Predicting De Novo Expansion in Bank Merger Cases

THE DOCTRINE of potential competition, while gaining increased prominence in bank merger analysis, remains an empirically vacuous standard for federal regulatory action on bank merger applications.' A major issue related to the question of potential competition concerns the probability that a merger applicant would become a competitor in the market of the proposed acquired bank through de novo branch entry if the merger were denied. Of equal interest to federal regulators is the probability that the resulting bank would establish a de novo office in the market of the acquired bank subsequent to merger approval. This consideration focuses upon the effects on future competition deriving from expansion of the resulting bank within its newly-entered market.2 While objective criteria are utilized in assessing actual competition in bank merger cases, the determination of potential and future competition remains primarily subjective. The purpose of this paper is to establish objective operational guidelines for predicting de novo expansion in bank merger cases. In the process, the relative impact of various factors upon bank expansion decision-making is empirically estimated. Section II contains a multivariate discriminant model which distinguishes between decisions of merger applicants to, or not to, open de novo branch offices in the markets of the banks either acquired or denied acquisition through federal regulatory action on their merger applications. The sample selection procedure is described and a cash flow analysis of market expansion behavior of commercial banks is outlined. In Section III, the methodology is discussed and test results of the discriminantmodel are presented and evaluated. Finally, Section IV contains the prospects and implications of the study.