Brief for the United States — United States v. First National Bancorporation, Inc.

Supreme Court brief1972

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What actually matters in this document.

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Statement:

A. The structure of banking in Colorado_ - - -

B. The acquiring holding company - - - - - - - --

C. The local geographic market___---_____-

D. The acquired bank and the structure of

Danke m Greeiey...................

E. The proceedings--..-------------------

Argument:

Introduction and Summary -_-------------

I. The effect of the proposed acquisition may

be substantially to lessen competition

in commercial banking in the Greeley

area by eliminating the significant po-

tential competition that the acquiring

bank holding company provided in

A. An acquisition that eliminates

significant potential competi-

tion in banking may substan-

tially lessen competition within

the meaning of Section 7 of

the Clayton Act_._..-------

B. The anticompetiti-e effect of an

acquisition that eliminates a

significant potential banking

competitor is even greater

where it is part of a State-wide

trend toward concentration in

Argument—Continued Piet f

C. The determination whether the

acquiring firm is a potential

competitor depends upon the

objective facts relating to its

independent entry into the mar-

ket and not upon management’s

subjective statements with re-

spect to the likelihood of such

SE camer ands enesate ns 28

D. Bancorporation is a_ significant

potential entrant into the

Greeley banking area_________ 36

1. The Greeley market is at-

tractive to new entry__ 37

2. Bancorporation is one of

the few firms that has

the ability to enter the

Greeley market in a

meaningful way_______ 37

3. Bancorporation has shown

substantial interest in

expanding into new mar-

Ly are 39

4. Bancorporation is a po-

tential entrant into the

Greeley market despite

the testimony of a bank-

ing official that he would

not recommend _ the

chartering of a new

bank in that area_____ 40

EK. The effect of the acquisition may

be substantially to lessen com-

petition in the Greeley area____ 44

1. The Greeley market is

highly concentrated ____ 47

PSEA TEM MERE LE ALES VDT REN Heras 6S MES

Ill

‘gument—Continued

2. The acquisition of PNB

Greeley by Bancorpora-

tion may substantially

lessen competition by

eliminating Bancorpora-

tion as a significant po-

tential competitor in the

Greeley market _---- ---

II. The acquisition may substantially lessen

competition in correspondent banking in

CI cca stn e o ae ae ee ee nee

A. Correspondent banking is a line

of commerce and Colorado is an

appropriate geographic market -

B. The acquisition may substantially

lessen competition in corre-

spondent banking in the State _-

cic nancnkne Geka an werk chet

CITATIONS

ISeS !

Abex Corp. v. Federal Trade Commission, 420

I’, 2d 928, certiorari denied, 400 U.S. 865___-

The Bendix Corporation v. Federal Trade Com-

seston, 450 F. 20 G34... .......-...-......-

Brown Shoe Co. v. United States, 370 U.S. 294-

Page

20,

53, 56, 57, 60

Ekco Products Co. v. Federal Trade Commission,

Be Oe oo ok wd kuau dsp aenekanewe 22

Federal Trade Commission v. Consolidated

Foods Corp., 380 U.S. 592_.------------- 60

Federal Trade Commission v. Procter & Gamble

2 Gs ee ere 21-22, 29

First National Bancorporation, Inc., In_ the

Matter of, 57 Ved. Res. Bull. 613-_ - -------- 7

Cases—Continued

General Foods Corp. v. Federal Trade Com-

mission, 386 T°. 2d 936, certiorari denied,

Be SM 6 oo bodiicdondexhumnnsinn ne

Reynolds Metals Co. v. Federal Trade Com-

mission, 309 F. 2d 2238__._...._.._.__.__-

Stanley Works, The (Order of the Federal

Trade Commission dated May 17, 1971),

3 Trade Reg. Rep. § 19,646____._________

United States v. Aluminum Co. of America, 377

te eS ae 21,

United States v. Bethlehem Steel Corp., 168 F.

a de TT Eee PE ee ee EDD

United States v. Continental Can Co., 378 U.S.

United States v. du Pont de Nemours & Co.,

Bh ee ee er eee

United States v. El Paso Natural Gas Co., 376

ints Gena ka eadaee ne wunieas

United States v. First City National Bank of

Houston, 386 U.S. 361__..........-.-----

United States v. First National Bancorporation,

Inc., and the Security State Banking of

Sterling, D. Col., C-2754, filed Dec. 2, 1970

United States v. Ford Motor Co., 286 F. Supp.

407, affirmed, No. 70-113, March 29,

SPE Seatesenennccdensducebeaate 21, 30,

United States v. Jos. Schlitz Brewing Co., 253

F. Supp. 129, affirmed, 385 U.S. 37_______-

United States v. Kennecott Copper Corp., 231

PG ME ont cceneces cease cdenccees

United States v. Kimberley-Clark Corp., 264 F.

EE eye re mnne aa ees Ae re

United States v. Pabst Brewing Co., 384 U.S.

IR RMIT RTE RRA

Page

24, 60

31, 60

Sie |

een oe

Cases—Continued Page

United States v. Penn-Olin Chemical Co., 378

ck | eee ee 22, 23, 29, 31, 35, 49, 50, 51, 53

United States v. Penn-Olin ¢ ‘hemical Co., 246

I’. Supp. 917, affirmed, 389 U.S. 308__--_- 35

United States v. Philadelphia National Bank,

BPO SE 4 ck wascddnees baa ecosueees 20-21,

22, 27, 31, 48, 44, 48, 53, 56, 57, 59, 60

United States v. Phillipsburg National Bank,

See ak Beh cs eeasicknyaeescveswnceens 2,

19, 23, 27, 31, 46, 47, 48, 51, 53, 56, 57, 60

United States v. Standard Oil Co., 253 F. Supp.

SE Ons deve Cake kadub eae ew ee ceaeee 22, 31

United States v. Third National Bank in Nash-

ville, 300 U.S. 171...........- _.. 2, 19, 46, 47, 49

United States v. Topco Associates, No. 70-82,

O.T. 1971, decided March 29, 1972____--- 35

United States v. Vons Grocery Co., 384 U.S

SS hale ce ons 4k e eee Sakae oe es 49, 61

United States v. W ilson Sporting Goods Co.,

288 F. Supp. 543... .....-.-- Wea 22

Whitney National Bank in Jefferson Parish V.

Bank of New Orleans & Trust Co., 379 U.S

ie ee eat pace scadewaGneeeenys * 44

Statutes:

Bank Holding Company Act of 1956, 70 Stat.

134, as amended, SO Stat. 237:

Section 3(a)(3), 12 U.S.C. 1842(a)(3)__- 12

Section 3(c), 12 U.S.C. 1842(¢)______- 3,19, 45

Section 3(d), 12 U.S.C. 1842(d)__.-____- 5, 38

Section 11(b), 12 U.S.C. 1849(b)__...--_ 18, 27

Section 11(e), 12 U.S.C. 1149(e)____-__- 44

Section 12(c), 12 U.S.C. 1842(¢)_______- 45

Bank Merger Act of 1966, 12 U.S.C. 1828(¢)

RL laceckdaaudeesodkeseucan 19, 27, 45, 46

Statutes—Continued

Section 7 of the Clayton Act, 38 Stat. 731, as

amended, 64 Stat. 1125, 15 U.S.C. 18_____- 2,

4, 18, 19, 20, 21, 27, 28, 29, 30, 31, 32,

35, 43, 44, 48, 49, 51, 53, 54, 57, 60, 61

Section 2 of the Expediting Act, 15 U.S.C. 29 2

Colo. Rev. Stat. 1963 § 14-3-1 (1969)______. 5

Miscellaneous:

American Banker, February 24, 1971......-- 34

Areeda, Antitrust Analysis, 517 (1967)... __-- 22

Bain, [ndustrial Organization (2d ed. 1968), p.

Ds s canccascncnesnhsnsekinenndaaeaioas 22

Board of Governors of the Federal Reserve

System, Recent Changes in the Structure of

Commercial Banking, 56 Yed. Res. Bull.

Se (hee cntinababuniosanes 18, 26, 27, 33, 39

Pitofsky, Joint Ventures Under the Antitrust

Laws: Some Reflections on the Significance of

Penn-Olin, 82 Harv. L. Rev. 1007 (1969). 32, 35

Salley, 1 Decade of Holding Company Regu-

lation in Florida, Federal Reserve Bank of

Atlante, Monthly Review, (July 1970)... 34

Solomon, Bank Merger Policy and Problems—

A Linkage Theory of Oligopoly, Journal of

Money, Credit and Banking (1970)__..__- 24

Turner, Conglomerate Mergers and Section 7 of

the Clayton Act, 78 Harv. L. Rev. 1313

(UEP oinak cndnikén sameetendudnbinidans 22, 40

Vernon, Regulatory Barriers to Branching and

Merger and Concentration in Banking Mar-

kets, 37 The Southern Economic Journal

BES CHE i adienncaebekddamasndenamainns 33

Wille, Foreword to Kohn and Carlo, Potential

Competition: Unfounded Faith or Pragmatic

Foresight? (New York State Banking De-

RIUGEREE, BENGE « cunacsabonhatnsosdamaae 26, 34

—

Oo’

in the Supreme Court of the United States

Octosen Term, 1971

No. 71-703

Unirep STATES OF AMERICA, APPELLANT

Fmstr Nationa, Banconroration, INc, AND

THE Finst NaTiIONAL Bank or GREELEY

APPEAL FROM THE UNITED STATER DIATHICT COURT FOR

THE DISTRICT OF COLORADO

BRIEF FOR THE UNITED STATES

OPINION BELOW

The memorandum opinion and order of the district

urt (J.S., App. A, pp. 26-61) is reported at 329 F.

ipp. 1003.

JURISDICTION

The memorandum opinion and order of the district

urt was filed on July 12, 1971. On August 27, 1971,

« district court entered an order denying plaintiff's

mely motion, under F.R. Civ. P. 52(b) and 59, to

open the record, to obtain additional findings of fact

id conclusions of law, and to obtain the relief re-

(a)

quested in the complaint (J.S., App. B, p. 62). The

United States filed a notice of appeal to this Court on

September 24, 1971 (J.S., App. C, p. 63). Probable

jurisdiction was noted on February 22, 1972. The

jurisdiction of the Court is conferred by Section 2 of

the Expediting Act (15 U.S.C. 29). United States v.

Phillipsburg National Bank, 399 US. 250; United

States v. Third National Bank in Nashville, 390 U.S.

171.

QUESTIONS PRESENTED

1, Whether acquisition of a leading bank in a con-

centrated local market in Colorado by one of the

largest holding companies in the state violates Section

7 of the Clayton Act by eliminating the potential com-

petition of the acquiring firm and by contributing to

the statewide trend toward domination of commercial

banking by a few large holding companies.

2. Whether acquisition of the second largest bank

in Greeley, Colorado, by the second largest bank hold-

ing company based in Denver, Colorado, may sub-

stantially lessen competition among Denver banks

offering correspondent banking services to Colorado

“country banks” by contributing to the trend toward

foreclosure of outlets for such services in the state.

STATUTES INVOLVED

Section 7 of the Clayton Act, 38 Stat. 731, as

amended, 64 Stat. 1125, 15 U.S.C. 18, provides in

pertinent part:

No corporation engaged in commerce

shall aequire, directly or indirectly, the

whole or any part of the stock or other

share capital and no corporation subject

to the jurisdiction of the Federal Trade

Commission shall aequire the whole or

any part of the assets of another corpo-

ration engaged also in commerce, where

in any line of commerce in any section

of the country, the effect of such aequi-

sition may be substantially to lessen com-

petition, or to tend to create a monopoly.

* * * * *

Section 3(¢) of the Bank Holding Company Act of

1956, 70 Stat. 134, as amended, 80 Stat. 237, 12 U.S.C.

1842(¢), provides in pertinent part:

The [Federal Reserve] Board shall not

approve—

(2) any other proposed acquisition or

merger or consolidation under this sec-

tion whose effect in any section of the

country may be substantially to lessen

competition, or to tend to create a

monopoly, or which in any other manner

would be in restraint or’ trade, unless it

finds that the anticompetitive effects of

the proposed transaction are clearly out-

weighed in the public interest by the

probable effect of the transaction in

meeting the convenience and needs of the

community to be served.

In every case, the Board shall take into

consideration the financial and managerial

resources and future prospects of the com-

pany or companies and the hands con-

cerned, and the convenience and needs of

the conununity to be served.

So in orginal.

$66 -162--12——2

————

STATEMENT

This is a direct appeal from the judgment of the

United States District Court for the District of Colo-

rado, dismissing a complaint by the United States

alleging that the acquisition by the second largest

bank holding company in the State of Colorado, First

National Bancorporation (‘*Bancorporation”), of The

First National Bank of Greeley (“FNB Grecley’’),

the largest independent bank and the second largest

commercial bank in Greeley, Colorado, violated See-

tion 7 of the Clayton Act.

A. THE STRUCTURE OF BANKING IN COLORADO

It is agreed that, insofar as this case involves

potential competition, the relevant product market

is, as the district court found (J.S. App. A, pp.

41-43), “commercial hanking.”’ *

Denver is the banking, commercial and financial

center of Colorado (see App. 219-221).’ It has almost

a quarter of the State’s population and almost half

of the State’s bank deposits (compare PX 21, App.

782, and DX 32, App. 1670). Bancorporation’s prin-

cipal subsidiary, the First National Bank of Denver

(“FNB Denver”) is the largest bank in the city; it

* The court found it unnecessary to make any finding about

product market in resolving the separate question relating to

correspondent banking services (see n. 20, infra).

*“App.” references are to the printed appendix in this Court:

“PX” references are to plaintiff-appellant’s exhibits introduced

in the district court; “DX” references are to {6 defendants

appellees’ exhibits in the district court.

GR Pa el rE nr

had 25.3 percent of the deposits in Denver County

in December 1969 (PX 21, App. 782).

There are also other significant banking markets

in Colorado, which are located in the other population

centers of the State—Colorado Springs, Boulder, Fort

Collins, Pueblo, and Greeley. All of these cities are

located along the Rocky Mountain front, north and

south of Denver.

Colorado prohibits branch banking,’ but does not

prohibit common ownership of two or more separate

banks by a holding company.

In the 1960’s the leading Colorado banks began to

form holding companies to bring local banks across

the state under common control (PX 4, App. 534-

535). In 1960, there was one holding company operat-

ing in Colorado—an out-of-state firm, Western Ban-

corporation—which operated three subsidiary banks

in Colorado accounting for 4.4 percent of total Colo-

rado deposits.” By 1970, there were seven such com-

panies, which together operated 41 subsidiary banks

throughout the state (JS. App. A, n. 35), including 13 °

of the 27 banks outside of Denver that had June 1970

deposits of more than $20 million (PX 125, App.

1157). By concentrating on the acquisition of local

market leaders in Colorado’s most significant bank-

ing markets (DX 3, App. 1371-1372), these seven

companies by 1970 had obtained 51 percent of the

* Colo. Rev. Stat. 1963. § 14-3-1 (1969).

* As an out-of-state holding company, Western Bancorpora-

tion was barred by the Bank Holding Company Act of 1956

from further expansion in Colorado. 12 U.S.C. 1842(d).

*This includes the post-trial acquisition of National State

Bank of Boulder by Bancorporation. See n. 9 infra.

State’s total deposits,’ although they owned less than

one-fifth of all Colorado banks. As a result, despite

an increase in the absolute number of banks and bank-

ing organizations in Colorado between 1960 and 1970

(DX 28, App. 1653-1660), there has been a trend

toward control by a few large holding companies of

the leading banks in local market areas (see n. 28,

infra, and accompanying text at pp. 24-25).

%. THE ACQUIRING HOLDING COMPANY

Bancorporation is a registered bank holding com-

pany. It was organized by the state’s largest bank,

First National Bank of Denver (**F NB Denver’’), to

combine FNB Denver as its lead bank with three

smaller Denver banks that had been organized de novo

by principals of FNB Denver (PX 3, App. 513; PX

4, App. 534-535; PX 5, App. 552-554; PX 6, App.

557-561). In June 1970, FNB Denver had _ total

deposits of $468.0 million (12.3 percent of total

deposits held by Colorado commercial banks) ; it had

total assets of $586.5 million, and loans and discounts

of ¥340.8 million (J.5., App. A, pp. 29-30). Moreover,

FNB Denver is the largest of the six Denver banks

offering a full range of correspondent banking service

to smaller Colorado banks.” As of August 1970, it had

‘Computed from PX 115, App. 1144-1145, and DX 28, App.

1655-1660.

* Because of Denver's political, social, and economic signifi-

cance in the state and region, smaller “country” banks through-

out the state rely upon six downtown Denver banks to supply

their primary needs for large bank services. These inter-bank

operations are known as correspondent banking services, which

include such things as check clearing, overline loans, advice on

local banking regulations, international transactions, and a

growing number of financial and bank-related services.

a .

more than 37 percent of the Colorado interbank de-

posits held by these six banks, as compared to approni-

mately 23 percent held by each of the two next largest

banks (PX 204, App. 1503; PN 205, App. 1304; see

also App. 247-248).

At the time of its organization, Bancorporation

stated in its first annual report (PX 3, App. 513):

The policy of our company is to ex-

pand as rapidly and as wisely as possible

through the acquisition of other banks in

Colorado (preferably banks in_ those

growth areas where Bancorporation may

make the most significant contribution to

Colorado’s economy and concurrently

generate the highest profits for its share-

holders) and through other legally per-

missible investments and_ activities.

Bancorporation has vigorously pursued this policy by

attempting to enter all but one of the state’s six most

significant markets. Its proposed acquisition of FNB

Greeley was the first of six applications filed by the

holding company between 1969 and 1971 seeking reeu-

latory permission to acquire important banks in vari-

ous Colorado local banking markets.” Its six applica-

“In addition to the three applications discussed at n. 28,

infra, Bancorporation has had two others. The Federal Reserve

Board denied its application to acquire the only bank in the

rapidly expanding Montbello section of Denver (DX 52, App.

1750-1759): it approved its acquisition of the second largest

bank in Boulder. In the latter instance the government. did not

bring suit because the acquired bank was in serious financial

difficulties. Jv the Matier of First National Bancorporation,

Ine.. 57 Fed. Res. Bull. 613. It also recently acquired a small

bank in East Colorado Springs. Fed. Res. Bd. Order, April 26,

1972.

Re...

Soames tas

tions involved banks with total deposits of $217.2 mil-

lion (DX 1, App. 1329-1336); these included the

state’s eighth, ninth and fifteenth largest banks (PX

123, App. 1155), which were the third, fourth and

ninth largest banks outside Denver (PX 125, App.

1157). The holding company has other proposals

under active consideration (PX 241, App. 1323-1328;

see also PX 4, App. 535-536; PX 6, App. 561-564;

App. 286).

Cc. THE LOCAL GEOGRAPHIC MARKET

The district court found that the relevant geo-

graphic market for purposes of determining the ef-

fect of the present acquisition on potential competi-

tion is the so-called ‘*Greeley Area,” consisting of the

City of Greeley, Colorado, and the adjacent communi-

ties of Evans, LaSalle, Peckham, Kersey, Gill, Eaton,

Lucerne, Farmers and Bracewell (J.S., App. A, pp.

32, 4347). Appellees have not challenged this find-

ing.

The City of Greeley is located approximately 50

miles north of Denver in Weld County; it is the

county seat (J.S., App. A, p. 29; App. 37). The Gree-

ley Area is presently undergoing rapid development;

in the past deeade it has grown substantially, while

the entire economy of Weld County, previously agri-

1° With respect to the effect of this acquisition on actual com-

petition among Denver-based banks for correspondent banking

; services, the court found it unnecessary to decide the relevant

geographic market (see n. 20, ‘vfra).

cultural, has experienced a healthy diversification

(App. 74-75).”

The population of the Greeley Area increased from

45,228 to 58,500 between 1960 and 1970, an increase of

29.3 percent (PX 98, App. 1126). Most of this in-

crease occurred within the City of Greeley, where the

expansion was 47.8 percent (PX 88, App. 1118). Eco-

nomic growth during the period was even more sig-

nificant. For example, the consumption of electric

power and of natural gas increased 115.8 percent (PX

101, App. 1127) and 127.3 percent (PX 100, App.

1127), respectively; and the number of main tele-

phones went up 48.2 percent (PX 99, App. 1126).

Retail sales for Greeley—which is Weld County’s

trade and government center (App. 37-39)—were up

97.1 percent (PX 91, App. 1121), while gross sales

rose 281.8 percent (PX 90, App. 1120). Moreover,

personal income in Weld County increased from

$119.5 million in 1959 to $212 million in 1968 (PX

103, App. 1128).”

" Between 1950 and 1968, Weld County continued to be one

of the nation’s top ten agricultural counties. But farm earn-

ings, which accounted for 49.2 percent of the total personal

income at the beginning of this period accounted for only 28.3

percent at the end. In the same period, earnings from manu-

facturing increased from 4.1 percent to 11.1 percent (J.S., App.

A, p. 34, n. 4; PX 104, App. 1129-1130).

% Since three-fourths of Weld County's population growth

is attributable to the City of Greeley (PX 88, App. 1118), pre-

sumably a similarly disproportionate share of the county’s

growth is personal income which was earned by Greeley

residents.

PE Te re

D. THE ACQUIRED BANK AND THE STRUCTURE OF

BANKING IN GREELEY

Within the Greeley Area, six separate banking or-

ganizations operate eight banking cffices of varying

size. Their relative market shares appear in tabular

form at J.S., App. A, p. 33. The acquired bank, FNB

Greeley, is the community’s largest independent bank,

and its second largest banking organization (J.S.,

App. A, pp. 32, 48). It is also Colorado’s fifteenth larg-

est bank in terms of total deposits, and ranks twelfth

in the state in terms of total loans and discounts (J.S.,

App. A, p. 31). It has total deposits of $39.2 million,

constituting 33.9 percent of the total deposits for the

city, and 31.8 percent of the total deposits for the

Greeley Area (J.S., App. A, p. 32). At the time of the

proposed acquisition, the total assets of FNB Greeley

were $47.7 million; its outstanding loans were $28.9

million, or 32.6 percent of the Greeley Area total (PX

73, App. 1097; PX 78, App. 1102).

The largest banking organization in the Greeley

Area is Affiliated Bankshares of Colorado, Ine.,

(“ABC”). It owns three banking institutions there,

the combined deposits of which total $49.6 million, or

42.9 percent of the total deposits for the city and 40.2

of the total deposits for the area (J.S., App. A, p.

33; PX 74, App. 1098). ABC’s principal local sub-

sidiary, Greeley National Bank, is almost the same size

as the acquired bank (PX 73-86, App. 1097-1116; PX

114-118, App. 1142-1151; and see App. 77-78).

The third largest banking organization operating

in the Greeley Area, United Bank of Greeley (‘UB

—

Greeley”), is a subsidiary of United Banks of Colo-

rado (“United’’), the state’s largest holding company

(PX 114-118, App. 1142-1151). UB Greeley has $24.7

million in deposits, which are 21.4 percent of the total de-

posits for the city and 20 percent of the total deposits

for the area (J.S., App. A, p. 33).

Together, the acquired bank, ABC and UB Greeley,

have 98.2 percent of total deposits in the City of

Greeley, and 92 percent of deposits in the Greeley

Area (J.S., App. A, pp. 32-33).

None of Bancorporation’s subsidiaries competes di-

rectly with Greeley Area banks for local business, but

the acquiring holding company has maintained a pres-

ence in the area through a_ loan-production office

operated by its lead bank, FNB Denver (PX 4, App.

538-539; PX 40, App. 952-953). It has made a number

of large loans in the area (PX 48, App. 1057-1058),

does some trust business there (PX 37), and has

solicited business in the area (PX 38).

Bancorporation is the largest Colorado holding

company not already in the Greeley Area (App. 75-

76). Of the three remaining holding companies in the

state not operating in the area at the time of trial,

only two appear capable of competitively sigiificant

entry; the third has a total combined deposit figure

which amounts to less than the deposits held by the

‘The only other bank in the City of Greeley, State Bank

of Greeley, is a commercial bank (App. 277) with less than 2

percent of local deposits (J.S.. App. A. p. 33). There are two

additional banks in the Greeley Area, which combined have

slightly more than 6 percent of the area’s total deposits (/béd.).

acquired bank (7bid.; Compare J.S., App. A, pp. 35-

36, n. 5, with PX 74, App. 1098).

E. THE PROCEEDINGS

On July 9, 1969, Bancorporation applied to the Fed-

eral Reserve Board, pursuant to Section 3(a)(3) o/

the Bank Holding Company Act of 1956 (70 Stat. 134,

as amended, 84 Stat. 1763, 12 U.S.C. 1842(a) (3) ), for

approval of the proposed acquisition of FNB Greeley.

The Comptroller of the Currency recommended ap-

proval, but the Department of Justice advised the

Board that it believed the combination “would have

a significantly adverse effect on competition’? (1X

48, App. 1718). The Board approved the application

by a four-to-three vote on June 9, 1970."

™ Those three holding companies are: Colorado CNB Bank-

shares, with combined deposits of $281.8 million; First Colorado

Bankshares, with combined deposits of $120.4 million; Central

Colorado Bancorporation, with combined deposits of $36 million

(J.S.. App. A, pp. 35-36, n. 5). Mountain Banks, Ltd., the

new holding company formed since trial which owns two of the

banks Bancorporation proposed to acquire (see n. 28, ‘nfra), has

combined deposits of $182.5 million. Wountain Banks, Ltd., 58

Fed. Res. Bull. 315.

**The majority, while recognizing that Bancorporation had

the capacity for de novo or foothold entry into Greeley, con-

cluded that the banking market there was not so concentrated

that Bancorporation should be limited to these alternatives (DX

48, pp. 1718-1719). The existence of a non-Denver bank

holding company, (Affiliated Bankshares of Colorado, Inc.) in

the area, it felt (DX 48, App. 1719-1720), assured sufficient

market diversity to prevent increased “parallelism” in the

Greeley Area. Nor did it consider particularly relevant the fact

that Bancorporation’s application was but one of several by

Colorado holding companies across the state; the impact of each

proposed acquisition on the state’s banking structure must be

FEM LT LPT TIT SAF . ‘ . . 2

——

The United States filed this civil antitrust action on

July 8, 1970, thereby automatically staying consum-

mation of the acquisition under Section 11(b) of the

Bank Holding Company Act of 1956 (70 Stat. 138, as

amended, 80 Stat. 240, 12 U.S.C. 1849(b)).” It

claimed that the acquisition would substantially lessen

competition by (1) eliminating Bancorporation as a

potential entrant into the Greeley Area, (2) removing

it as an external influence on the relevant market, and

(3) contributing to the trend toward dominance of

the state’s banking institutions by a few large holding

companies. In an amended complaint (App. 20-26),

the United States further alleged that the acquisition

would eliminate actual competition by foreclosure of

FNB Greeley as a customer for the correspondent

banking services in Colorado, offered by six Denver

banks; and that this would contribute to the trend

considered solely on its individual merits, the majority con-

cluded (DX 48, App. 1719).

The three dissenting members deemed the proposed acquisi-

tion to be anticompetitive (DX 48. App. 1725-1728). In their

view, the effect of the majority’s approval is to permit Ban-

corporation, upon a minimal showing, to enter by acquisition

into a market that is attractive for de wore entry, under cir-

cumstances where its existing presence could be expected to

expand into a full service operation in competition with exist-

ing banks. They argued that the adverse impact of such a de-

termination is accentuated by the ongoing holding company

movement, which threatens to concentrate in the hands of a few

the control of a large percentage of the banking institutions

in Colorado’s six most significant banking markets (Denver,

Colorado Springs, Boulder, Fort Collins, Greeley. and Pueblo).

The time to stop this trend, they concluded, is now.

*%* On October 4, 1971, Mr. Justice White continued the stay

pending disposition of this appeal.

Bee.

toward foreclosure of a substantial portion of the

market for correspondent banking services due to

holding company ownership of both supplier and

customer banks,

Following a trial on the merits, the district court

distuissed the complaint. It ruled that the government

had failed to show that the effect of the aequisition

“would be substantially to lessen competition’ (J.S.,

App. A, p. 47). It discounted as “future horribles”’

(id. at p. 52) the government's evidence of a trend in

Colorado toward the acquisition by statewide holding

companies of leading banks in separate local markets.

Instead, noting that thix was Bancorporation’s first

attempt to expand beyond the Denver metropolitan

area,” the court foeused only on the competitive

unpact of this acquisition on banking in the Greeley

Area.

First, the court found that Bancorporation was not

a potential de novo entrant into the relevant market.

Relying solely upon figures showing comparisons of

population per banking office (J.S., App. A, p. 49), it

determined that neither the Greeley Area nor Weld

County was “underbanked."’" >sancorporation off-

The court stated that ~* * * this is the first effort on the

part of the Government to halt the trend of acquisitions. It did

not choose to intervene until after the United Banks of Colo-

rade and Affiliated Bankshares had both entered the Greeley

Area” (3.5. App. A. p. 37).

"While Greeley’s ratio of 6454 persons per bank office ix

lews than the 9854 ratio for the state, it is larger than the na-

tional figure of 5,751 (J.S.. App. A, p. 49). Moreover, the addi-

tion of a seventh bank based on 1970 population figures would

draw the ratio down to 5.557, or slightly less than the national

cials, it pointed out, had denied any intention to enter

the Greeley Area other than by acquisition of PND

Cirecley. Moreover, “objective” evidence showing that

Greeley’s growth was only “moderate,” and that the

appropriate banking agencies would not now permit

de novo entry, seemed, in the court’s view, to give sub-

stance to these denials. Consequently, while reeog-

nizing Bancorporation’s financial capability for de

novo entry, it concluded that “the practical difficulties,

together with the expense, argue against Bancorpora-

tion’s following this route’ (LS., App. A, p. 50).

The possibility that Bancorporation would make a

“foothold” acquisition of Creeley’s smallest bank *™*

was dixmissed as unlikely under “the objective evi-

dence presented” (JS., App. A, p. 50); the court did

not dixcuss, however, the other two “foothold” possi-

bilities in the larger Greeley Area with respect to

which the government had introduced evidence (see,

Cy PX 73-83, App. 1097-1107).

The court also concluded that there was little evidence

demonstrating that Bancorporation was an existing in-

fluence in the market by its presence in the “wings”

(J.8., App. A, pp. 50-51).

Finally, the district court rejected the government's

argument that this acquisition would effect an

anticompetitive foreclosure of FNB Greeley as a cus

tomer for Denver-based correspondent banking serv-

average. Among the several states, these ratios range from a state.

wide average low of 2501 for South Dakota to a high of ATO

for Florida (DX 22, App. 1623-1624). Colorado's ratio in the

second highest in the nation (/b//.).

i Soon, 2, infra, p. 22.

: _

ices. It held that the 1.2 percent ” foreclosure claimed

by the government was insub-tantial.” The court dis-

tinguished cases holding similarly small market fore-

closure percentages to be anticompetitive on the

ground that they involved national markets in other

industries (J.S., App. A, p. 60).

The district court accepted this figure only arquendo. First,

it found questionable the government's reliance on interbank de-

posits as an acceptable measure of market shares in the corre-

spondent banking market ; it pointed out that wide variations in

the amount of uncollected funds in deposit accounts distort the

sums actually available for investment by the correspondent

banks. Second, the court found that the government's market was

improperly restricted to the interbank deposits of Colorado banks

held by six Denver correspondent banks (J.S.. App. A, pp. 58-59).

* In light of this finding, the court found it unnecessary to de-

cide whether Denver-based correspondent banking is an appro-

priate “line of commerce.” and whether Colorado is an appropriate

“geographic market™ or “submarket” (J.S., App. A, pp. 53-58).

"On August 27, 1971, the district court denied the govern-

ment’s timely motion to reopen the record, to obtain additional

findings of fact, and to obtain the relief requested in the complaint

(J.5., App. B, p. 62). The purpose of the motion was to place in

evidence post-trial developments in Colorado banking, which, in

the government's view, show that firms to which the merger route

is barred a8 potential competitors often become actual competi-

tors, The developments included United's decision to acquire a

much smaller bank in Colorado Springs after the government's

suit interrupted its effort to purchase that city’s third largest

bank (App. 2001-2003; PX 244-245, App. 2022-2029), and the

formation of a new holding company around two of the banks

that Bancorporation unsuccessfully attempted to acquire in Colo-

rado Springs and Pueblo ( App. 1997-2001; see n. 24, jnfra).

In denying this motion the district court ruled that the evidence

pertaining to the holding company formation was not newly dis-

covered and that in the interest of finality it should not be the

lasis for granting the relief requested (App. 2007). It permitted

the government to present its evidence, however, so that it could

ARGUMENT

INTRODUCTION AND SUMMARY

The structure of the banking business in the United

States is presently undergoing significant changes.

With the relatively recent emergence of the bank hold-

ing company movement, and, where permitted by state

law, the branch banking movement, there now exists

the potential for substantially-increased competition

in commercial banking through new entry into pre-

viously static local banking markets. But these expan-

sive movements also present serious risks for future

competition in this vital sector of the economy.

The ultimate effect that this expansion will have on

the competitiveness of the banking business in this

country will depend largely on the method by which

banking organizations are permitted to expand. When,

for example, entry into new markets is accomplished

independently or through the acquisition of a small

hank as a foothold from which to compete for a

greater market share, the local markets affected be-

come the arena for greater competition, On the other

hand, when banking organizations extend their mar-

kets by aequiring leading local ban» in significant

banking areas throughout a state, the potential com-

petitive benefits of their entry are lost; they simply

succeed to the share of the acquired institution and, in

be utilized in this appeal (/bid.). With respect to United's deci-

sion to attempt entry into Colorado Springs by acquiring a smal]

bank. the court found it to be without probative value in the pres-

ent case; it found that “Bancorporation would not go into Greeley

on any foothold basis” ( App. 2007-2008).

many instances, eliminate strong independent locally-

oriented banking competitors in the local markets.

In many states, continued expansion by a few bank-

ing organizations in the manner last described has

recently resulted, or threatens to result, in a concen-

tration of the statewide banking business in a few of

the largest and most acquisitive organizations.” The

situation in Colorado is a good example. There, the

trend toward concentration has rapidly accelerated,

with Denver-based holding companies endeavoring to

acquire control of established institutions which have

large market shares in the state’s more important local

banking markets. This form of acquisition is known asa

market extension—i.¢., the entry of a firm into a new

geographic market by acquisition of a firm already

doing business there. While it does not change existing

market shares, it may well have a significant effect on

market structure and behavior by eliminating the po-

tential competition of the acquiring organization.

This case involves the legal criteria by which the

substantiality of such an effect is to be determined in

market-extension acquisitions by banking organiza-

tions; it raises squarely the question of the extent to

which Section 7 of the Clayton Act forbids this de-

veloping domination by large banking organizations of

a substantial percentage of the banking business in a

particular state. For, as we have noted, the state

boundaries form the legal arena to which banking ex-

#2 See Board of Governors of the Federal Reserve System.

Recent Changes in the Structure of Commercial Bavking,

Fed. Res. Bull. 195, 205-208 (1970). for recent statewide changes

in concentration.

SER OTA —-~ . . , n .

pansion is limited, and from which out-of-state banks

are excluded.

The preservation of competition in banking has been

a matter of recent concern to Congress. Both in the

Bank Merger Act of 1966, 12 U.S.C. 1828(¢)(7)(D),

and in the 1966 amendment to the Bank Holding

Company Act, 12 U.S.C. 1842(¢), Congress barred

federal regulatory approval of bank acquisitions which

would violate the antitrust prohibitions of Section 7

of the Clayton Act unless “the anticompetitive effects

of the proposed transaction are clearly outweighed in

the public interest by the probable effect of the trans-

action in meeting the convenience and needs of the

community to be served.” It directed the federal courts

to follow the same standard. See e.g., United States v.

Phillipsburg National Bank, 399 U.S. 350; United

States v. Third National Bank in Nashville, 390 U.S.

171; United States v. First City National Bank of

Houston, 386 U.S. 361.

In resolving the question relating to potential com-

petition in this case, the district court erroneously

required the government to prove that competition

“would be” lessened (J.S., App. A, p. 47), rather than

looking to whether the effect of the questioned acquisi-

tion “may be substantially to lessen competition or

tend to create a monopoly,” as required by Section 7.

Moreover, it applied subjective rather than objective

criteria in determining the substantiality of the ac-

quiring bank’s role as a potential competitor; it failed

to give due weight to existing concentration in the

Greeley Area; and it ignored the relationship between

45-165 -72 4

~ ——

this particular acquisition and the undisputed trend ]

toward concentration throughout the state. | \

Finally, the district court erred in failing to recog- j

nize that the elimination of the acquired bank as a 2

customer for correspondent banking services in Colo- a

rado may substantially lessen actual competition in the ‘

state’s correspondent banking market. In evaluating | i

this question, the court considered the FNB Greeley (

acquisition in isolation, without regard to the trend

in Colorado toward foreclosure of the correspondent (

banking market through large bank holding company (

acquisitions. This Court and other courts have recog- {

nized that where a trend toward substantial foreclo- 1

sure is present, acquisitions of relatively small market ‘

segments, such as the 1.2 percent involved here, are

significant. See Brown Shoe Co. v. United States, 370 ;

U.S. 294, 332-334. t

I. THE EPFECT OF THE PROPOSED ACQUISITION MAY BE SUBSTAN-

TIALLY TO LESSEN COMPETITION IN COMMERCIAL BANKING IN THE

GREELEY AREA BY ELIMINATING THE SIGNIFICANT POTENTIAL

COMPETITION THAT THE ACQUIRING BANK HOLDING COMPANY

PROVIDED IN THAT AREA

— a

A. An Acquisition That Eliminates Significant Pktential Com-

petition in Banking May Substantially Lessen Competition

within the Meaning of Section 7 of the Clayton Act. '

In a market with many firms of roughly comparable

size and strength, internal competition can be generally

relied upon to keep down prices, to promote efficiency,

and to encourage innovation. But where the market is

highly concentrated—where a few firms account for

most or all of the business—there is, as this Court

observed in United States vy. Philadelphia National

OE RE IE

Bank, 374 U.S. 321, 363, a real danger that the firms

vill find their interests best served by tacitly renounc-

ng vigorous competition, by adopting a policy of “live

ind let live.” Actual competition may then cease to be

. fully effective force; by mutual, though tacit, con-

ent, it may be abandoned in favor of parallel behav-

or and the ‘‘easy life.” United States v. Aluminum

/0. Of America, 377 U.S. 271, 280.

It is therefore important that the firms in a con-

entrated market remain subject to a significant form

f competitive restraint; and that is the role of po-

ential competition. Potential competition (i.e., the

hreat of entry by strong firms outside the market

ither independently or by acquisition of a smal] firm

uready in the market) often provides the most sig-

1ificant limitation on the exercise of market power by

he leading firms in a concentrated market. Conse-

juently, the elimination by acquisition of one of the

eading potential entrants into the market can have a

significant anticompetitive effect on the existing mar-

cet structure. And this is particularly so where, as

ere, there are extremely few firms which have the

neentive and capability to introduce a significant new

‘ompetitive factor into the market.

For this reason, the effect of a merger or acquisi-

ion which results in the elimination of a significant

potential competitor “may be substantially to lessen

“ompetition”, contrary to Section 7 of Clayton Act.

Ford Motor Co. vy. United States, No. 70-113, O.T.

971, slip op. 6, decided March 29, 1972; Federal

[rade Commission v. Procter & Gamble Co., 386 U.S.

568; United States vy. Penn-Olin Chemical Co., 378

U.S. 158; United States v. Continental Can Co., 378

U.S. 441; United States vy. El Paso Natural Gas Co.,

376 U.S. 651.” The continued presence of a number of

strong firms on the periphery of such a market with the

capability and incentive to enter it is both an external

factor influencing the conduct of those firms already

inside,” and a possible source of future deconcentration

through independent or “ foothold” entry.” This Court

has recognized the importance of preserving the

sources of deconcentration in concentrated markets.

“[L]f concentration is already great, the importance

of preventing even slight increases in concentration

and so preserving the possibility of eventual decon-

centration is correspondingly great.” United States v.

Philadelplaa National Bank, supra, 374 U.S. at 365,

*§ See also U'nited States vy. Standard Oil Co., (N.J.), 253 F.

Supp 196 (D. NJ.) : Uuited States vy. Jos. Schlitz Brewing Co..

255 F. Supp. 129 (N.D. Cal.), affirmed, 385 U.S. 37; United

States v. Wilson Sporting Goods Co., 288 F. Supp. 543 (N.D.

Ill.): Ekeo Products Co. y. Federal Trade Commission, 2A7

F.2d 745 (C.A. 7); General Foods Corp. y. Federal Trade

Commission, 386 F.2d 936 (C.A. 3), certiorari denied, 391

U.S. 919.

**See also Bain. /ndustricl Organization, 2d ed. 1968, p. 8:

Turner, Conglomerate Mergers and Section 7 of the Clayton

Act, 78 Harv. L. Rev. 1313. 1572-1373 (1965); Areeda, Anf/-

trust Analysis, 517-518 (1967).

*“Foothold” entry means entry by a new competitor into a

market, through acquisition of a small competitor already

operating there. See The Bendix Corp.. 3 Trade Reg. Rep.

19.288, vacated and remanded on other grounds, 7he Bendir

Corporation y. Federal Trade Commission, ASO F. 2d 534 (CLA. 6):

The Stanley Works (Order of the Federal Trade Commission

dated May 17, 1971), 3 Trade Reg. Rep. © 19.646.

fi. 42.° An acquisition that eliminates such potential!

competition may have no less serious anticompetitive

effects than one that eliminates existing competition.

Cf. United States v. Penn-Olin Chemical Co., supra,

378 U.S. at 168, 170-174.

Potential competition is as important in banking

as in any other industry, perhaps more so. Because

local banking markets can support only a_ limited

number of banks, such markets necessarily tend to

be concentrated. The possibility of outside entry is,

therefore, of particular significance, since it may be

the only factor that inhibits anticompetitive conduct

by firms within the market and also the most likely

means for achieving market deconcentration.

LR. The Anticompetitive Effect of an Acquisition That Elimi-

nates a Significant Potential Banking Competitor Is Eveu

Greater Where It 1s Part of a State-wide Tieud Toward Con-

centration in Banking.

A recent trend in the banking dustry has been

the acquisition by large banks (in states that permit

branch banking) or by holding companies of the lead-

ing independent banks in concentrated local markets.

The existence of this condition increases the anti-

competitive effect of an acquisition, such as the one in-

volved here, that eliminates from the edge of a local

market a potential entrant which merely substitutes

itself for an already established local bank with a

“New entry can, of course, quickly alleviate ‘undue’ con-

centration. And the possibility of entry can act as a substantial

check on the market. power of existing competitors.” ['n/ted

States v. Phillipsburg National Bank, supra, 399 U.S, at 377 (Mr.

Justice Harlan, dissenting).

oes be

substantial market share. Such an acquisition not

only removes the significant procompetitive effect upon

local market behavior that the acquiring firm pro-

vided; it also jeoparizes the vigor of competition in

the area which, because of its concentration, depends

so much on the presence of strong independent banks.

When a few leading institutions within a state

enter most of that state’s significant local banking

markets by purchasing large market shares instead

of competing for them, the same organizations begin

to confront each other as the dominant factors in

separate concentrated markets all over the state (App.

133-134). This creates a real danger that the domi-

nant banks, not faced with the difficulty of having

to compete locally for survival—as would be the case

had entry been made de novo or by foothold aequisi-

tion—will tacitly renounce vigorous competitive prac-

tices in the areas in which they operate (App. 141-

142); the few state leaders, facing each other in

commonly linked oligopolistic markets, will be en-

couraged to pursue parallel practices in disregard of

local competitive conditions (ibid; App. 133, 134).*

‘*As that condition develops the greater is the likeli-

hood that parallel policies of mutual advantage, not

competition, will emerge.”’ United States v. Aluminum

Co. of America, supra, 377 U.S. at 280.

Just such a situation now threatens in Colorado.

Seven Colorado holding companies already control

more than half of the state’s total deposits (J.S., App.

*7 See also Elinor Harris Solomon, Bank Merger Policy and

Problems—A Linkage Theory of Oligopoly, Journal of Money,

Credit and Banking, p. 323 (1970).

Lee

A, p. 35); they own almost half (13) of the 27 most

significant banks—those having total deposits in ex-

cess of $20 million (PX 125, App. 1157)—outside

of Denver. And, but for the institution of government

antitrust litigation and the disapproval of other ac-

quisitions by the bank regulatory authorities because

of their adverse competitive effects, the degree of

statewide concentration would have been even

greater.”

** The largest state-based holding company, United Banks of

Colorado, Ine... abandoned plans to acquire the . third

largest bank in Colorado Springs because the purchase agree-

ment expired during the period that a government antitrust

suit to enjoin its consummation was pending (App. 2001-

2002), Similarly, Bancorporation’s attempt to acquire the sec-

ond largest bank in Colorado Springs and El Paso County was

dropped when the government brought suit (PX 145, App.

1199-1221; DX 54, App. 1764-1795). Its application to acquire

the largest bank in Pueblo was rejected by the Federal Re-

serve Board on competitive grounds (DX 49, App. 1729-

1736). And a government civil antitrust action is now pending

with respect to its proposed acquisition of the largest bank in

Sterling and Logan County (United States v. First National

Bancorporation, Inc.. and the Security State Banking of Ster-

ling, D. Col., C-2754, filed Dec. 2, 1970).

Had the foregoing transactions been consummated, the total

number of banks outside of Denver with deposits of more than

$20 million that would now be controlled by these holding com-

panies, including the instant acquisition, would be 18 out of

27 (see PX 125, App. 1157). Moreover, the state’s largest

holding companies would have been much closer to the situ-

ation in which each was operating with a large market share in

each of the State's six most significant banking markets, namely,

Denver, Colorado Springs, Pueblo, Boulder, Greeley and Fort

Collins. United is now in six of these markets including Colo-

rado Springs in which its foothold entry recently was approved.

See n. 9 supra, and J.S.. App. A. pp. 35, n. 5. Western is

in Denver and Fort Collins (‘bid.). The fourth largest, Affili-

A recognized authority in state and federal bank

- regulation has recently written that ‘‘the potential

competition standard may be the only criterion avail-

able to the bank regulatory agencies or the courts by

which a trend toward a market dominated by only a

handful of banks or bank holding companies may be

checked.” The trend may develop extremely

‘apidly.” Indeed, in a number of states it has reached

ated Bankshares, Inc., is in Colorado Springs, Boulder and

ireeley (hid). The appellee here, Bancorporation, is in

Denver and Boulder, but would have been in all except Fort

Collins (ibid.). Thus in the five markets outside of Denver

in which these holding companies operate, thare would have

been only three banks with deposits of more thaz $20 million

not already controlled by them—one in Colorado Springs (the

lead bank in Central Colorado Bancorporation, Inc.) and two

in Pueblo). Compare DX 1, App. 1329-{436, DX 3 App. 1371

1372, and above text at pp. 5-6 with DX 2. App. 1337-1370.

The banks Bancorporation sought to acquire in Pueblo and

Colorado Springs are now the largest banks in a recently ap-

proved new five-banks holding company (App. 1997-2000:

Mountain Banks, Ltd.. 58 Fed. Res. Bull. 315). The organiza-

tion is interested in further expansion, and one of its principal

organizers testified that it would not rule out an acquisition of

FNB Greeley should it become available (App. 2001).

* Frank Wille, then New York Superintendent of Banking and

now Chairman, Federal Deposit Insurance Corp., in foreword

to Kohn and Carlo, Potential Competition: Unfounded Faith

or Pragmatic Foresight? (New York State Banking Depart-

ment, 1970).

*° Board of Governors of the Federal Reserve System. Recent

Changes in the Structure of Commercial Banking, 56 Fed. Res.

Bull. 195 (1970). As there pointed out, statewide concentration

ratios measured by total deposits held by the five largest bank-

ing organizations are very high.

The practical enforcement problera in dealing with a trend

of acquisitions is especially acute in banking. Under the terms

of the Bank Merger Act and the Bank Holding Company Act.

RE EI ee EF

the point where two or three banking organizations

together control more than half of the state’s total

deposits (DX 30, App. 1662-1663). In some states where

the concentration has been very intense, there have

recently been some signs of deconcentration as new

banking organizations have been created. The situation

in the banking industry today is therefore at a crucial

stage in which the trend could go either toward in-

creased statewide concentration, or toward a more

competitive situation.”

‘‘There is no reason to think that concentration is

less inimical to the free play of competition in bank-

ing than in other service industries’? (United States

v. Philadelphia National Bank, supra, 374 U.S. at

369). The recent increase in concentration of the bank-

ing business in Colorado necessarily is felt in the con-

centrated local markets, as state-wide firms acquire

one important bank after another. Section 7 of the

Clayton Act applies equally to large and small bank-

ing markets (ef. United States v. Phillipsburg Na-

tional Bank, supra, 399 U.S. at 357-358). In determining

the effect of the present acquisition upon competition

in the Greeley Area, the broader context in which the

the government must commence antitrust proceedings against

an approved bank merger or holding company acquisition within

30 days of the approval. See 12 U.S.C. 1828(c) (6) and 1849(b).

By the terms of the statutes, the government does not have the

option, available in other industries, to take appropriate re-

medial action at some later time to undo mergers which subse-

quently appear to have been part of an anticompetitive trend.

31 Recent Changes in the Structure of Commercial Banking,

supra, n. 30.

466-163—72—_5

ms iit i

acquisition took part—the state-wide trend toward

concentration—-is a significant factor.

The district court, however, declined to consider the

state-wide trend toward concentration in evaluating

the competitive impact of this aequisition. It held,

instead, that Bancorporation was not a potential en-

trant into the Greeley market, on the basis of testi-

mony by officials of that firm that in fact they would

not have entered the market except by the aequisition

of FNB Greeley. We argue below that the subjective

intent of the acquiring firm is not the proper basis

under Section 7 for determining whether it is a poten-

tial market entrant. The district court's analysis is

further flawed, however, by its failure to reeognize

that the trend by all the bank holding companies in

Colorado, including Bancorporation (see n. 28 supra),

to enter important local markets made Bancorporation

a more visible potential competitor to those banks in

the Greeley market and increased the likelihood that it

would have entered either by acquiring a sinaller bank

or by itself attempting to come in independently.

C. The Determivattonm Whether the Acquiring Firm Is

Potential Competitor Depends Upon the Objective Facts

Relating to Ita Independent Entry Into the Market and Not

Upon Management's Subjective Statements With Leaspert to

the Likelihood of Such Entry.

In determining that Bancorporation was not a

potential entrant into the Greeley Area, the district

court placed principal reliance on testimony by FND

Denver officials that Bancorporation did not intend to

enter that market except by acquisition of FNB

Greeley, with its large market share. **The evidence

is uncontradicted,”’ it stated (J.S., App. A, p. 49)

“that Banecorporation has no intention of entering

the Greeley market if this acquisition is disapproved.”

Although it found that “Bancorporation has the fi-

nancial capability to enter the Greeley market de

novo,” the court concluded (J.S8. App. A, p. 50) that

“the practical difficulties, together with the expense,

argue against Bancorporation’s following this route.”

mere the emeet omedidedd 4S S.. Agy Aly. ob) that

As this Court has recognized, however, the appli-

cation of Section 7 to corporate combinations that

involve the elimination of potential competition can-

not turn on subjective statements corporate

intent. In United States ¥. Penn-Olin Chemical

Co., supra, 378 U.S. at 175, after a full review of

objective evidence showing the capability and incen-

tive of joint venturers to enter a market independ-

ently, this Court held: “Unless we are going to re-

quire subjective evidence, this array of probability

certainly reaches the prima facie stage. As we have

indicated, to require more would be to read the statu-

tory requirement of reasonable probability into a re-

quirement of certainty. This we will not do.” See also

Federal Trade Commission v. Procter & Gamble Co.,

386 U.S. 568, 580-581.

The proper standard, we submit, for determining

whether a firm is a potential entrant into a new mar-

ket is based upon objective factors: whether, con-

sidering the structure of the market, the putative

entrant's financial capability to enter independently,

x i

its economic incentive to do so, and the reasonable

prospects for making such an entry successful, there

exists a basis for entry which would be reasonably

acceptable to prudent management, if entry by acqui-

sition of a large market share was not available.

Section 7 is concerned with the prevention of anti-

competitive market structures and is designed to cut

off trends toward concentration in their incipiency.

Business management, by contrast, is necessarily and

properly motivated by a purpose to maximize profits.

Decisions must be made by bank executives in light

of the most immediate profit advantages to their

banks; their business judgments do not depend on pre-

serving the industry structure that is most likely to

encourage competition.

Thus, management's stated reluctance to enter a

market de novo or by a foothold acquisition is not

a ground for coneluding that the firm is not a poten-

tial entrant. See United States v. Ford Motor Co., 236

F. Supp. 407, 421 (E.D. Mich.), affirmed, No. 70-

113, this Term, decided March 29, 1972. Almost always

it is easier for a firm to enter a market by purchasing a

large existing market share than by engaging in the com-

petitive struggle required for independent entry or |

expansion through a small “foothold” acquisition ; this

method of entry has the additional attraction of also

removing a significant competitor (i.c., the acquired

firm) for the entering firm.

Baneorporation had an announced policy of ex-

panding as rapidly as possible through acquisitions

into growth areas which would generate the highest

profits to shareholders (PX 3, App. 513). But, from

the standpoint of preserving a competitive market

structure, the fact that expansion can be accomplished

by more profitable means is not a bar to or incon-

sistent with independent entry. United States v.

Standard Oil Co. (NA.), 23 F. Supp. 196, 220-223.

227 (D.NJ.). Section 7 reflects the fundamental con-

cept of insuring that the profit motivation in our free

enterprise system is directed into procompetitive

channels.

If management's subjective preference to maximize

profits by entering a market through acquisition rather

than independently were deemed controlling, Section

7 could not achieve its purpose of prohibiting all ac-

quisitions whose effect “may be substantially to lessen

competition.” It is therefore essential in assessing the

role of a potential entrant on the edge of a market

that the <ituation “be viewed functionally in the con-

text of the particular market involved, its structure,

history and probable future.” United States v. Con-

tinental Can Co., supra, 378 US. at 458; United

States ¥. Philadephia National Bank, supra, 374 US.

at 357-358; United States v. Phillipsburg National

Bank, supra, 399 U.S. at 360, 365.

Such an objective evaluation not only provides a

more accurate barometer for gauging the capabilities

of independent entry, but also affords a more realistic

reading of the potential entrant’s impact on the con-

duct of those firms already in the market under scru-

tiny. See, c.g., Ford Motor Co. vy. United States, supra;

United States ¥. Penn-Olin Chemical Co., supra. Ordi-

“ |

narily, firms in the market will be aware of objective

factors bearing on the economic incentive of others to

enter, and the financial capacity of such firms to do so.

But they will not be aware of the relative profit ad-

vantages to an outside firm that bear on manage-

ment’s determination whether to enter independently,

or by acquisition, or not to enter at all. And even if the

outside firm publicly announces a preference for ex-

pansion by acquisition, experience teaches that such

decisions are not immutable. See Pitofsky, Joint Ven-

tures Under the Antitrust Laws: Some Reflections on

the Significance of Penn-Olin, 82 Harv. L. Rev. 1007,

1024 (1969).

There is yet another reason for using objective

rather than subjective criteria in resolving potential

competition cases. Under the approach of the district

court, the competitive status of a firm on the edge of

the market depends essentially on the trial court’s

evaluation of the sincerity of statements by that firm’s

management that independent entry is not a feasible

alternative to entry by acquisition of a bank with a

large market share. This introduces a highly uncertain

factor into the administration of Section 7.

Management officials, who naturally attempt to

justify their corporate decision to enter a market by

acquisition, are often unable to give disinterested,

retrospective testimony about what their corporation

would have done if it had not been able to consummate

the acquisition. Moreover, experience has shown that

when an anticompetitive bank acquisition is blocked

by antitrust or other regulatory authority, the aequir-

ing firm may turn to a more competitive method of

market entry that it originally concluded it would not

pursue. In our growing economy, banking organiza-

tions have strong economic incentives to expand into

new markets, and where they cannot do so by acquisi-

tion of a local leader in the relevant market, they

often are willing to do so by de novo entry or foothold

acquisition.”

This has happened in Colorado. Bancorporation’s

application for Federal Reserve Board approval to

acquire Exchange National Bank, a large downtown

institution in Colorado Springs, characterized entry

de novo or by a small foothold aXquisition as

“imprudent.”’” But after this acquisition was aban-

doned in the face of a government antitrust suit,

n. 28, supra, Bancorporation applied for approval

of asmall foothold acquisition in the Colorado

Springs market, which it justified “inasmuch as Ban-

corporation was forced to cancel its agreement to

acquire the Exchange National Bank of Colorado

* Banks’ incentive to expand is demonstrated by nationwide

data which show that the rate at which the number of local

banking offices increases is highest in states with the fewest

restraints on the opening of new banking offices (DX 33-34.

App. 1671-1687). See also Board of Governors of the Federal

Reserve System, Recent Changes in the Structure of Commer-

cial Banking, 56 Fed. Res. Bull. 195, 205-208 (1970); Vernon,

Regulatory Barriers to Branching and Merger and Concentra-

tion in Banking Markets, 37 The Southern Economic Journal

349 (1971).

” Application to the Board of Governors for Prior Approval

of Acquisition by Bancorporation of the Exchange National

Bank, pp. G-21—G-23 (March 2, 1970).

Springs * * *.°°* Similarly, United, the state’s largest

holding company, agreed to acquire a much smaller

bank in Colorado Springs after its attempt to enter

that city by buying its third largest bank was aban-

doned in the face of a government antitrust suit

(App. 2001-2002).” There has been the same behavior

in other states,” and in other industries as well.”

“ Application to the Board of Governors for Prior Approval

of Acquisition by Bancorporation of the East Colorado Springs

National Bank, pp. 10. 46. 72-73. The Board approved this

application on April 25, 1972.

The abandoned acquisition involved a major bank with June

1970 deposits of $52.4 million. which were 19.5 percent of total

Colorado Springs deposits. while the foothold acquisition Ban-

corporation subsequently proposed involves a bank with $7.4

million in deposits, constituting only 2.5 percent of the city’s

total (PX 147. App. 1225).

"The Federal Reserve Board approved this application on

December 7. 1971. 58 Fed. Res. Bull. 5x.

“A recent study of proposed bank acquisitions in New York

that the state banking authority prohibited in order to pre-

serve the potential competition of the acquiring bank shows

that in ten of thirteen cases between 1961 and 1963, the appli

cant then entered the market involved independently or by a

smaller acquisition. Kohn & Carlo, op. cit.. xv pra. n. 29.

Experience elsewhere is similar. In Florida, four of the

state's largest banks were barred from combining under a

common holding company. Each bank then formed its own

holding company and the four banking organizations now

compete directly with each other. See Salley, A Decade of

Holding Company Regulation in Florida, Federal Reserve

Bank of Atlanta. Monthly Review. (July 1970). In Connecti-

cut, a proposal to combine the state's largest bank and another

large Connecticut bank was abandoned in the face of a govern-

ment antitrust suit. The unsuccessful acquiring bank has since

filed two applications for de noro entry and a proposal for

a smaller acquisition which would bring it into three com-

munities in the market area of the bank it proposed to acquire.

See American Banker, February 24, 1971, p. 2.

“See Brief for the United States. ('wited States vy. Falstaff

Brewing Co. No. 71-875, this Term.

———aw ;

This economic experience indicates that subjective

testimony as to corporate intentions and economic

preferences is an unreliable basis for decision under

Section 7. Moreover, if such subjective evidence were

controlling, it would make the antitrust consequences

of an acquisition completely unpredictable to business

and government alike. As this Court noted in United

States vy. Philadelphia National Bank, supra, 374 U.S.

at 362, ‘‘unless businessmen can assess the legal con-

sequences of a merger with some confidence, sound

business planning is retarded.”’ See also United

States v. Topco Associates, No. 70-82, this Term, decided

March 29, 1972, slip op. 13 1. 10.°

** Appellees argue (Motion to Affirm, p. 16, n. 16) that “sub-

jective representations are. if true, not merely relevant, they

must be conclusive.” They rely heavily upon the second Penn-

Olin case, 246 F. Supp. 917 (D. Del.). affirmed per curiam by

an equally divided Court, 289 U.S. 308. That affirmance. of

course, is of no precedential significance, and there appears to

have been no departure from this Court’s insistence on objec-

tive evidence in Penn-Olin I (378 U.S. at 175). Moreover, even

accepting arguendo the district court’s second Penn-Olin deci-

sion as correct, it is not applicable in this case because there

are significant differences between the joint venture involved in

Penn-Olin and the acquisition involved here. The Penn-Olin

joint venture for entry into a new market created new actual

competition which may haye had a significant deconcentrating

and procompetitive effect. But see Pitofsky. op cit., supra. p. 32.

at 1030-1062. In contrast, the market extension merger in this

case simply substitutes one competitor for another and thus

has no pocential deconcentrating effect whatever. Instead. the

acquiring firm’s potential for future deconcentration and _ its

actual influence on the market as a potential competitor are

both permanently lost. Cf. Penn-Olin 1. supra; United States v.

Procter & Gamble, supra: Ford Motor Co. y. United States.

au pra,

For these reasons, we submit that the fundamental

determination in potential competition cases cannot

depend upon management’s stated economic prefer-

ences as between independent entry and entry by

acquisition, but must be based on an objective ap-

praisal of the factors bearing on whether independent

entry is preferable to no entry at all for a firm with

the potential entrant’s capabilities and incentives. The

basie question is whether, considering all the cireum-

stances, independent entry in the future is a reason-

able choice for prudent management if entry by large

acquisition is not available. Where a concentrated

market is growing, and profit expectations in it are

good, an outside firm with the legal, technological and

financial capability to enter must be viewed as a po-

tential entrant if it would be reasonable for it to enter

independently or by a foothold acquisition. Such a

firm serves both as a future source of deconcentration

and as a restraining influence on existing competitors.”

D). Bancorporation Is a Significant Potential Entrant Into the

Greeley Banking Area.

Under the objective criteria we have outlined, Ban-

corporation is a significant potential entrant into the

Greeley banking market because (1) the Greeley Area

* There may be other beneficial effects from preserving the

firm as a potential entrant, such as the creation of a new com-

; petitor. Two banks which Bancorporation unsuccessfully souglit

: to acquire in Pueblo and Colorado Springs are now the largest

1 banks in a recently formed holding company which may com-

; pete with Bancorporation and other Colorado holding companies

: in entering the Colorado banking markets (app. 1997-2000; see

n. 28, supra).

has been undergoing substantial economie growth

which makes it an attractive place for investment;

(2) Bancorporation is one of the few firms that has

the ability to enter as a substantial competitor in the

market; and (3) Bancorporation has shown substan-

tial interest in expanding into such local markets.

Finally, (4) the fact that a bank regulatory official

testified that he would not now charter a new bank

in the Greeley Area does not undermine the conclu-

sion, compelled by the objective evidence, that Ban-

corporation is a potential entrant into that market.

1. The Greeley market is attractive to new entry.

In the decade of the 1960’s, the Greeley Area had

undergone rapid and expansive development. Its

population increased 30 percent; its total personal

income rose from $119.5 million in 1959 to $212 mil-

lion in 1968, accompanied by a shift from a predomi-

nantly agricultural to a more mixed economy; and

its gross sales increased by 281.8 percent (see State-

ment, supra at pp. 8-9). At the time Bancorporation

made the acquisition, the Eastman Kodak Com-

pany was locating a_ national industrial facility

in Windsor, just outside the Greeley Area, which

would have a significant affect on the economy of

Windsor, Greeley and the neighboring towns. The

banks doing business in the area were all profitable

(App. 453-455, 462).

The Greeley Area was, therefore, in the words of

the government’s expert witness, a market which

“would be attractive to outside banks’’ (App. 73).

2. Bancorporation is one of the few firms that has

: —r

the ability to enter the Greeley market in a meaning-

ful way. Bancorporation, the state’s second largest

holding company, was one of three large Colorado

banking organizations with the legal capacity, fi-

nancial capability, and economie incentive to enter the

Greeley Area independently or by a foothold acquisi-

tion and have a substantial impact on competition in

the market.

Two of the state’s seven holding companies, United

and ABC, already controlled four institutions in

Greeley, accounting for 60 percent of the area’s total

deposits. A third, Western Bancorporation, is barred

from future expansion in Colorado as an_ out-of-

state firm. 12 U.S.C. 1842(d). Of the three remain-

ing holding companies (other than Bancorporation),

only Colorado CNB Bankshares, with combined de-

posits of $281.3 million, and First Colorado Bank-

shares, with combined deposits of $120.4 million, have

} sufficient assets to be capable of merningful de novo

* or foothold entry. The other organization, Central

- Colorado Baneorporation—has combined deposits of

only $36 million and is too small—smaller indeed than

the acquired bank—to be a significant entrant. (State-

ment, supra, n, 14)“

* Colorado CNB bankshares has recently applied for a new

charter in Greeley (Motion to Affirm, p. 23).

"' Bancorporation’s contention that there are many potential

entrants into the Greeley market is not well taken. It is based

apparently on the fact chat although 64 new banks opened in

Colorado between 1960 and 1970, only ten of them were or-

ganized by persons associated with the state's six largest bank-

ing organizations (Motion to Affirm, p. 19). These small banks,

however, often operated for the most part by inexperienced

Siti EARL RENAE

Bancorporation’s capability to enter the Greeley

Area independently is undisputed (J.S., App. A, p.

50). Moreover, its lead bank (FNB Denver) has

organized de novo banks in the Denver suburbs, as

the population has shifted to those areas; it has not

ruled out future expansion of this kind (App. 286;

PX 4, App. 5386; PX 6, App. 561-564).”

3. Bancorporation has shown substaniial interest in

expanding into new markets. Bancorporation had for

some time manifested substantial interest in expanding

its operations. As noted earlier, it had filed six appli-

cations between 1969 and 1971 to enter new Colorado

personnel, cannot. provide local banking markets with the same

wide range of sophisticated banking services that can be pro-

vided by a large and experienced organization such as Ban-

corporation, as Bancorporation’s own witness pointed out (App.

294.) See Board of Governors of the Federal Reserve Sys-

tem, Recent Changes in the Structure of Commercial Banking.

56 Fed. Res. Bull. 195, 197 (1970). Nor can penetration of a

new market. by such small institutions—frequently mere shop-

ping center offices—furnish the same competitive impact as a

large new entrant.

* Bancorporation suggests that, despite its size and resources,

it should not be deemed a significant potential entrant in view

of the experience of two other large holding companies, United

and Western, both of which lost market shares upon entering

new markets (Motion to Affirm, pp. 19-23). But not one of the

seven instances of “unsuccessful” entry cited by Bancorporation

involved a de novo entry by United or Western. Each involved

the acquisition of a bank which, like FNB Greeley, was a

market leader in its local area at the time it was acquired by

the holding company. Thus, far from showing that large

organizations are incapable of meaningful competitive entry,

the examples cited by Bancorporation demonstrate, instead,

that the acquisition of local market leaders by such large bank-

ing institutions is not likely to make the acquired bank a more

aggressive competitor (see discussion /nfro, pp. 51-52).

Se ee

banking markets by acquisition (see nn. 9 and 28,

supra, and accompanying text at pp. 7-8 supra). It had

been particularly active in and around the Greeley

Area.

Its lead bank, FNB Denver, which operated a loan

production office in that area, had made a number of

large loans there and had solicited trust business in the

community (Statement, supra, p. 11)."° In addition,

Bancorporation had actively considered entry into

neighboring Loveland ‘' by converting a small indus-

trial hank there to commercial operations (PX 6, App.

963-564). It had also conducted negotiations to pur-

chase a small bank in Windsor, a town fifteen miles

from the City of Greeley, but it terminated these

discussions about the time that FNB Greeley became

available (PX 24, App. 1324; see also PX 6, App.

539-542; PX 41, App. 1036-1037).

4. Bancorporation is a potential entrant into the

Greeley market despite the testimony of a banking

*8 See generally, Turner, Conglomerate Mergers and Section

7 of the Clayton Act, 78 Harv. L. Rev. 1313, 1375.

**Loveland’s population growth over the past decade was

substantial, but it was only roughly half that of Greeley’s in

absolute numbers (DX 6, App. 1376-1378). Moreover, in terms

of the ratio of banking officers to population, Loveland, with

three offices and a ratio of 5,406 persons per office, was a more

crowded market than Greeley, with its ratio of 6,484 persons

per office (compare DX 2, App. 1537-1370 with DX 6, App.

1376-1378).

‘A former industrial bank, which has already been converted

to a commercial bank, also serves Greeley. A) Bancorporation

witness testified that this institution, State Bank of Greeley,

was unavailable because its owners insisted on unreasonable

terms (App. 298): one of the principals of that bank, however,

has died (App. 299).

official that he would not recommend the chartering of

anew bank iv that area. The Regional Administrator of

National Banks, who would recommend to the Comp-

troller of the Currency whether to charter a new na-

tional bank in the Greeley Area (App. 341), testified

that he “could not see a need of a new national bank in

Greeley’? (App. 330) “in the foreseeable future,’ which

he considered to be “upward to five years’? (App. 330).

On the basis of this testimony, the district court con-

cluded (J.S., App. A, p. 50) that “[a]pproval of a na-

tional charter by the Comptroller of the Currency”? was

“unlikely.’’ The court also stated that there was “[t Jesti-

mony from the State Banking Commissioner indicat-

[ing] that a new state charter would net be granted,

hecause the growth of the area would not justify it”

(J.8., App. A, pp. 49-50), In fact, however, the State

Banking Commissioner refused to express any opinion

in his testimony with respect to whether he would

authorize a new bank in the Greeley area, since no

application therefor was then pending (App. 490-493 ).

There is serious question whether the evidence of

the Regional Administrator of National Banks is ad-

missible on such a question. This was at best an ‘‘ad-

visory opinion,” not based on concrete facts presented

by a specific application. An opinion expressed in

such circumstances is peculiarly unreliable, since it

may be subject, consciously or unconsciously, to pres-

sures of one sort or another; and such pressures may

well be exactly the opposite of those which would be

present when an actual application made on behalf of

a bank was under consideration. Moreover, the hy-

pethetical opinion was expressed by the Regional Ad-

ministrator of National Banks, a subordinate official,

who does not make the actual decision. That ix made

by the Comptroller of the Currency.

The attitude and policies of regulatory authorities

can amd do change. The fact that the Regional Admin-

istrator saw no need for an additional hank in ireeley

when he testified in this case does not mean that he

would reach the same conelusion at some future time.

Nor is it certain that even if he «o recommended, the

Comptroiier of the Curreney would accept the recom.

mendation (App. 332-333). Moreover, conditions in

local banking markets do not remain static, and

changes may indicate the need for an additional hank

tomorrow where none exists today,

In any event, the question whether there might he a

potential entrant should be determined on the basix of

the actual geographic, demographic, and economic

facts, Those facts show, ax we have indicated, that

Lancorporation ix a potential entrant inte the Creeley

Arva; certainly they do not establish that Batiworporn-

tion ix not a potential entrant. A potential entrant ix a

significant factor with respect to a market ax long as

there ix a reasonable haxsis on which it might he author-

ind to go into the market. The threat that 2 regulator

may allow entry is a factor tending to restrain tho

already in the market, ax the defendant's expert testi-

fied (App. 396-397).

For these reasons, the testimony of officials of reen-

latory agencies as to the recommendations they might

make to their superiors concerning the chartering of a

—

new bank is an inadequate basis for a judicial deter-

mination whether the acquiring firm would be likely to

obtain regulatory approval if it sought independently

toe enter the market. Whether the Comptroller of the

Currency would be “unlikely” to approve a new na-

tional bank in the Greeley area, as the district court

concluded, depends rather upon all the factors as they

may exist at the time such application is made.

Where, as in the present case, the market is not

overbanked—i.e., it is growing and the existing bank»

are profitable—the regulatory decision on whether tu

authorize a new bank should turn upon the need of the

community for additional banking services and not the

wish of the existing hanks to be protected against fur-

ther competition. To assume that in such cireum-

stances the regulatory authorities would not permit a

new bank in the Greeley area would be at odds with

the policy reflected in Section 7 of the Clayton Act that

“corporate growth by internal expansion is sociably

preferable to growth by acquisition” (United States v,

Philadelphia National Bank, sapra, 374 US. at 370).

The application of this policy to the Greeley market

would be particularly likely in view of the trend in

Colorado of bank acquisitions by holding companies;

the regulatory authorities would not be oblivious to the

fact that the alternative to permitting Bancorporation

to organize a new bank in Greeley might be its aequisi-

tion of a substantial existing bank there, with the

undesirable anticompetitive consequences described

in this brief.“

* Another factor indicating the inappropriateness of judicial

reliance upon the kind of speculative prediction the Regional

; mi

Moreover, the approval of the Comptroller of the

Currency was not necessary to the making by Ban-

corporation of a foothold entry through the aequisi-

tion of one of the smaller banks in the Greeley area.

Such an acquisition would be within the exclusive

jurisdiction of the Federal Reserve Board. Whitney

National Bank in Jefferson Parish v. Bank of New

Orleans & Trust Co., 379 US. 411. There were three

such banks available: a small commercial bank in the

City of Greeley (State Bank of Greeley), and two

small bank« in the neighboring towns of La Salle

(Platte National Bank) and Eaton (Eaton Bank)

(J.8. App. A, pp. 32-33).

EB. The Effect of the Acquisition May Be Substantially To Leasen

Competition in the Greeley Area.

Section 7 of the Clayton Act prohibits any acquisi-

tion whose effect in the relevant market “may be

substantially to lessen competition."’ The Bank Hold-

ing Company Act of 1956, as amended in 1966, 12

U.S.C. 1849(e), provides that the district courts, in

deciding cases brought under Section 7 of the Clayton

Act challenging bank holding company acquisitions,

shall apply the same standard that the Act requires

the Board of Governors of the Federal Reserve Sys-

Administrator made in this case is that bank regulatory statutes

are primarily simed at preventing bank failures (mee [nifed

4). Regulatory policies controlling entry necemarily also at ree

this factor (App. 329). There is no suggestion in this case. how-

ever, that the authorization of a new bank in Greeley would

cause any of the existing ones there serious financial probleme.

let alone failure. and the Regional Administrator himself de-

clined to suggest that consequence ( App. 334).

—

tem to apply in considering such acquisitions. That

standard (12 U.S.C. 1842(c)) prohibits the Board

from approving any acquisition—

* * * whose effect in any section of the

country may be substantially to lessen

competition, or to tend to create a

monopoly, or which in any other manner

would be in restraint or “ trade, unless it

finds that the anticompetitive effects of

the proposed transaction are clearly out-

weighed in the public interest by the

probable effect of the transaction in

meeting the convenience and needs of the

community to be served.

In every ease, the Board shall take into consideration

the financial and managerial resources and future

prospects of the company or companies and the banks

concerned, and the convenience and needs of the

community to be served.

This is almost the same language that Congress

used in the Bank Merger Act of 1966 for determin-

ing the legality of bank acquisitions subject to the

regulatory jurisdiction of the Comptroller of the Cur-

rency and the Federal Deposit Insurance Corpora-

tion. It was subject to extensive Congressional con-

sideration during the enactment of the Bank Merger

Act; the similar language was adopted in the amend-

ments to the Bank Holding Company Act several

months later without any substantial discussion. Con-

gress obviously intended the virtually identical lan-

guage it used in the Bank Holding Company Act to

* So in orginal.

— an

, i i

have the same meaning as the language it previously

had used in the Bank Merger Act. Accordingly, this

Court's decisions interpreting the Bank Merger Act

(see, ¢.g., United States y. Phillipsburg National

Bank, supra, 399 US. at 357-358; United States v.

First City National Bank of Houston, supra; United

States v. Third National Bank in Nashville, supra)

also govern the Bank Holding Company Act.

Under either statute, “[t]he task of the district

courts [is] to inquire de novo into the validity of a

bank merger approved by the relevant bank regula-

tory agency to determine, first, whether the merger

offend[s] the antitrust laws and, second, if it [does].

whether the banks ha[ve] established that the merger

[is] nonetheless justified by ‘the convenience and needs

of the community to be served.’"’ (United States v.

Third National Bank in Nashville, 390 U.S. 171, 178.)

“To weigh adequately one of these factors against the

other requires a proper conclusion as to each’’ (id.

at 183).

As we read the opinion of the district court in the

present case, its only holding was that the govern-

ment had not shown an anticompetitive effect. The

court did not attempt to determine whether, if there

were such effect, the acquisition nevertheless should be

upheld under the community ‘‘convenience and needs”

standard. Although the court discussed appellees’ con-

tentions with respect to alleged benefits of the acquisi-

tion, this analysis related to the court’s conclusion

that this acquisition was not anticompetitive. Accord-

ingly, if the Court agrees with us that this acquisition

had the anticompetitive effects condemned by Section

7, the case must be remanded to the district court to

consider the “convenience and needs” defense. Cf.

Nashville Bank, supra, 390 U.S. at 192; United States y.

Phillipsburg Bank, supra, 399 US, at 569-370, 372-578.

1. The Greeley market is highly concentrated, At

the time of the proposed acquisition, the three largest

of the six banking organizations operating in the

Greeley area—ABC, FNB Greeley and United—

together had 98.2 percent of total deposits in the city

of Greeley and 92 percent of deposits in the Greeley

Area. Greeley’s banking structure therefore was even

more concentrated than the small market involved in

United States v. Phillipsburg National Bank, supra,

399 U.S. at 366-367. The bank to be acquired (FNDG

Greeley) was not only the second largest in the area,

with 33.9 percent of the city’s total deposits and 31.8

percent of total deposits in the area, but was the only

major bank there not under the control of any of the

state’s seven bank holding companies. See the State-

ment, supra, pp. 10-11,

Bancorporation seeks to avoid the significance of

this market concentration by pointing to data that the

number of banks in Greeley was, at the time of the

proposed acquisition, similar to the number of banks

in communities of similar size throughout the country

(see Motion to Affirm, pp. 13-16). It relies upon the

opinion of its expert witness that the velationslip

between concentration as measured by market shaves,

Bs il

on the one hand, and probable competitive effects, on

the other, is very tenuous “ (App. 444-449).

But this Court has consistemtly rejected any such

comparison as a measure of ‘banking concentration

in Section 7 cases. Instead, it has treated market

share figures as fundamental tto a determination of

anticompetitive effects. See Umited States v. Phila-

delphia National Bank, supra, 374 U.S. at 363;

United States v. Phillipsburg National Bank, supra,

399 U.S. at 366-367.

A test for banking concentration in a particular

market based on a comparisom with the prevailing

number of banks in cities of similar size would tie the

Section 7 determination to a mational average that

bears only remotely on the central question under the

antitrust statute, without due regard for the economic

structure of the specific local market involved. To the

extent that high concentration is the rule rather than

the exception, the effect would be essentially to pre-

serve existing concentration, and Congress’ purpose

to change that condition in banking, as well as other

industries, could never be achiewed. Moreover, it can-

not be assumed, as Bancorporation contends that the

data on which it relies reflect bank regulators’ views

as to that ratio of bank institutions to population

that is necessary for achievement of optimum econ-

omies of seale. As noted in United States vy. Phila-

delphia National Bank, supra, 374 U.S. at 324-330,

* Bancorporation’s expert expressed similar views as a wif-

ness for the defendant banks in the Phillipsburg case. See Ap-

pendix Volume 1. pp. 500-506, 522-528, No. 1093, October

Term, 1969.

bank regulation is primarily concerned with preserv-

ing bank solvency, not with the optimum competitive

structure.

2. The acquisition of FNB Greeley by Bancorpo-

vation may substantially lessen competition by elim-

inating Bancorporation as a significant potential

competitor in the Greeley market, The district court

held that to prove a vioiation of Section 7 the govern-

ment had to show that the effect of the acquisition

“would be substantially to lessen competition’? (J.S.,

App. A, p. 47), and it concluded that the government

had not sustained its allegations that the acquisition

“has the effect substantially to lessen competition”

(id., p. 61). That, of course, is not the test under

Section 7.

The statute condemns acquisitions whose effect

“may be’’ substantially to lessen competition, and the

government is not required to show either that that

“would be” its effect or that it “has” that effect. It

need show only a ‘“‘reasonable likelihood” (United

States v. Penn-Olin Chemical Co., supra, 378 U.S.

at 171) or ‘‘reasonable probability” (id., p. 175;

United States v. Von’s Grocery Co., 384 U.S. 270,

285 (Mr. Justice Stewart, dissenting) ) that the acqui-

sition would have that effect, that it ‘‘tended to lessen

competition’ in the area (United States v. Third Na-

tional Bank in Nashville, supra, 390 U.S. at 183).

Section 7 “look[{s] not merely to the actual present

effect of a merger but instead to its effect upon future

competition” (United States v. Von’s Grocery Co.,

supra, 384 U.S. at 277).

i —_

The effect of the proposed acquisition here may be

substantially to lessen competition in the Greeley

banking area. That market is highly concentrated: the

three leading banking organizations have more than

90 percent of the business. The presence at the edge

of such a concentrated market of a substantial firm

that is a potential entrant is an important factor that

tends to make the firms in the market more competi-

tive and to inhibit their anticompetitive behavior. See,

supra, pp. 20-23. As this Court recognized in United

States v. Penn-Olin Chemical Co., supra, 378 U.S. at

174:

* * * Nevertheless, “[p]otential competi-

tion * * * as a substitute for * * * [ae-

tual competition] may restrain producers

from overcharging those to whom they

sell or underpaying those from whom

they buy * * *. Potential competition,

insofar as the threat survives [as it

would have here in the absence of Penn-

Olin], may compensate in part for the

imperfection characteristic of actual com-

petition in the great majority of com-

petitive markets.”

Bancorporation’s acquisition of FNB Greeley

would eliminate the mediating effect upon competi-

tion that the acquiring firm is able to exert as long

as it remains a potential entrant. Since, moreover, the

acquisition would merely change the ownership of

FNB Greeley, it would not introduce any new com-

petitive factor into the market. The elimination of po-

tential competition in this instance, therefore, would

have a more serious anticompetitive impact than

exists when two potential entrants combine to enter

a market through a joint venture. In the latter situ-

ation, the loss of potential competition is counterbal-

anced by the creation of a new firm that actually en-

ters the market. Cf. United States v. Penn-Olin Chem-

ical Co., supra, 378 U.S. at 170, 172-174.

A further anticompetitive effect of this acquisition

is that it would bring under holding company control

the only one of the three principal banks in the Gree-

ley area that’ is now an independent local entity. A

single large independent bank is more likely to engage

in vigorous competition if it is not one of those firms

controlled by holding companies, which themselves are

in similar competitive situations in many markets

throughout the state. See, supra, pp. 23-24. The acequi-

sition therefore would change the present market

structure, with whatever competitive vigor a large in-

dependent provides against holding company-con-

trolled banks, to one in which traditional oligopolistic

patterns of mutual accommodation rather than vigor-

ous competition are likely to emerge.

Appellees argue (Motion to Affirm, pp. 25-26), how-

ever, that they would make FNB Greeley a more vig-

orous and efficient competitor (App. 464-465). But

possible improvements in banking service that might

result from the acquisition are to be considered under

the ‘‘convenience and needs’’ defense (see, supra,

pp. 46-47); they are not relevant in determining

whether there is a violation of Section 7. United

States Vv. Phillipsburg National Bank, 399 U.S. at

367-368, In any event, appellees’ anticipated improve-

ments are not borne out by the results of the acqui-

tions of leading local banks in other areas by two

bank holding companies (supra, n. 42).

The district court did not find that Bancorporation’s

acquisition would make FNB Greeley a more aggres-

sive competitor, but only that it was unlikely that the

acquisition would make it less aggressive (J.S., App.

A., p. 50). Moreover, other bankers in the Greeley Area

apparently were skeptical that the acquisition would

make FNB Greeley a more vigorous competitor; they

indicated that they preferred to have Bancorporation

enter by taking over an established bank rather than

by organizing a new one. As the president of the State

Bank of Greeley explained in supporting the aequi-

sition (DX 68, App. 1814): “We are very much op-

posed to a de novo bank commencing business in Weld

County at the present time. Despite the projected

population growth, the present banks can satisfactorily

accommodate the needs of the Community for the fore-

seeable future. A de novo bank does not bring in new

deposits, but instead draws funds from other banks.”’

Finally, the acquisition would eliminate the possi-

bility for deconcentration of the market that would

result if Bancorporation either entered the market in-

dependently or through a foothold acquisition of one

of the small banks in Greeley. If Baneorporation took

either of the latter steps, it would be required to c¢om-

pete vigorously to obtain a significant share of the

market. On the other hand, there is every reason to

believe that, if each of the three leading banks in the

Greeley Area is owned by a holding company, the ex-

isting concentrated structure of the market will con-

tinue indefinitely or, indeed, may become more

concentrated,

One of the major concerns of Congress in amending

Section 7 of the Clayton Act in 1950 was to stem the

rising trend of concentration in American business.

United States vy. Philadelphia National Bank, supra, 874

U.S. at 362-363; United States v. Penn-Olin Chemical

Co., supra, 378 U.S. at 170-171; Brown Shoe Co. v.

| United States, supra, 370 U.S. at 331-332. Because of the

central role banking plays in the American economy,

the prevention of concentration in that industry is of

particular sigificance. The acquisition of FNB Greeley

by Bancorporation would eliminate any possibility for

deconcentration that now exists in the highly concen-

trated Greeley market, and would further the anti-

competitive tendencies that are inherent in the market.

The effect of the merger “may be substantially to les-

sen competition” there, in violation of Section 7.

A local geographic market such as the Greeley Area

is plainly entitled to the benefit of this standard. See,

e.g., United States v. Phillipsburg National Bank,

supra. Similarly where, as here, the particular ac-

quisition challenged is part of a statewide trend toward

concentration, that trend is necessarily relevant to a

proper evaluation of the effect that the acquisition

“may tend” to have upon competition. UViited States v.

Brown Shoe Co., supra, 370 U.S. at 317; United

States v. Pabst Brewing Co., supra, 384 U.S, at 551-552,

Since entry by out-of-state firms is barred by law, if

all the local banking markets in a state should become

dominated by the same few firms, bank customers

would no longer have a meaningful alternative to the

hanking policies of the acquiring companies; the safe-

guard against possible exploitive conduct that inheres

in the availability of alternative banking markets in

the state disappears once those markets become domi-

nated by the same firms.” The state of Colorado is an

area of the country which has competitive significance

in banking, and comes within the area protected by

Section 7 (see United States v. Pabst Brewing Co.,

supra). Thus, in this case, the district court should

have considered the aequisition’s effect on future com-

petition both in the Greeley Area and in the State of

Colorado.

Il, THE ACQUISITION MAY SUBSTANTIALLY LESSEN COM-

PETITION IN CORRESPONDENT BANKING IN COLORADO

Bancorporation’s acquisition of FNB Greeley would

have another anticompetitive effect; the foreclosure of

the acquired bank as a customer for correspondent

banking services in Colorado,

A. Correspondent Banking Isa Line of Commerce and Colovado

Is an Appropriate Geographic Market

Correspondent banking, like commercial banking, is

"This is substantiated by the testimony of a banker in

(irecley who concluded that. if prices for bank services in

Greeley should get “out of line.” business could be lost to FNB

Denver, the aequiring bank (App. 301-302),

a congeries of services clustered around demand de-

posits; it involves, however, banking services that are

provided by large ‘‘city” banks to small ‘‘country”’

banks, rather than to the public at large (App. 179,

199, 204-210). In a unit-banking state, such as Colo-

rado, these services are supplied to and through local

banks by interbank correspondent relationships; they

are generally paid for by the maintenance of ‘‘corre-

spondent balances,” which are in fact interbank de-

mand deposits (App. 236-237).

The full range of correspondent banking services in-

cludes such interbank services as check clearing, inter-

national banking, investment advice, personnel ac-

quisition assistance and training, overline loans,” and

the like (App. 183, 190, 234). Banks offering the com-

plete line of such services tend to be located in the finan-

cial and political centers of a state (App. 219-220, 240-

242). Moreover, customers for full-range correspondent

banking services tend to be limited to ‘‘country’* banks

located in the same state. This is, in part, because it

is important to have a primary correspondent familiar

with local banking regulations (App. 246). In Colorado,

there is the additional reason: state law requires state

banks to use a Colorado correspondent as a depository

for bonds or other collateral which must be posted as

security for deposits of the State Treasurer (J.S., App.

A, 57-58).

Correspondent banking is a well-recognized and dis

tinct aspect of the Colorado banking industry (App.

°° Overline loans are loans made together with another bank

that is unable to satisfy its customers’ credit needs because of its

legal lending limits.

» cf

7 prac

; te

177, 188, 208, 218-219; PX 24, App. 835-837). Of the

227 commercial banks in the state, only three do not

have a Denver correspondent (PX 235, App. 1322) ;*

and, of the correspondent deposits held by Denver

banks, between 60 and 65 percent in each instance are

deposited by Colorado banks (PX 203, App. 1301-

1302).

While other specialty institutions in the state, such

as sav.ngs and loan associations and finance com-

panies, provide certain services in competition with

commercial banks,” they do not compete over the en-

tire range of services. These submarkets are thus *‘not

a basis for the disregard of a broader line of commerce

that has economic significance.’’ United States v. Phil-

lisburg National Bank, supra, 399 U.S. at 360; and

see United States v. Philadelphia National Bank,

supra, 374 U.S. at 356-357; Brown Shoe Co. v. United

States, supra, 370 U.S. at 326.

Correspondent banking involves, as the district

cout found (J.8., App. A, p. 55), “unique produc-

tion facilities, distinct customers, and specialized

vendors.”’” There is, according to the government’s

“While two Colorado country bankers testified on behalf

of Bancorporation that they do not need a Denver correspond-

ent. each in fact has one (App. 375, 379-380).

See App. 189, 219-220, 231. See also App. 177-178, 4 1-192,

198, 201-202, 209, 378, 507, 508. Such competition is relevant in

considering mergers between banks and other types of financial

institutions. United States v. Phillipsburg National Bank, supra.

399 U.S. at 360.

** The court, however. found inconclusive the evidence with

respect to whether correspondent banking is a distinct product

market. It was concerned that there was no evidence that corre-

spondent banking has distinct prices or sensitivity to price

expert witness in this’ case (App. 234-235), as great

a synergistic effect from the clustering of corre-

spondent banking services as from commercial bank-

ing services, for such clustering “has economic

significance well beyond the various products and

services involved.’’ United States v. Phillipsburg

National Bank, supra, 399 U.S. at 361.

These factors, we submit, demonstrate that corre-

spondent banking is an economically significant line

of commerce, and that the State of Colorado is an

economically significant area for purposes of Section

7. Compare Brown Shoe Co. v. United States, supra,

370 U.S. at 325, with United States v. Philadelphia

National Bank, supra, 374 U.S. at 357-362; see also

United States vy. Pabst Brewing Co., supra.

B. The Acquisition May Substantially Lessen Competition In

Correspondent Banking in the State

The effect of the acquisition on the Colorado cor-

respondent banking market would be to further a

changes. (J.S., App. A, p. 55). But this is an excessively rigid

attempt to apply the submarket criteria of Brown Shoe Co. v.

United States, 370 U.S. 294, 325. There is no precise price for

many services supplied to country banks because compensation

usually takes the form of interbank deposits. Moreover, what is

significant is not the price interrelationship between commercial

banking and correspondent banking, but the customer to whom

the services are supplied. The enumerated submarket criteria of

Brown Shoe ave not a fixed list of factors that must be present

in every case before there can be a submarket, but only a guide

to factors that may identify an “economically significant sub-

market.” See Reynolds Metals Co. vy. Federal Trade Commis-

sion, 309 F. 2d 223, 226-229 (C.A.D.C.); Atexr Corp. v.

Federal Trade Commission, 420 F. 2d 928, 931-922 (C.A. 6),

certiorari denied, 400 U.S. 865.

58 |

trend in the state of similar acquisitions of ‘“‘country”’

banks by Denver correspondent banks. This trend

presently threatens, on the one hand, to eliminate

actual competition among the Denver banks supply-

ing correspondent services, and, on the other hand,

to erect barriers to the entry into this highly con-

centrated market of new banks offering a full range

of such services.

Bancorporation’s lead bank, FNB Denver, is the

largest of six offerors of Denver correspondent bank-

ing services (see pp. 6-7, supra). Its share of Colo-

rado interbank deposits as of August 1970, exceeded

37 percent; the two nearest rivals each had approxi-

mately 23 percent (PX 205, App. 1304; App. 247-

248; see also PX 204, App. 1303). These three orga-

_ nizations together thus controlled more than 83 per-

cent of the state’s interbank deposits (PX 205, App.

_ 1304).

By the end of August 1970, the seven state holding

companies, which already owned five of the six corre-

spondent banks, had through bank acquisitions fore-

closed approximately 12 percent of the correspondent

banking market by joint ownership of both supplier and

customer banks (PX 215, App. 1313; App. 257). Ban-

corporation’s acquisition of the National State Bank

of Boulder * added 2.5 percent to this figure (PX 164,

App. 1240-1248; PX 217, App. 1315; App. 257-259),

and its acquisition of Security State Bank in Sterling

will add another 0.8 percent (PX 217, App. 1315).

The acquisition of FNB Greeley would increase the

Seen. 9. pr.

Baas.

figure yet another 1.2 percent,” making a total market

foreclosure of 16.5 percent. Nor does it appear that

the Colorado holding companies are content to stop

there (see pp. 24-25, supra).

** The 1.2 percent figure includes the interbank deposits of

banks already foreclosed by ownership as claimed by Ban-

corporation (Motion to Affirm, pp. 35-36). The figure exclud-

ing Colorado affiliates would be 1.4 percent (PX 217, App.

1315).

°° Further holding company acquisitions are continuing to

foreclose additional market shares (Motion to Affirm, pp. 34-

35, n. 27). Bancorporation cites the government’s failure to

bring suit in these instances as illustrative of an alleged incon-

sistency between theory and practice; it claims that this “fail-

ure” cannot be justified on the ground that the uncontested

acquisitions involve smaller banks because, in its view, the

smaller banks have a greater need for the services of big banks

than do larger banks. But the relative importance of a cor-

respondent account is best measured by its size. While the dis-

trict court only accepted interbank deposits as a measure of

the degree of foreclosure arguendo (J.S., App. A, pp. 58-59),

all of the objections that have been raised to their use as a

measuring rod here would apply equally to the use of deposit

figures in testing commercial banking mergers. What is impor-

tant, in the final analysis, is the total market foreclosure and

interbank deposits are sufficient to show that. See [nited States vy.

Philadelphia National Bank, supra. 374 US, at 356-357.

Bancorporation also contends that the fact that the number

of potential customers for correspondent services in Colorado

has increased between 1961 and 1970 demonstrates that the

market is not “drying up.” But, as the President of the most

recent entrant into the market (Security National Bank) tes-

tified, a correspondent banking account the size of FNB Gree-

ley’s is an important one (App. 207-208): if Security National

Bank were able to attract FNB Greeley’s business it would dou-

ble its market share. (Compare PX 205, App. 1304 with PX

190, App. 1295). It is, therefore, the forclosure of these more

substantial acco. s that creates the major threats to

compet ition.

Foreclosure of the market to competitors by acqui-

sition of a customer may substantially lessen competi-

tion in violation of Section 7. United States v. Ford

Motor Co., supra; Federal Trade Commission v. Con-

solidated Foods Corp., 380 U.S. 592; Brown Shoe Co.

v. United States, supra; United States v. du Pont de

Nemours & Co., 353 U.S. 586. Where a trend toward

substantial foreclosure is present, acquisitions of rela-

tively small market segments, such as the 1.2 percent

here, are significant. See e.g., Brown Shoe Co. v.

United States, supra at 332-334 (2 percent, 1.5 per-

cent and 1 percent); cf. United States v. Aluminum

Co. of America, supra (1.3 percent). The district

court held that this principle was inapplicable

because it had only been applied in cases involving

national, not local, markets (J.S., App. A, p. 60). But

this Court has made it clear that the antitrust laws

apply with the same vigor in local markets as in the

larger areas. United States vy. Philadelphia National

Bank, supra, 374 U.S. at 357-362; United States v.

Phillipsburg National Bank, supra, 399 U.S. at 358,

365.

The district court erred (J.S. App. A, p. 60) in

considering the FNB Greeley acquisition in isolation,

without regard to the trend in Colorado toward fore-

closure of the correspondent banking market through

; large bank holding company acquisitions, including

Obed ete ae

od Ba bbe

5? See also United States v. Kimberley-Clark Corp., 264 F.

Supp. 439, 446448 (N.D. Cal.) (2 percent); United States v.

4 Kennecott Copper Corp., 231 F. Supp. 95, 105 (S.D. N.Y.) (.76

| to 1.0 percent): United States v, Bethlehem Steel Corp., 168

; F. Supp. 576, 606 (S.D. N.Y.) (1.3 percent).

contemporaneous proposals for additional statewide

acquisitions. Such evidence substantiates what must

ordinarily be inferred from the evidence of a past

trend—.e., that the trend will continue unless halted.”

This evidence is relevant to the determination under

Section 7 of the Clayton Act whether the particular

acquisition under serutiny may tend substantially to

lessen competition in the correspondent banking mar-

ket in Color.do. Cf. United States v. Von’s Grocery

Co., supra, 384 U.S. at 277.

CONCLUSION

The judgment of the district court should be re-

versed and the case remanded for further considera-

tion under correct criteria.

Respectfully submitted.

Erwin N. Griswon,

Solicitor General.

Waker B. Comrcys,

Acting Assistant Attorney General.

DaNIEL M. FriEpMAN,

Deputy Solicitor General.

Wma. Braprorp REYNOLDs,

Assistant to the Solicitor General.

Doxaup I. Baker,

Howarp E. SHAprRo,

Lee A. Rav,

Attorneys.

May 1972.

58 See generally n. 28. svpra. and acecompanving text.

o t / ving

US. GOVERNMENT PRINTING OFFICE 1972

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.