The following three FIs dominate a local market and their total assets are given below.
$\begin{array}{lccc}
\text {Institution }& \text { Asset Size}\
\text {Bank A}&\$ 50 \text { million}\
\text {Bank B}& \$ 60 \text { million}\
\text {Bank C}&\$ 90 \text { million}\
\end{array}$
Under the 1982 guidelines,would the Fed approve the merger of Banks A and C?
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.

Question

The following three FIs dominate a local market and their total assets are given below. 
$\begin{array}{lccc}
  \text {Institution  }&  \text { Asset Size}\
  \text {Bank A}&\$ 50    \text { million}\
  \text {Bank B}& \$ 60   \text { million}\
  \text {Bank  C}&\$ 90  \text {  million}\
\end{array}$
 Under the 1982 guidelines,would the Fed approve the merger of Banks A and C?
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.

Quizplus · Accepted Answer

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration. The post-merger HHI can be calculated as follows:

HHI = (50/200)^2 + (60/200)^2 + (90/200)^2 = 0.355

If Banks A and C merge, the new HHI would be:

HHI = (140/200)^2 + (60/200)^2 = 0.58

The increase in HHI would be:

∆HHI = 0.58 - 0.355 = 0.225

Since the increase in HHI is over 100 (i.e., 22.5% increase), it is unlikely that the Fed would approve the merger under the 1982 guidelines. Choice B is therefore the best answer.

The Following Three FIs Dominate a Local Market and Their