United States v. Philadelphia National Bank, No. 83

• Court: United States Supreme Court
• Writing for the Court: BRENNAN
• Citation: 10 L.Ed.2d 915,83 S.Ct. 1715,374 U.S. 321
• Parties: UNITED STATES, Appellant, v. The PHILADELPHIA NATIONAL BANK et al
• Docket Number: No. 83
• Decision Date: 17 June 1963

374 U.S. 321 83 S.Ct. 1715 10 L.Ed.2d 915 UNITED STATES, Appellant,

v.

The PHILADELPHIA NATIONAL BANK et al.

No. 83. Argued Feb. 20, 1963. Decided June 17, 1963.

[Syllabus from pages 321-322 intentionally omitted]

Page 322

Lee Loevinger, Washington, D.C., for appellant.

Page 323

Philip Price, Philadelphia, Pa., for appellees.

Mr. Justice BRENNAN delivered the opinion of the Court.

The United States, appellant here, brought this civil action in the United States District Court for the Eastern District of Pennsylvania under § 4 of the Sherman Act, 15 U.S.C. § 4, and § 15 of the Clayton Act, 15 U.S.C. § 25, to enjoin a proposed merger of The Philadelphia National Bank (PNB) and Girard Trust Corn Exchange Bank (Girard), appellees here. The complaint charged violations of § 1 of the Sherman Act, 15 U.S.C. § 1, and § 7 of the Clayton Act, 15 U.S.C. § 18.¹ From a judgment for appellees after trial, see D.C., 201 F.Supp. 348, the United States appealed to this Court under § 2 of the Expediting Act, 15 U.S.C. § 29. Probable jurisdiction was noted. 369 U.S. 883, 82 S.Ct. 1156, 8 L.Ed.2d 285. We reverse the judgment of the District Court. We hold that the merger of appellees is forbidden by § 7 of the

Page 324

Clayton Act and so must be enjoined; we need not, and therefore do not, reach the further question of alleged violation of § 1 of the Sherman Act.

I. THE FACTS AND PROCEEDINGS BELOW.

A. The Background: Commercial Banking in the United States.

Because this is the first case which has required this Court to consider the application of the antitrust laws to the commercial banking industry, and because aspects of the industry and of the degree of governmental regulation of it will recur throughout our discussion, we deem it appropriate to begin with a brief background description.²

Page 325

Commercial banking in this country is primarily unit banking. That is, control of commercial banking is diffused throughout a very large number of independent, local banks—13,460 of them in 1960—rather than concentrated in a handful of nationwide banks, as, for example, in England and Germany. There are, to be sure, in addition to the independent banks, some 10,000 branch banks; but branching, which is controlled largely by state law—and prohibited altogether by some States—enables a bank to extend itself only to state lines and often not that far.³ It is also the case, of course, that many banks place loans and solicit deposits outside their home area. But with these qualifications, it remains true that ours is essentially a decentralized system of community banks. Recent years, however, have witnessed a definite trend toward concentration. Thus, during the decade ending in 1960 the number of commercial banks in the United

Page 326

States declined by 714, despite the chartering of 887 new banks and a very substantial increase in the Nation's credit needs during the period. Of the 1,601 independent banks which thus disappeared, 1,503, with combined total resources of well over $25,000,000,000, disappeared as the result of mergers.

Commercial banks are unique among financial institutions in that they alone are permitted by law to accept demand deposits. This distinctive power gives commercial banking a key role in the national economy. For banks do not merely deal in but are actually a source of, money and credit; when a bank makes a loan by crediting the borrower's demand deposit account, it augments the Nation's credit supply.⁴ Furthermore, the power to accept demand deposits makes banks the intermediaries in most financial transactions (since transfers of substantial moneys are almost always by check rather than by cash) and, concomitantly, the repositories of very substantial individual and corporate funds. The banks' use of these funds is conditioned by the fact that their working capital consists very largely of demand deposits, which makes liquidity the guiding principle of bank lending and investing policies; thus it is that banks are the chief source of the country's short-term business credit.

Banking operations are varied and complex; 'commercial banking' describes a congeries of services and credit devices.⁵ But among them the creation of additional

Page 327

money and credit, the management of the checking-account system, and the furnishing of short-term business loans would appear to be the most important. For the proper discharge of these functions is indispensable to a healthy national economy, as the role of bank failures in depression periods attests. It is therefore not surprising that commercial banking in the United States is subject to a variety of governmental controls, state and federal. Federal regulation is the more extensive, and our focus will be upon it. It extends not only to the national banks, i.e., banks chartered under federal law and supervised by the Comptroller of the Currency, see 12 U.S.C. § 21 et seq. For many state banks, see 12 U.S.C. § 321, as well as virtually all the national banks. 12 U.S.C. § 222, are members of the Federal Reserve System (FRS), and more than 95% of all banks, see 12 U.S.C. § 1815, are insured by the Federal Deposit Insurance Corporation (FDIC). State member and nonmember insured banks are subject to a federal regulatory scheme almost as elaborate as that which governs the national banks.

The governmental controls of American banking are manifold. First, the Federal Reserve System, through its open-market operations, see 12 U.S.C. §§ 263(c), 353—359, control of the rediscount rate, see 12 U.S.C. § 357, and modifications of reserve requirements, see 12 U.S.C.

Page 328

ss 462, 462b, regulates the supply of money and credit in the economy and thereby indirectly regulates the interest rates of bank loans. This is not, however, rate regulation. The Reserve System's activities are only designed to influence the prime, i.e., minimum, bank interest rate. There is no federal control of the maximum, although all banks, state and national, are subject to state usury laws where applicable. See 12 U.S.C. § 85. In the range between the maximum fixed by state usury laws and the practical minimum set by federal fiscal policies (there is no law against undercutting the prime rate but bankers seldom do), bankers are free to price their loans as they choose. Moreover, charges for other banking services, such as service charges for checking privileges, are free of governmental regulation, state or federal.

Entry, branching, and acquisitions are covered by a network of state and federal statutes. A charter for a new bank, state or national, will not be granted unless the invested capital and management of the applicant, and its prospects for doing sufficient business to operate at a reasonable profit, give adequate protection against undue competition and possible failure. See, e.g., 12 U.S.C. §§ 26, 27, 51; 12 CFR § 4.1(b); Pa.Stat.Ann., Tit. 7, § 819—306. Failure to meet these standards may cause the FDIC to refuse an application for insurance, 12 U.S.C. §§ 1815, 1816, and may cause the FDIC, Federal Reserve Board (FRB), and Comptroller to refuse permission to branch to insured, member, and national banks, respectively. 12 U.S.C. §§ 36, 321, 1828(d). Permission to merge, consolidate, acquire assets, or assume liabilities may be refused by the agencies on the same grounds. 12 U.S.C. (1958 ed., Supp. IV) § 1828(c), note 8, infra. Furthermore, national banks appear to be subject to state geographical limitations on branching. See 12 U.S.C. § 36(c).

Page 329

Banks are also subject to a number of specific provisions aimed at ensuring sound banking practices. For example, member banks of the Federal Reserve System may not pay interest on demand deposits, 12 U.S.C. § 371a, may not invest in common stocks or hold for their own account investment securities of any one obligor in excess of 10% of the bank's unimpaired capital and surplus, see 12 U.S.C. §§ 24 Seventh, 335, and may not pay interest on time or savings deposits above the rate fixed by the FRB, 12 U.S.C. § 371b. The payment of interest on deposits by nonmember insured banks is also federally regulated. 12 U.S.C. (1958 ed., Supp. IV) § 1828(g); 12 CFR, 1962 Supp., Part 329. In the case of national banks, the 10% limit on the obligations of a single obligor includes loans as well as investment securities. See 12 U.S.C. § 84. Pennsylvania imposes the same limitation upon banks chartered under its laws, such as Girard. Pa.Stat.Ann. (1961 Supp.), Tit. 7, § 819—1006.

But perhaps the most effective weapon of federal regulation of banking is the broad visitorial power of federal bank examiners. Whenever the agencies deem it necessary, they may order 'a thorough examination of all the affairs of the bank,' whether it be a member of the FRS or a nonmember insured bank. 12 U.S.C. §§ 325, 481, 483, 1820(b); 12 CFR § 4.2. Such examinations are frequent and intensive. In addition, the banks are required to furnish detailed periodic reports of their operations to the supervisory agencies. 12 U.S.C. §§ 161, 324, 1820(e). In this way the agencies maintain virtually a day-to-day surveillance of the American banking system. And should they discover unsound banking practices, they are equipped with a formidable array of sanctions. If in the judgment of the FRB a member bank is making 'undue use of bank credit,' the Board may suspend the bank from the use of the credit facilities of the FRS. 12 U.S.C. § 301. The FDIC has an even more formidable

Page 330

power. If it finds 'unsafe or unsound practices' in the conduct of the business of any insured bank, it may terminate the bank's insured status. 12 U.S.C. § 1818(a). Such involuntary termination severs the bank's membership in the FRS, if it is a state bank, and throws it into receivership if it is a national bank. 12 U.S.C. § 1818(b). Lesser, but nevertheless drastic, sanctions include publication of the results of bank examinations. 12 U.S.C. §§...