Even though the US Justice Department updated its antitrust guidelines in December 2023, federal bank regulators have not changed their own rules on measuring competitive effects.
The DOJ guidelines included an update to the Herfindahl-Hirschman Index (HHI) calculation, which is used to measure market concentration. Deals can raise a red flag from a market concentration perspective if the combination leads to markets having an HHI greater than 1,800 and creates a "significant increase" in the index. Previously, the DOJ defined a significant increase as a 200-point jump in the HHI, but the update lowered that to a 100-point rise.
Various agencies, including bank regulators, have their own discretion about implementing guidelines such as the ones the DOJ issued in December 2023. Bank regulators have not yet updated their merger guidelines, which define a significant increase as a 200-point rise in the HHI.
Earlier this year, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. proposed updates to their merger policies.
The FDIC's proposal includes a question about HHI: "Should the HHI be a definitive factor in making a determination? In other words, should the FDIC find favorably regarding competitive effects if the proposed merger does not exceed the defined banking-specific HHI thresholds? If not, why not?" The FDIC board plans to finalize its statement of policy on bank merger transactions during a meeting on Sept. 17.
The OCC's proposal, meanwhile, did not mention HHI.
"HHI is a tool, and the tool has been used in the past, with the DOJ and the banking agencies saying, 'OK, well, if our threshold is 1,800 and 200, then if we hit those thresholds, then we've got to look a little bit closer, do some additional digging,'" Joseph Silvia, partner at Duane Morris LLP advising financial institutions on M&A and more, said in an interview. "It's not a complete bar to an approval, but it is a red flag."
Competitive effects are among the statutory factors under the Bank Merger Act that regulators review for M&A transactions.
"If you don't hit that threshold, it's not that it's just a free pass, and you satisfy the statutory factor," Silvia said. "It's just a tool to say, 'OK, likely not going to be lessening competition. There's some additional information that we'll look at, but likely not going to be an issue in this transaction.'"
If bank regulators adopt the new DOJ guidelines, which include the threshold increase of 100, it could be disadvantageous to banks compared with using the current threshold of 200, advisers said.
"It'd be easier to trigger a competitive problem" and would take "less movement in the HHI, in the concentration of deposits," John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics, said in an interview.
In December 2021, the DOJ sought public comment on potentially revising the 1995 Bank Merger Competitive Review Guidelines, and bank trade groups and others weighed in. There has not been an update since then.