BANK ACQUISITIONS

Since 1970, foreign banks have acquired at least 59 American banks with assests at the time of acquisition in excess of $20.6 billion. As banking becomes a global activity more foreign banks may recognize the competitive advantages of a significant American representation. Unfavorable political and economic prospects in some other countries accentuate the advantages of doing business in the United States. In addition, there are a large number of privately owned banks in the United States relative to the number of such institutions in most foreign countries. At present many banks are viewed as attractive investments with equity prices well below book value and favorable price/earnings ratios.

The traditional policy of the U.S. Government toward international investment is neither to promote nor to discourage inward or outward investment flows or activities. This policy is based on a careful and pragmatic assessment of the national self-interest, though it comports as well with our philosophical preference for open markets and a minimum degree of Government interference. Investment in this country which originates from abroad benefits our economy; indeed much of this Nation was built with foreign capital.

Foreign investment in American banks has generally brought to our banking system additional capital, management skills, and increased competition. This has been especially true in recent acquisitions. Many of the banks acquired needed financial and managerial assistance. Many also became parts of larger international financial organizations better able to compete with the largest American and foreign banks in domestic and foreign markets. Virtually all of the major banks acquired recognized the advantages of their associations with a foreign institution and overwhelmingly endorsed the combination.

No one can predict with any assurance whether the acquisition of large American banks by foreign persons will continue at a relatively high level and whether a significant number of American banks will eventually be foreign owned. The economic, cultural, and political considerations that influence acquisitions are not the same for all large foreign institutions and the value of the dollar vis-a-vis foreign currencies has fluctuated widely in recent years. Nonetheless, the potential for major acquisitions in our banking sector is something that requires our continuing attention. Banking is at the core of the Nation's economy; hence significant foreign ownership could raise questions as to whether such ownership is consistent with the overall best interests of the Nation. These questions are difficult to articulate. As of today there has been no suggestion that any significant past bank problem was the result of, or facilitated by, foreign ownership. The potential problems associated with foreign ownership cluster around two related issues: (i) Added difficulties in assuring the safety and soundness of the bank; and (ii) possible diversion of credit and service from, and concomitant injury to, the area or market served by the bank. Banking is a comprehensively regulated industry, and the regulators are presumably in the best position to comment on these problems. To the extent that particular foreign ownership would prejudice the safety or soundness of the institution, clearly such an

acquisition should not be permitted-just as a domestic acquistion would not be permitted in similar circumstances. We understand the regulators feel they have adequate power to deal with this type of issue.

The second issue-the risk that foreign ownership may limit or deprive U.S. customers of service or credit-is difficult to evaluate. Clearly a foreign owner is subject to the laws of his home country and that could at least in extreme situations-lead to pressures that might be inimical to the United States. However, in that type of situation the regulators have power to prevent precipitous actions by the bank and the President could also invoke his emergency powers to block assets under the International Emergency Economic Powers Act. It is also not likely that all foreign owned banks would act uniformly; so the risk of sizable dislocations is not likely to be high.

If the concern is that the bank may shift its business emphasis when controlled by a foreigner, there are similar risks when control shifts between domestic persons. I would also point that it is not entirely realistic to assume a foreigner would acquire a bank and then deliberately take actions that would alienate the bank's customers and its standing in the community. That type of action would surely reduce the bank's deposit base and the value of the foreigner's investment. It would also encourage competitors and attract new entrants to the market. Also, all insured banks, including foreign-owned banks, are subject to the Community Reinvestment Act.

I should also stress that in addition to general supervisory powers over banks, the regulators today have the power to disapprove all significant acquisitions, domestic and foreign. They do not have the power to disapprove merely because the acquirer is foreign but they do if the particular foreigner presents a question as to whether he will operate the bank on a safe and sound basis. The change in the Bank Control Act, which the Congress enacted just last year, contains new provisions that are especially tailored to cover bank acquisitions by individuals. While there has been only limited experience to date with these new provisions, it appears that the standards contained in the act are broad enough to assure that the regulators have the power to make a comprehensive review of acquisitions by domestic or foreign individuals.

We conclude that at its present level, foreign ownership of U.S. banking assets does not pose any undue risks. Accordingly, we do not see any need for an artificial percentage limitation on foreign banking assets in the United States. However, we do feel that the situation should be followed closely, and the two Treasury studies underway on the treatment of U.S. banks abroad and on the McFadden Act should provide useful insights generally in this

area.

I will also ask the Interagency Coordinating Committee to consider adopting a more comprehensive and contemporaneous reporting system so the Congress and the regulators themselves will have more complete and timely information about foreign ownership. This should facilitate the timely review of proposed acquisitions and provide the Congress with information so that it too may better monitor developments in this area.

The bank regulators, as part of their approval process for acquisitions, are looking into a variety of issues. They are interested in the special circumstances of hostile takeovers of American banks and whether the acquisition or ownership of our banks by foreign government-owned institutions poses any special problems. They are also working with foreign bank regulators to improve the process of verifying financial information on proposed foreign acquirers and monitoring financial transactions between an overseas bank and its domestic subsidiary.

Given these various inquiries into foreign bank acquisitions of American banks, we believe it is not necessary to initiate another study as proposed by S. J. Res. 92. If, after the studies now in process are completed, further work is required, that would be the time to expand on their conclusions. We are particularly opposed to any moratorium on acquisitions. Such an action could undermine foreign confidence in our open-door investment policy. It could be viewed as a forerunner of restrictions on acquisitions first in banking and then in other industries.

INTERNATIONAL BANKING FACILITIES

The Treasury Department has favored the establishment of international banking facilities (IBF's) in New York City. On December 22, 1978, Treasury advised the Federal Reserve Board that it endorsed the thrust of the New York City Clearing House banks' IBF proposal.

In theory, the IBF proposal would relocate to this country some of the activities that American banks are now conducting overseas. We are not in a position to confirm that these facilities would bring to the United States a significant amount of international banking business and the job opportunities associated with it. But to the extent they have such an effect, the results would obviously be beneficial. Our support for the proposal assumes that the operation of these facilities would have no adverse effect on the conduct of monetary policy, and on the supervision and stability of the banking system. In our opinion, the New York IBF proposal would have no significant effect on Federal tax revenues and the Office of the Comptroller of the Currency believes there would be no unmanageable bank supervision problems. Indeed, the return of certain of these off-shore activities to offices within the United States might facilitate the supervisory process and the ability of the regulators to gauge the safety and soundness of the banks.

You have asked about the effects that the IBF might have on our monetary policy and our balance of payments. We would expect the IBF to have a minor positive effect on our balance of payments. For purposes of monetary policy, it would appear that the flow of funds between American bank main offices and IBF's could be controlled much as the flow of funds between main offices and overseas branches is now controlled. The increased proximity of the offices should not make that much difference, but we would want to rethink our opinion if the Federal Reserve Board or any of the other bank regulators were to reach a different conclusion.

The Federal Reserve, the administration and the Congress are presently considering a major revision of domestic reserve requirements and the appropriateness of reserve requirements on Euro

currencies. If in the future, because of legislative or Federal Reserve action, domestic and foreign reserve levels were so close as to eliminate any significant reserve advantage to IBF's, these facilities could still be useful. The country-risk exposure of American banks doing business abroad and of their customers could be favorably affected by doing more of that business in the United States. In addition, IBF's would have the advantage of exemption from State or local taxes on their activities if other States acted like New York State in eliminating such taxes.

Other States may want to have IBF's for the use of their own banks. This would seem to be an appropriate means of spreading the competitive benefits of these facilities. Non-New York State banks have expressed a strong desire to have their own IBF's located in New York City whether or not they have them in their home State. We would hope that the technical difficulties raised concerning clearing activity at the New York Clearing House and the Federal Reserve can be favorably resolved on a nondiscriminatory basis. This should assure a broad base of competition among banks in their IBF's.

Thank you, Mr. Chairman. If there are any questions I would be glad to try to answer them.

The CHAIRMAN. Thank you, Secretary Carswell.

Our next witness is the Hon. Donald L. Flexner, Deputy Assistant Attorney General, Antitrust Division, Department of Justice, and you're accompanied by Mr. Roberts. Would you introduce Mr. Roberts?

Mr. FLEXNER. This is Mr. Neil Roberts on my right. He is chief of the evaluation section of the Antitrust Division.

The CHAIRMAN. All right, sir. The same 10-minute rule, and go right ahead.

STATEMENT OF DONALD L. FLEXNER, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, ACCOMPANIED BY NEIL ROBERTS, CHIEF, EVALUATION SECTION, ANTITRUST DIVISION

Mr. FLEXNER. Thank you, Mr. Chairman.

I am pleased to be here today in response to the committee's invitation to present views of the Department of Justice with regard to the competitive effects of acquisitions of American banks by foreign banking institutions. My statement will focus on how the Department analyzes bank mergers and banking holding company acquisitions from the competitive standpoint in exercising its antitrust enforcement responsibilities and its reporting obligations under various regulatory statutes. I shall try to place in proper perspective the significance to this analysis of the nationality of the acquiring banking institutions.

Relevant Federal statutes, including the Clayton Act, the Bank Merger Act, and the Bank Holding Company Act, require scrutiny of proposed bank mergers to determine whether they would result in monopoly or may substantially lessen competition in any section of the country. These are traditional antitrust standards, essentially identical to those we have used under the antitrust laws in analyzing the competitive effects of mergers and acquisitions generally.

The analysis of a proposed acquisition of an American bank by foreign institutions is theoretically quite straightforward, although, of course, it may be a little complicated in any given factual

context. First, appropriate product and geographic markets in which to measure competitive effects are identified. Second, the possible loss of existing or potential competition is assessed through analysis of market structure and the effect of the loss of the acquired bank as a competitor in the market and the loss of the acquiring bamk as a perceived or actual potential competitor. Assuming that we are talking about the acquisition of a domestic commerical bank by a large foreign banking organization, the relevant product market, or line of commerce, will likely be deemed to be the cluster of services commonly known as commercial banking. Within that product market may be submarkets of relevance to a particular transaction, and which also require analysis. For example, it may be appropriate to assess the competitive effect of a bank acquisition in large loan markets or in the market for international banking services.

Defining relevant geographic markets in bank acquisition cases requires consideration of where the merging banks do business and where their customers can conveniently turn for competitive alternatives. One must remember, of course, what types of customers are involved-this is the product market question again-and consider differences in rural and urban areas. The geographic markets on which the Department has most often focused its competitive analysis in mergers of commercial banks have been primarily local markets where banks provide retail services to individuals and small- and medium-sized businesses. However, when we analyze possible competitive effects of bank mergers on wholesale bank services for larger customers, perhaps international banking services, larger geographic markets may be appropriate.

Once the metes and bounds of the relevant market or markets have been determined, antitrust analysis shifts to assessing the effect of a merger or acquisition on competition. Ordinarily, this is done by ascertaining the effect of the transaction directly on market structure and, indirectly, on market performance. Market structure analysis entails, at its most primitive level, establishing the number of competitors in a particular market, their respective market shares, and market concentration-the percentage of the market controlled by the largest competitors. Where both parties to a merger or acquisition compete in the same market, the transaction will eliminate existing competition between the two institutions, reduce the number of existing competitors by one, and increase concentration. If the increase in concentration is significant, we generally would conclude that the merger or acquisition would be anticompetitive and unlawful.

Where the parties to a merger or acquisition transaction do not currently compete in the same market, as may be the case with respect to an acquisition of an American bank by a foreign institution which does not yet compete significantly in the United States, the standard analysis requires a determination of the extent to which the acquiring firm may be a potential entrant into the market or markets in question such that its elimination as such may eliminate significant potential competition. The analysis begins with objective factors such as the number and capabilities of other potential entrants, the significance of the acquired firm in the relevant market or markets, and the degree of concentration in