The following three FIs dominate a local market and their total assets are given below. $$\begin{array} { | c | r | }
\hline \text { Institution } & \text { Asset Size } \
\hline \text { Bank A } & \text { \$50 million } \
\hline \text { Bank B } & \text { \$60 million } \
\hline \text { Bank C } & \text { \$90 million } \
\hline
\end{array}$$ Under the 1982 guidelines, would the Fed approve the merger of Banks A and B?
A)It is likely to approve because it is not a concentrated market.
B)It is unlikely to approve because the post-merger HHI has increased by over 100.
C)It is likely to approve because the post-merger HHI has increased by over 100.
D)Likely to approve because the post-merger HHI has increased by less than 5,000.
E)It is unlikely to approve because the post-merger HHI has increased by an amount over 5,000.

Question

The following three FIs dominate a local market and their total assets are given below. $$\begin{array} { | c | r | } 
\hline \text { Institution } & \text { Asset Size } \
\hline \text { Bank A } & \text { \$50 million } \
\hline \text { Bank B } & \text { \$60 million } \
\hline \text { Bank C } & \text { \$90 million } \
\hline
\end{array}$$ Under the 1982 guidelines, would the Fed approve the merger of Banks A and B?
A)It is likely to approve because it is not a concentrated market.
B)It is unlikely to approve because the post-merger HHI has increased by over 100.
C)It is likely to approve because the post-merger HHI has increased by over 100.
D)Likely to approve because the post-merger HHI has increased by less than 5,000.
E)It is unlikely to approve because the post-merger HHI has increased by an amount over 5,000.

Quizplus · Accepted Answer

The Herfindahl-Hirschman Index (HHI) is used to measure market concentration. A significant increase in HHI (over 100 points) after a merger, especially in markets already concentrated, could lead to regulatory concerns about reduced competition. In this case, merging Banks A and B significantly increases the HHI, indicating a more concentrated market, which is why the Fed is unlikely to approve under the 1982 guidelines focused on maintaining competitive markets.

The Following Three FIs Dominate a Local Market and Their