Looking Back with Interest (Rates): Merger Retrospectives in the U.S. Banking Industry
In the following three essays I use quantitative evidence to address the effectiveness of horizontal merger policy in the United States in protecting the competitive balance of markets. Since the enactment of the Sherman Antitrust Act in 1890, the Federal Government has attempted to protect the public from increased prices, reduced innovation, and other adverse effects that may occur when firms are able to exercise market power. Horizontal mergers, in which firms that were previously direct competitors combine to operate as a single entity, are of particular concern to the Antitrust Authorities (mainly the Department of Justice and the Federal Trade Commission) as these mergers necessarily remove a competitor from the market. Surprisingly, there are relatively few empirical studies that investigate whether the Antitrust Authorities are able to accurately identify the potentially anticompetitive mergers, or whether once identified, the proposed remedies are appropriate to alleviate concerns over gains in market power. I provide empirical work on these two issues.
In the first essay, I consider the question of how the antitrust agencies identify potentially troublesome mergers based on pre-merger information. I use pre-merger data from the commercial banking industry to implement a model proposed in the literature to be an improvement over the current merger application screening tool. I find that relative to the current screen the proposed model reduced the number of mergers flagged as being competitively troublesome. This result is important given the time and resource constraints that antitrust agencies face when evaluating merger applications. To test whether the proposed model was not to lax, I combine pre- and post-merger data and implement a difference-in-differences method to estimate the actual merger affects. I then check to see whether mergers estimated to have resulted in price effects were identified by the proposed model and find that all of the mergers estimated to have resulted in statistically significant price increases were flagged by the proposed model.
In my second essay, I turn to the question of whether branch divestitures are sufficient market power remedies in bank mergers. In particular, I combine data on pre- and post-merger market conditions with data on the Federal Reserve Board's (FRB) stated post-merger expectations to investigate how well divestiture remedies alleviate market power concerns. I identify mergers that involved the divestitures of bank branches in at least one of the banking markets in which the merging banks competed prior to the merger. I then divide the sample of merger markets into two subsamples, one in which divestitures occurred and one in which no divestitures occurred and compare the interest rates banks paid depositors in divestiture markets to the rates paid to depositors in non-divestiture markets. I find that in the second year after the merger the interest rate spread between divestiture and non-divestiture markets was over 135 percent larger on deposit accounts than the pre-merger spread and remained almost 40% higher in the third year following the merger. As a result, depositors in divestiture markets were relatively worse off than depositors in non-divestiture markets following the merger. This evidence suggests that the divestitures may not have been sufficient market power remedies.
In the final chapter I address a troubling aspect of antitrust policy. Namely, despite its long history and recognized importance, a deficiency of the empirical evidence required to accurately assess the effectiveness of antitrust policy has persisted. I identify publicly available data sets on pre- and post-merger market data, as well as publicly available data on specific post-merger market predictions made by the Federal Reserve Board at the time of the merger application review that can be collected to address this deficiency. I then check to see how the FRB's pro forma estimates of the post-merger market shares underlying their review process compare to the post-merger market shares observed in the data. I find that pro forma market shares consistently overestimate the post-merger market share of the surviving bank, a finding that is troublesome to the extent that it reflects a restriction in output by the merged bank. I conclude that the findings reaffirm the warnings from a number of economists that assumptions underlying merger policy need to be analyzed and argue that the availability of data useful for such analyses should be viewed by the profession and policy makers as rendering the deficiency of empirical evidence on antitrust policy as irresponsible and unacceptable.