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What is HHI?
What is a "Pro Forma HHI Analysis"?
HHI (Herfindahl-Hirschman Index) is a commonly used method of measuring the concentration of an industry in a particular geographic market. HHI is calculated by squaring the market share of each firm competing in the market and then summing these results. This sum can range from 0 to 10000, with larger numbers signifying more concentrated markets. That is:
Thus, if there were only one firm in a marketthat is, the firm controlled 100 percent of the market—the HHI for this market would be 10000 (= 1002).
Most markets, however, have several firms, and often many firms, competing with each other. HHI, by using the square of each firm’s market share in its calculation, accounts for all firms in the market, giving greater weight to firms with larger market shares.
For example, if a market has five firms competing in it, with one of the firms controlling 35 percent of the market, one controlling 25 percent of the market, one controlling 20 percent, one controlling 15 percent and the last controlling 5 percent, then:
HHI = (35)2 + (25)2 + (20)2 + (15)2 + (5)2 = 2500.
If, instead, each firm controls 20 percent of the market, then:
HHI = (20)2 + (20)2 + (20)2 + (20)2 + (20)2 = 2000.
Thus, even though there are five firms in both examples, the market in the first example is more concentrated than the market in the second. More generally, as firms’ market shares become relatively more equal, or as the number of firms competing in a market increases, the lower that market’s HHI will be.
HHI is an index used to measure an industry’s concentration in a geographic market. The U.S. Department of Justice has set forth bank merger guidelines for determining if a market is considered to be unconcentrated, moderately concentrated or highly concentrated based on the market’s HHI.
The guidelines are as follows:
|If HHI is
less than 1000.................
between 1000 and 1800..........
greater than 1800..............
|Market is considered to be
A pro forma HHI analysis considers how a market’s HHI changes when the market’s structure changes. That is, a pro forma HHI analysis illustrates how a proposed transaction—merger or acquisition, for example—will change a market’s concentration.
The bank merger guidelines also describe under which pro forma situations the Department of Justice generally will not challenge a transaction. For the banking industry, this is known as the "1800/200 rule." That is, the Department of Justice generally will not challenge a transaction unless the pro forma HHI is greater than 1800 AND the change in HHI resulting from the transaction is greater than 200 points.
|BHC||Bank holding company, which is a company (for example, a corporation, partnership or trust) that has direct or indirect control of a bank.|
|THC||Thrift holding company, which is a company (for example, a corporation, partnership or trust) that has direct or indirect control of a thrift.|
|Branch #||Branch numbers identify a bank’s or thrift’s branches. In particular, “-1” indicates a bank or thrift head office without additional branches. “0” indicates a bank or thrift head office with additional branches. Branch numbers are not unique across banks and thrifts and may change over time.|
|Common Markets||Banking markets in which both the buyer and target have branches.|
|DI||Depository institution. Includes BHCs, banks, thrifts and their branches.|
|Fed ID||Unique Federal Reserve identifiers for depository institutions. Also known as RSSD ID.|
|Other||Includes bankers banks, cash management banks, credit card banks, industrial loan companies, pure internet banks, nonbank banks, depository trust companies and wholesale banks.|
|RMA||Ranally Metro Area (RMA) is Rand McNally’s definition of a metropolitan area. RMA definitions can be found in Rand McNally’s Commercial Atlas & Marketing Guide. RMAs are not restricted to following county boundaries, as regular metropolitan statistical area definitions are.|
|Thrift||Includes both mutual and stock savings and loan associations (S&L), savings associations, building and loan associations, cooperative banks, homestead societies, and savings banks. Credit unions are not thrifts.|
Banking market structures are updated upon application approval or consummation.
Deposit data are from the FDIC’s Summary of Deposits database. CASSIDI includes the most current vintage of these annual data, unless otherwise noted. The current data are from June 30, 2016.
Deposit data, though reported in millions of dollars, are rounded to the nearest thousand dollars.
HHI numbers are rounded to the nearest whole number.
Addresses included for BHCs, banks, thrifts, and branches are not necessarily mailing addresses.
Cities included in banking markets are generally those with bank or thrift branches.
Banking Structure transaction information and transaction histories come from various Federal Reserve, FDIC, and OCC source materials.
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