Capital One and Discover Financial Merger: Boosting Competition and Financial Stability

2024-03-21 20:15:39

Capital One’s $35.3 billion merger with Discover Financial will boost competition and benefit financial stability, the bank said in its regulatory filing filed overnight, according to people familiar with the matter. the folder.

The bank also said the deal would not harm competition in the credit card space because the combined entity will account for approximately 13% of credit card purchase volume, which it said is the best measure of credit card market share, the people said.

The operation unveiled last month will create the largest American credit card issuer in terms of balances and the sixth largest bank in terms of assets. It will also allow Capital One to control the credit card payment network of Discover, which is the fourth largest payment network operator following Visa, Mastercard and American Express.

The possibility that the merger would create a viable competitor to Visa and Mastercard, whose dominance in card payments has been criticized by lawmakers, is Capital One’s main argument in favor of the deal, the people said. Discover’s network has ceded market share over the past decade and Capital One, as a much larger bank, can provide the additional scale and volume Discover needs to compete, the bank said in his file.

She also argued that the deal would benefit financial stability by ensuring that Discover is taken over by a safe bank that will invest in risk management, according to the people interviewed. The credit card company’s stock price and earnings have been hurt by compliance lapses and a decline in credit quality.

Visa, Mastercard and Discover declined to comment.

In pitching the deal, Capital One said it would expand Discover’s network, which some antitrust experts say would be its biggest selling point. However, the arguments made by the bank in its application to the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, which will review the merger with the assistance of the Department of Justice, have not been reported .

They will be closely scrutinized by investors and will likely draw backlash from antitrust advocates and Democratic lawmakers who have called on regulators to block the deal, arguing it would raise costs for consumers and that it would threaten financial stability.

The deal comes as regulators tighten their scrutiny of bank mergers under Democratic President Joe Biden’s administration. The debate over the risks and benefits of bank mergers intensified following JPMorgan and New York Community Bank were allowed to buy assets of failed banks last year.

“This is a key test of the federal merger review framework,” said Jesse Van Tol, executive director of the National Community Reinvestment Coalition, a community lending advocacy group that opposes the deal. .

An OCC spokesperson confirmed receiving the request. The Fed declined to comment.

CONTROL OF THE JUSTICE DEPARTMENT

While the Justice Department has traditionally focused on depositors and branches when assessing the competitive impact of bank mergers, the agency said last year that it would examine a broader range of issues.

It might review the deal under new 2023 guidelines, which take a stricter stance on deals in highly concentrated markets, the American Economic Liberties Project think tank said in an analysis published Thursday .

Shahid Naeem, a senior policy analyst at AELP who wrote the report, said the Justice Department took a dim view of the type of “vertical integrations” that Capital One was proposing as part of its takeover of Discover’s network when reviewing deals in the technology sector.

He adds that a court also rejected similar “merger-competition” arguments made by JetBlue to defend the takeover of Spirit Airlines. “It seems very unlikely that these arguments hold water,” Mr. Naeem said. “It’s not a question of weighing the pros and cons, but of determining whether an agreement will reduce competition in a market.

Capital One, however, believes these cases are irrelevant because the banking industry is unique and mergers in that industry are subject to a different set of considerations, according to those interviewed.

The AELP is an anti-monopoly group that opposes the merger. Its founder, Sarah Miller, last year became chief of staff at the Federal Trade Commission, another competition watchdog.

“This analysis of the AELP is a great window into how people like Jonathan Kanter and other Biden administration officials might approach this deal,” said Jeremy Kress, a professor at the University of Michigan, in referring to the Justice Department’s top antitrust lawyer.

Although banking regulators are leading Capital One’s review, they are unlikely to ignore the Justice Department’s objections, particularly amid political pressure for greater severity, lawyers said .

In January, the OCC proposed new rules on mergers, while the Federal Deposit Insurance Corporation said Thursday it plans to take a closer look at large transactions.

The Justice Department did not respond to a request for comment. Speaking at an event Thursday, Mr. Kanter said that the needs of bank customers were diverse and that, when considering bank mergers, “we would be doing the public a disservice if we simply limited our analysis to a numerical approach. (Reporting by Michelle Price; Writing by Jamie Freed, Franklin Paul and Lisa Shumaker)

1711065990
#Capital #tells #regulators #Discover #deal #boost #competition #stability #sources #March #p.m