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posted on 03 January 2016

U.S. Antitrust Examination - The Effect Of The Farm Credit System

from the Kansas Fed

-- this post authored by Charles S. Morris, James Wilkinson, and Eric Hogue

The goal of U.S. antitrust laws is to protect consumers and businesses from anticompetitive behavior. One area of antitrust law prohibits business mergers that substantially lessen competition or create a monopoly. In banking, insufficient competition can be harmful for consumers and businesses. For example, if a merger of two competing banks results in a combined bank with a substantial market share, bank customers may pay higher interest rates on loans, receive lower interest rates on deposits, or have less access to credit.

The federal banking regulatory agencies are responsible for approving bank mergers. As part of the approval process, they must ensure mergers comply with antitrust laws. The agencies initially assess the competitive effects of proposed mergers using screening measures based on the deposit shares of banks operating in the market. If proposed mergers do not pass the initial screening test, the banking agencies conduct further analysis of the mergers' potential effects on competition.

One shortcoming of deposit-based measures of competition is they do not explicitly account for competition from nondepository financial firms. For example, banks compete with finance companies for business and consumer loans and with money market mutual funds for deposit products. In rural markets where agriculture is a primary business activity, the Farm Credit System's retail lenders, known as Farm Credit Associations (Associations), are particularly important nonbank competitors. Despite Associations' large presence in agricultural loan markets, we are not aware of any studies that have assessed the effect of Associations on banking concentration measures - in particular, their implications for banking market competition and the evaluation of competitive conditions.

In this article, we estimate local market shares of agricultural loans to assess how Associations affect competition for these loans in rural markets where agriculture is an important industry. Our analysis suggests Associations often reduce measures of local market concentration, which implies excluding them from market structure analyses may understate the market's competitiveness. Section I reviews U.S. antitrust laws and the underlying economic theory. Section II outlines the methodology for assessing competition in banking markets, with a focus on the Federal Reserve System's process. Section III shows how including Associations as a competitor in rural agricultural lending markets affects local market concentration measures.

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Source: media/files/publicat/econrev/econrevarchive/2015/ 4q15morriswilkinsonhogue.pdf

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