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Fintech boom prompts Justice to revisit bank merger guidance

DOJ asking public whether online lenders and their ilk should factor into decisions on competitive effects of proposed mergers

DOJ asked the public to directly answer whether its rules give proper weight to online deposits.
DOJ asked the public to directly answer whether its rules give proper weight to online deposits. (iStock)

The Department of Justice’s antitrust division is contemplating whether it should revisit 25-year-old bank merger guidelines as new financial technologies reshape the banking industry and the market share data that the government uses to determine whether to allow mergers to proceed.

It is asking the public whether it should include “nontraditional banks,” such as online lenders, when considering the competitive effects of a proposed bank merger. The responses could shape a policy allowing more rural banks to combine, a move that might not impact competition as much as in the past, given consumers’ increasing options.

At least one trade group is telling it that the old rules don’t fit the modern landscape.

The purpose of an antitrust competitive effects analysis is to determine whether a proposed merger is likely to decrease competition in a market in a way that makes it more likely for the post-merger firm to gain monopoly power and harm consumers. If this analysis doesn’t include all of a bank’s relevant competitors, including online banks, the analysis could be skewed and prevent mergers that should be allowed, according to those who support changing the rules.

[Mergers and acquisitions on hold as pandemic disrupts markets]

“This is a problem for community banks particularly in rural areas because additional scrutiny may discourage mergers that result in a stronger financial institution that is better able to meet compliance burdens,” Mickey Marshall, the Independent Community Bankers Association’s regulatory legal affairs director, said in an email to CQ Roll Call. “When the guidelines were first introduced in 1995, the internet as we know it did not exist.” 

He said including online banks in bank merger analysis “would better reflect the competitive landscape that small banks actually face.”

Antitrust regulators acknowledge the shifting landscape.

“Innovative emerging technologies are disrupting traditional banking models and introducing new competitive elements to the financial sector,” Makan Delrahim, assistant attorney general for the antitrust division, said in his call for comments. “As part of the division’s increased attention to modernizing our competitive analysis of financial services markets, we are examining whether the 1995 Banking Guidelines need updating to reflect our evolving economy.”

DOJ asked the public to directly answer whether its rules give proper weight to online deposits. It asks for suggestions on how its competitive effects analysis can reflect that the geographic dispersion of deposits from online banks isn’t publicly available by market or branch.

The deadline for submitting comments is Oct. 16. 

In a letter signed by Marshall and Christopher Cole, ICBA executive vice president and senior regulatory counsel, the organization wrote that online banks should be part of the competitive effects analysis.

“These institutions solicit deposits and lend on a nationwide basis and are present in urban and rural markets,” they said.

But they noted that under the Office of the Comptroller of the Currency’s new Community Reinvestment Act rule, OCC-supervised banks, including internet banks, will be required to track and report the location of their retail domestic depositors.

Call for better data

In a draft comment not yet submitted but provided to CQ Roll Call, the National Community Reinvestment Coalition, a pro-consumer group, said it finds the question about online bank deposits “puzzling” because Justice doesn’t currently consider these deposits. It recommends that the department improve its data on those deposits, such as requiring them to be “geocoded,” before including them in DOJ analyses.

The group said including large fintechs in merger analyses wouldn’t prevent mergers of the smaller banks that are trying to survive or increase their efficiencies.

CQ Roll Call made several requests to the Justice Department to view the comment letters it has received so far, but the requests went unanswered. ICBA’s letter appears on the association’s website, and the NCRC’s draft letter was provided to CQ Roll Call.

Some legal experts say it’s time the bank merger rules are updated.

“The banking industry has gone through massive changes since the DOJ last reviewed the merger guidelines applicable to M&A transactions,” said Sanford M. Brown, a partner at the Dallas office of the law firm Alston & Bird LLP. “To be sure, technology in general, and fintech companies in particular, are an important part of today’s banking industry — most customers can bank with any bank they want, and they can do so without ever stepping foot into a bank branch.” As an example, he noted that merger guidelines never contemplated that people could be banking from their smartphones.

Brown’s colleague at Alston & Bird, partner John Snyder, who practices in Washington and formerly worked in the DOJ’s antitrust division, said the COVID-19 pandemic is accelerating the shift toward digital banking.

“The division has likely recognized that the structural approach that is the focus of the 1995 bank merger guidelines fails to appropriately account for this revolution,” he told CQ Roll Call.

Scott A. Coleman, a partner in the Minneapolis office of law firm Ballard Spahr LLP, said he believes the ability of most banks to gather deposits and offer products and services by web or mobile app is causing the Justice Department’s antitrust division to reconsider the effectiveness of the so-called Herfindahl-Hirschman Index, which is a commonly accepted measure of market concentration, according to the department.

Daniel H. Burd, a partner in the corporate practice group at Jones Walker, recently wrote in an article appearing in The National Law Review that it is possible that the inclusion of online bank and fintech competitors in the antitrust division’s analysis of competitive factors may make the standards for bank mergers generally “more lenient.”

He also said, however, the revision of the banking guidelines to reflect technological change “could be primarily technical, and neutral in effect on the competitive analysis of large bank mergers.”

Still, in either case, Burd, a former staff attorney at the Federal Reserve, told CQ Roll Call he believes the Justice Department will come out with revisions before the end of the year. That belief is based in part on the relatively brief 45-day comment period and that the process doesn’t involve a formal rule-making but rather the adoption of a revised supervisory policy, he said. As a result, the department isn’t constrained by the strict requirements of the Administrative Procedure Act, which governs the process of issuing regulations.

DOJ has said it will continue to consult with the Fed and other banking agencies before deciding on whether to modify the current bank merger guidelines.