Fordham Journal of Corporate & Financial Law Volume 13 Issue 4 Article 6 2008 Bank Merger Reform Takes an Extended Philadelphia National Bank Holiday Edward Pekarek Michela Huth Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Banking and Finance Law Commons, and the Business Organizations Law Commons Recommended Citation Edward Pekarek and Michela Huth, Bank Merger Reform Takes an Extended Philadelphia National Bank Holiday, 13 Fordham J. Corp. & Fin. L. 595 (2008). Available at: https://ir.lawnet.fordham.edu/jcfl/vol13/iss4/6 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. BANK MERGER REFORM TAKES AN EXTENDED PHILADELPHIA NATIONAL BANK HOLIDAY By Edward Pekarek and Michela Huth* * Edward Pekarek holds an LL.M. degree in Corporate, Banking and Finance Law from Fordham University School of Law, a J.D., Cleveland Marshall College of Law, and a B.A. from the College of Wooster. Michela Huth holds a J.D., Cleveland Marshall College of Law and a B.A. from the College of Wooster. The Authors wish to thank Fordham University School of Law Banking Professor Carl Felsenfeld, for his kind support and sage guidance. The foregoing opinions, conclusions, and perhaps errors and omissions, are solely those of the Authors. Comments and questions should be directed to the Authors at [email protected]. 595 596 FORDHAM JOURNAL OF Vol. XIII CORPORATE & FINANCIAL LAW I. INTRODUCTION.................................................................................. 597 II. AN OVERVIEW OF RELEVANT BANK CONSOLIDATION AND STATISTICS ................................................................................. 604 III. ORIGINS OF U.S. BANKING AND ANTITRUST LAW—BRIEF OVERVIEW.................................................................................. 611 A. A Tide Not Stemmed ........................................................... 615 B. Philadelphia National Bank and its Progeny....................... 620 C. The Aftermath of Philadelphia National Bank.................... 625 D. Regulation in the 1990s Produced the Highest Ever Run on Bank Mergers................................................................. 629 IV. U.S. BANKS ARE NO LONGER “UNIQUE” NOR “INSULATED” ......... 631 V. HAS THE COMPETITIVE ANALYSIS EVOLVED SINCE PHILADELPHIA NATIONAL BANK? WHAT’S IN YOUR WALLET? ........................... 637 VI. RELEVANT MARKETS ..................................................................... 646 A. The Federal Reserve’s Competitive Analysis...................... 650 B. The Department of Justice’s Competitive Analysis............. 652 C. Relevant Product Market ..................................................... 654 1. DOJ’s Relevant Product Market....................................655 2. Failed Attempt to Diversify the Product Market ...........658 3. Justice Harlan Criticizes Narrow Cluster Approach......661 4. Stare Decisis and Shifting Market Conditions...............664 D. Geographic Market .............................................................. 665 1. Federal Reserve Continues to Utilize a Localized Geographic Market........................................................668 2. Federal Deposit Insurance Corporation and Comptroller of the Currency .........................................670 3. DOJ’s Relevant Geographic Market..............................672 4. Rejection of the “State as a Whole” Geographic Market ...........................................................................675 5. A More Expansive Geographic Market.........................679 6. Conspicuous Absence of Relevant Geographic Market Analysis in Recent Bank Mergers ....................685 VII. MERGERS CAN STILL BE CONSUMMATED DESPITE ANTICOMPETITIVE EFFECTS ........................................................ 688 VIII. SUBPRIME MELTDOWNS AND CREDIT MARKET BEATDOWNS BEGET BANK MERGER SHOWDOWNS.......................................... 692 IX. CONCLUSION .................................................................................. 699 2008 BANK MERGER REFORM TAKES A HOLIDAY 597 It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.1 I. INTRODUCTION The landscape of the United States dual banking system2 changed dramatically in recent decades. The extent of this change, and the consolidation trend in the financial services industry, challenge the assumption that commercial banks provide services which are unique and insulated from non-bank competition.3 Today, commercial banks face increasing competition from various industries, and much of that new competition recognizes no geographic boundaries. Those charged with overseeing this industry in turmoil must move beyond old assumptions about banking products, services, and markets, as embodied within outdated merger review methodologies. This Article addresses the past, present, and future of banking consolidation with an aim to propose modern reforms to the multi-agency approach to banking antitrust analysis. “The market increasingly is being taken by non-banking entities, both on the credit and deposit side,” according to a banking consultant in 1993.4 Customers are taking their business to non-traditional institutions (brokerages, mortgage lenders, and insurers) for their online banking services.5 The advent of “pure Internet banks” presents additional 1. Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 469 (1897). 2. The U.S. banking system is comprised of the main components, national and state banks, the former are chartered by the Office of the Comptroller of Currency (“OCC”) and the latter by a state-level banking authority. For a detailed discussion of this system, including the implications of the Federal Deposit Insurance Corporation Improvement Act, see CARL FELSENFELD, BANKING REGULATION IN THE UNITED STATES 19-32.5 (Juris Publ., 4th ed. 2001). 3. United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963) (providing Court’s discussion of unique and insulated nature of traditional commercial banking). 4. Steven Greenhouse, Nonbanks’ Community Role Will Be Target of U.S. Study, N.Y. TIMES, June 9, 1993, available at http://query.nytimes.com/gst/fullpage.html?res= 9F0CE0DE163FF93AA35755C0A965958260&n=Top/Reference/Times%20Topics/Or ganizations/T/Treasury%20Department (quoting Joann Barefoot, banking consultant). 5. See Deborah Salus & Mary Weeks, Do Community Banks Gain Competitive Advantage with Online Banking? 3 J. BEHAV. & APPLIED MGMT. 263 (Winter 2002), 598 FORDHAM JOURNAL OF Vol. XIII CORPORATE & FINANCIAL LAW borderless competition with traditional banking institutions, sans the “brick and mortar” overhead.6 Moreover, non-traditional banks, though not regulated in the same manner as traditional banks,7 have increasingly ventured into service areas previously dominated by commercial banks.8 Yet, the erstwhile separation of commerce and banking has less to do with tradition, however, than it is attributable to regulatory restrictions.9 In short, administrative standards differ for banks and non-bank competitors, which in turn inhibits the competitiveness of the banks “in areas where the two intersect.”10 According to the Department of Justice available at http://www.ibam.com/pubs/jbam/articles/vol3/article3_17.htm. 6. Id. at 263. 7. See Bd. of Governors v. Dimension Fin. Corp., 474 U.S. 361, 364 (1986). In 1984, the Board promulgated rules providing that nonbank banks offering the functional equivalent of traditional banking services would thereafter be regulated as banks. The Board accomplished this by amending its definition of a bank, found in ‘Regulation Y,’ in two significant respects. First, the Board defined ‘demand deposit’ to include deposits, like NOW accounts, which are ‘as a matter of practice’ payable on demand. Second, the Board defined the ‘making of a commercial loan’ as ‘any loan other than a loan to an individual for personal, family, household, or charitable purposes,’ including ‘the purchase of retail installment loans or commercial paper, certificates of deposit, bankers’ acceptances, and similar money market instruments.’ Id. (citations omitted). Regulation Y in its complete form can be found at http://www.bankersonline.com/regs/225/225.html. The Federal Reserve is currently proposing changes to Regulation Y. See John Poirier, Fed’s Bank Merger Rule Changes May Come By Yr-end, REUTERS, Oct. 18, 2007, available at http://today.reuters.com/ne ws/articleinvesting.aspx?type=etfNews&storyID=2007-10-18T185833Z_01_N1837770 5_RTRIDST_0_FED-ACQUISITIONS.XML. 8. For example, CapitalOne is a hybrid financial holding company, offering a wide range of both traditional and non-traditional products and services to a broad customer base. See Capital One, About Capital One, Corporate Information, History, http://www.capitalone.com/about/corpinfo/history.php?linkid=WWW_Z_Z_Z_ABT1_ C1_01_T_ABT3. Wells Fargo & Co “is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance through almost 6000 stores, the Internet and other distribution channels across