Question

1. What are regulatory rules for bank mergers in the US?

2. Herfindahl-Hirschman Index (HHI)?

Answer 1

1.

Bank Mergers can take place in the USA, but it has to pass through the following regulatory rules.

A. The first rule is the decision by court of law. Any bank merger is challenged by US department of Justice and with consideration of the views of both the parties, the court of law gives its decision upon the merger.

B. The second rule is the regulations or statute create by the legislators that is used to examine the merger and its impact upon the fairness and competitiveness of the market. For example, Sherman anti-trust Act and Clayton Act work on it.

C. The third rule is to follow the Bank Merger Act of 1960 that requires the banks going for the merger to take permission from its superior federal regulatory agency. For example, state member banks will take permission from the Federal Reserve.

D. Mergers will also go through the evaluation of justice department and it will be evaluated on the basis of HHI. If post merger, HHI is more than 1800 and most merger HHI increases by more than 100 points, then justice department will strongly object to this ban merger.

2.

HHI index is a technique to measure the market concentration and used by the authorities to assess the impact of mergers upon the market concentration, free and fair competition. Its value is calculated as the sum of the square of the market share of all the players in the market.

For example, if there are two firms A and B, owning 50% market share each, then:

HHI = 50^2 + 50^2 = 5000