.J. 575 (1996).
(Footnote 51 return)
Joseph Brodley, Limiting Conglomerate Mergers: the Need for Legislation, 40 Ohio St.L.J. 867 (1979).
(Footnote 52 return)
Steven Rhoades, Competition and Bank Mergers: Directions for Analysis from Available Evidence, 41 Antitrust Bulletin 339 (1996).
(Footnote 53 return)
Prager & Hannan, Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry, Journal of Industrial Economics (forthcoming).
(Footnote 54 return)
Steven Rhoades, Have Barriers to Entry in Retail Commercial Banking Disappeared?, 43 Antitrust Bulletin 997 (1997).
(Footnote 55 return)
Section 3(c)(1) of the Bank Holding Company Act.
(Footnote 56 return)
S.Rep. 1095, 84th Cong. 1st Sess., on the Bank Holding Company Act of 1956 (July 25, 1955).
(Footnote 57 return)
S.Rep. 1095, 84th Cong. 1st Sess., on the Bank Holding Company Act of 1956 (July 25, 1955).
(Footnote 58 return)
Section 141, amending Section 11(b)(1) of the Bank Holding Company Act of 1956, 12 U.S.C. 1849(b)(1).
(Footnote 59 return)
See, March 18, 1997 letter from Consumers Union and Consumer Federation of America to Attorney General Janet Reno.
(Footnote 60 return)
See, Fixing FDICIA: A Plan to Address the Too-Big-To-Fail Problem, Federal Reserve Bank of Minneapolis (1997).
(Footnote 61 return)
This is of particular concern as banks and other institutions target the ''subprime'' market with offers of easy credit and a multitude of credit card solicitations. At the same time, those same institutions are seeking to keep families facing financial crisis from declaring bankruptcy.
(Footnote 62 return)
Board of Governors of the Federal Reserve System, Bank Mergers and Industrywide Structure, 1980–94, Staff Study, Jan. 1996.
(Footnote 63 return)
Ibid.
(Footnote 64 return)
Mergers and Acquisitions magazine, annual merger survey, March/April issues, 1996–1998.
(Footnote 65 return)
U.S. Bureau of the Census, Statistical Abstract of the United States: 1997, Table 785, p. 515, and Katerina Simons and Joanna Stavins, ''Has Antitrust Policy in Banking Become Obsolete?'' Federal Reserve Bank of Boston, New England Economic Review, March/April 1998, p. 13.
(Footnote 66 return)
Racine, ''Minneapolis Seen as Model for Consolidation,'' American Banker, May 25, 1994, p. 20.
(Footnote 67 return)
Matthews, ''The Next Merger? Look at Market Share,'' American Banker, Aug. 10, 1994, p. 20. This and the preceding quotation are cited in Stephen A. Rhoades, Competition and Bank Mergers: Directions for Analysis from Available Evidence, Antitrust Bulletin, Summer 1996, pp. 361–62.
(Footnote 68 return)
For one exhaustive survey, see Leonard W. Weiss, A Review of Concentration-Price Studies in Banking, in Concentration and Price (L. Weiss ed., 1989), pp. 219–54.
(Footnote 69 return)
Allen N. Berger and Timothy H. Hannan, ''The Price-Concentration Relationship in Banking,'' Division of Research and Statistics, Federal Reserve Board, Washington, D.C., April 1988.
(Footnote 70 return)
Stephen E. Frank, ''Consumers Wonder If Deals Will Deliver Better Services,'' Wall Street Journal, Apr. 14, 1998, p. A3.
(Footnote 71 return)
U.S. Public Interest Research Group, ''Banks Think Fees, Not Free,'' Aug. 1995.
(Footnote 72 return)
See ''Mad as Hell at the Cash Machine,'' Business Week, Sept. 15, 1997, p. 124; General Accounting Office, Automated Teller Machines: Survey Results Indicate Banks' Surcharge Fees Have Increased, Apr. 1998.
(Footnote 73 return)
For a detailed exposition of the anticompetitive problems posed by large conglomerate mergers, see Walter Adams and James W. Brock, The Bigness Complex (1987), Chap. 14.
(Footnote 74 return)
See, for example, Money with Strings Attached, Business Week, Dec. 21, 1992, pp. 74–75; and Jeffrey Taylor and Emory Thomas Jr., ''NationsBank Letter Sparks Investigation,'' Wall Street Journal, aug. 15, 1994, p. A4.
(Footnote 75 return)
In the case of Nationsbank's $15 billion acquisition of Barnett Bank, for example, the operations required to be divested by the Justice Department in return for its blessing represented less than 4 percent of the total number of offices being combined in the merger. Department of Justice, Press Release, ''Justice Department Reaches Accord Agreement with Nationsbank,'' Dec. 9, 1997.
(Footnote 76 return)
Stephen A. Rhoades, ''Commercial Banking,'' in Industry Studies (L. Duetsch ed. 1993), p. 287.
(Footnote 77 return)
John H. Boyd and Stanley L. Graham, ''Investigating the Banking Consolidation Trend,'' Federal Reserve Bank of Minneapolis, Quarterly Review, Spring 1991.
(Footnote 78 return)
Keefe, Bruyette & Woods, Inc., ''The Class of '95 Mega Mergers,'' July 18, 1997.
(Footnote 79 return)
See, for example, Jim Carlton, ''Wells Fargo Discovers Getting Together is Hard to Do,'' Wall Street Journal, July 21, 1997, p. B4; Stephen E. Frank, ''Consumers Wonder If Deals Will Deliver Better Service,'' Wall Street Journal, Apr. 14, 1998, p. A3; Saul Hansell, ''Clash of Technologies in Merger,'' N.Y. Times, Apr. 13, 1998.
(Footnote 80 return)
Saul Hansell, ''Time to Break Up the Banking Behemoths?'' N.Y. Times, Aapr. 7, 1995, p. C1.
(Footnote 81 return)
Leslie P. Norton, ''Merger Mayhem: Why the Latest Corporate Unions Carry Great Risk,'' Barron's, Apr. 20, 1998, p. 34.
(Footnote 82 return)
For a more detailed examination of this problem, see Walter Adams and James W. Brock, Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street (New York: Pantheon, 1989), 114–123.
(Footnote 83 return)
1998 Economic Report of the President, Tables B–14 and B–18; U.S. Bureau of the Census, Statistical Abstract of the United States: 1997, Table 962.
(Footnote 84 return)
1997 Statistical Abstract, Table 963.
(Footnote 85 return)
For in-depth examinations of this problem, see Walter Adams and James W. Brock, The Bigness Complex (New York: Pantheon, 1987); Antitrust Economics on Trial (Princeton, NJ: Princeton University Press, 1991), and ''Corporate Size and the Bailout Factor,'' Journal of Economic Issues, March 1987, pp. 61–85.
(Footnote 86 return)
Ron J. Feldman and Arthur J. Rolnick, ''Fixing FDICIA: A Plan to Address the Too-Big-To-Fail Problem,'' Federal Reserve Bank of Minneapolis, March 1998.
(Footnote 87 return)
Lenin's Economic Writings (Meghnad Desai ed., 1989), p. 186.