The History of Potential Competition in Bank Mergers and acquisitions

The theory of potential competition and its application to the banking industry has been a subject of continuing controversy since the 1960s, when banks and bank holding companies (BHCs) began to expand the geographic scope of their activities through mergers and acquisitions. During the past decade the policy of the Board of Governors of the Federal Reserve System toward acquisitions involving potential competition has come full circle. Prior to 1975 potential competition was accorded an important role in Board denials. Then, between May 1975 and November 1979, with one limited exception,' the Board did not deny an application solely on the basis of potential competition. Since then, however, potential competition has again been emphasized in the Board's analysis of the competitive effects of bank mergers and acquisitions. The past, present, and future roles of potential competition in the regulation of banks and bank holding companies are discussed in this article.