Federal Reserve and Justice Department Release FAQs
on Antitrust Review of Bank Mergers
October 13, 2014
On October 9, the Federal Reserve Board and the Antitrust Division of the Justice Department
jointly released a set of frequently asked questions and answers relating to antitrust reviews ofbank mergers. The FAQs (accessible here) generally reflect longstanding administrative policies
and practices of the two agencies and are a useful compilation of their respective views,
including areas where the approaches taken by the two agencies diverge. The FAQs indicatethat a common analytical approach will be used for all types of banking organization merger
applications, including those filed under the Bank Holding Company Act, the Bank Merger Act,and the Home Owners’ Loan Act.
INITIAL SCREENING
Federal Reserve — An initial screening is done for each pre-defined banking market in whichbank deposits are weighted at 100% and thrift deposits are weighted at 50% (except for thrifts
owned by bank holding companies, either before or after the acquisition, which are weighted at100%). If in any overlapping market the resulting Herfindahl-Hirschman Index (“HHI”)
increases by less than 200 points as a result of the merger or the post-merger HHI is less than
1,800, and the post-merger organization does not have a greater than 35% market share, then
the transaction will pass the initial screening and be eligible for approval by a local Reserve
Bank under delegated authority. Transactions that exceed these thresholds must be reviewed
by Federal Reserve staff in Washington, but may still be approved based on a closer review ofthe markets, the presence of mitigating factors, and other considerations.
DOJ — The DOJ’s initial screening analysis is also done using deposit data, but it does notnecessarily use the Federal Reserve’s pre-defined geographic banking markets. While the DOJ’s
decision regarding geographic markets is made on a case-by-case basis, the FAQs note thatapplicants “may wish” to also perform HHI calculations for each county in which the merging
parties have overlapping operations. Since the Federal Reserve’s geographic markets typicallyare based on Metropolitan Statistical Areas (“MSAs”) that usually comprise multiple counties,
concentration levels for individual counties can often be higher than for the MSA or Federal
Reserve banking market as a whole. In addition, the DOJ (unlike the Federal Reserve) screens
for two different product markets — retail banking and small business banking — and thrift
deposits are given different weights in those markets, as described below.
PRODUCT MARKETS
Federal Reserve — As a general matter, the Federal Reserve considers banks to compete in asingle product market — the “cluster” consisting of commercial banking products and services— and uses branch deposit data to measure market concentration. The FAQs note that forMemorandum – October 13, 2014

certain wholesale or nonbanking products that may be obtained separately from the normal
cluster of commercial banking services, such as credit cards and mortgage lending, the Federal
Reserve may do a separate concentration analysis and utilize different geographic markets,
which may be regional or national in scope.
DOJ — As noted above, the DOJ does not use the Federal Reserve’s “cluster of services”
product definition but instead focuses on the markets for retail banking services and for small
business services. The DOJ believes that small business customers are generally more limited
geographically in where they can turn for banking services and generally can obtain thoseservices only from commercial banks and not thrifts or credit unions. For this reason, thrift
deposits are weighted at 100% in the retail banking analysis but given no weight in the small
business analysis (except for thrifts that are active in commercial lending, including having 2%
or more of their total assets invested in commercial and industrial loans). Credit union deposits
are generally weighted at 0% as well in the small business market analysis, although thepresence of credit unions with active commercial lending businesses may be considered amitigating factor. In addition, the DOJ will look at information on small business lending in therelevant markets, including business loans booked at the merging parties’ branches, small
business loan originations reported under the Community Reinvestment Act, market surveys
conducted by the parties, and similar data. Because information on small business lending is
not reported for all market participants at a branch level the way deposit data are, compilingmarket share data on small business lending can be challenging. As a result, a DOJ
investigation of a bank merger may include both document requests from the merging parties(such as pricing surveys, lost business reports, and board presentations) and interviews withcompetitors and customers.
On occasion, the DOJ has also investigated the effect of bank mergers on middle market
banking, which presents similar information gathering challenges.
DEPOSIT DATA ADJUSTMENTS
Thrifts and Credit Unions — The Federal Reserve initially weights commercial bank deposits at100% and thrift deposits (other than thrifts owned by bank holding companies) at 50%. Federal
Reserve staff will usually agree to give 100% weight to deposits of thrifts that are actively
engaged in commercial lending (often indicated by commercial and industrial loans being morethan 5% of total assets). Federal Reserve staff will also include a credit union’s deposits at a
50% weighting if the credit union has broad field of membership requirements that include
most or all of a market’s population and has branches that are easily accessible to the public. Invery rare circumstances, the Federal Reserve will give a 100% deposit weighting to a credit
union with significant commercial lending business.
Centrally Booked/Out-of-Market Deposits — On occasion, one of the merging parties may have abranch in an overlapping market that is used to book deposits from out-of-market sources (e.g.,national escrow deposits) that distorts its market share. The Federal Reserve has in the pastmade adjustments to exclude such deposits where the applicant can demonstrate both the outof-market nature of such deposits and that similar adjustments need not be made to branchdeposits of other market participants. Since detailed information on deposit source is generally

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Memorandum – October 13, 2014

not available publicly, obtaining such information for other market participants can present
challenges. Significant government deposits booked in a particular branch can be addressed in
the same manner.
Specialized Depository Institutions — Certain types of specialized depository institutions thatsource their deposits from broader markets, such as credit card and Internet banks and trust
companies, are typically excluded from the Federal Reserve’s screening analysis.
REMEDIES
For transactions that present significant antitrust issues even after considering mitigating
factors and any approved deposit adjustments, the typical remedy to obtain approval is acommitment to sell branches in the concentrated markets. The Federal Reserve typically allows
the applicant to select a package of branches to be sold that will reduce the HHI below the200/1,800 thresholds and a 35% market share. In practice, due to mitigating factors, the Federal
Reserve has often accepted smaller divestiture packages. The FAQs do not address the range ofpermissible market concentrations but instead note that “there are no general guidelines fordetermining the level of divestiture that would be necessary to allow the [Federal Reserve] toapprove a potentially anticompetitive application.”
The DOJ follows a similar approach to remedies, but has more stringent requirements forseveral aspects of proposed divestitures:•the total customer relationship of the divested branch (deposits and loans) must be sold;•only target bank, and not acquiror, branches may be used to satisfy the divestiture
requirements; and•the DOJ must approve each of the divested branches for sale, as well as the proposed
purchaser (which must be “competitively suitable”), and the package of divested
branches must allow the buyer to “compete effectively” in the market.
***

For more information, please contact one of the following members of the Firm’s Financial
Institutions group listed below.
Lee Meyerson(212) 455-3675
lmeyerson@stblaw.com

Mark Chorazak(212) 455-7613
mchorazak@stblaw.com

Spencer Sloan(212) 455-7821
spencer.sloan@stblaw.comThis memorandum is for general information purposes and should not be regarded as legal advice. Pleasecontact your relationship partner if we can be of assistance regarding these important developments. The
names and office locations of all of our partners, as well as our recent memoranda, can be obtained fromour website, www.simpsonthacher.com.
The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it arerendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

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Memorandum – October 13, 2014

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