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February 29, 2024
Capital One-Discover Proposed Merger: Systemic Risk and
Market Competition Considerations
In February 2024, Capital One announced a merger deal
Capital One is a national bank), and Federal Deposit
with Discover. This In Focus explores the policy issues
Insurance Corporation (because Discover is a state-
raised by the potential merger that may be of interest to
chartered bank). In addition, the Department of Justice
Congress, with particular attention to the competition and
(DOJ) has the authority to block any merger on antitrust
systemic impacts on the banking system.
grounds. DOJ and the bank regulators review proposals for
their effects on market power on the national and local
Capital One is the 9th largest depository institution in the
level. Bank mergers are also subject to numerical statutory
country, with the 12th largest parent bank holding company
concentration limits to curb market power—the merged
(BHC) by assets ($478 billion). It is also one of the largest
entity may not hold more than 10% of total deposits
issuers of Visa and MasterCard branded credit cards.
nationally or 30% of deposits in any state and, for BHCs,
Discover is the 27th largest depository, with the 33rd largest
the merged entity cannot hold over 10% of all financial
BHC ($152 billion in assets). Discover also operates one of
company liabilities nationally. The two bank’s combined
the four largest card payment networks in the country and is
deposits and liabilities in this merger would not be close to
a major issuer of payment cards. If the banks do not divest
the national limits.
any current assets, the merger would result in an insured
depository institution with over $600 billion in assets,
Bank regulators must also consider other aspects of a
making it the 6th largest depository and 8th largest BHC in
merger, such as whether the merged institution would have
the country. As shown in Figure 1, the institution would be
adequate financial, capital, and managerial resources.
significantly smaller than the six largest BHCs, but
Regulators consider the “convenience and needs of the
comparable in size to four banking organizations currently
community,” and the banks’ Community Reinvestment Act
in the next tier (over $500 billion in assets). Additionally, it
(P.L. 95-128; CRA) ratings. As of the date of the latest
would combine two of the five largest card issuers and one
CRA rating, Discover held a satisfactory rating and Capital
of the largest card networks into one institution.
One held an outstanding rating. Regulators also consider
the banks’ effectiveness in combatting money laundering.
Figure 1. Comparing Capital One and Discover to the
According to the Fed, “deficiencies that have resulted in the
10 Largest Banking Organizations
issuance of a formal or informal enforcement action
December 31, 2023
generally are considered to be less than satisfactory.” In
2021, Capital One paid a $390 million civil money penalty
for violating anti-money laundering regulations. Both
Discover and Capital One over the past several years were
subject to various enforcement actions in various areas;
however, this is not uncommon for large banks. While these
specific actions were resolved, information about ongoing
supervisory concerns at any bank is not publicly available.
The time regulators take to review a particular merger
varies, and it is not uncommon for several months to pass
between a large merger announcement and approval, as
shown in Figure 2 for four recent proposed mergers by
banks currently closest in size to a merged Capital One-
Discover entity. Those review periods took between 179
and 430 days, with three approvals and, in the longest case,
Source: CRS calculations based on data from Federal Reserve.
a withdrawn application (TD-First Horizon). To gain
regulatory approval, applicants will often make changes to
Note: TD is an intermediate holding company. Others are BHCs.
their activities or holdings, such as divesting branches in
Regulatory Approval Process
overlapping markets to allay concerns about market power,
creating uncertainty on how a merger will affect factors
Statute requires bank regulators to review merger proposals
such as competition and systemic risk until approval has
for, among other things, their effects on competition, and
been granted.
grants them authority to block mergers that do not meet
certain standards. This merger is subject to the approval of
Systemic Risk Issues
the Federal Reserve (because both banks are structured as
Regulators must also consider whether the merger poses
BHCs), Office of the Comptroller of the Currency (because
systemic risk to the United States banking or financial
https://crsreports.congress.gov
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Capital One-Discover Proposed Merger: Systemic Risk and Market Competition Considerations
system. Although there does not seem to be a standard
The competition consideration in merger reviews generally
formula for determining this, the factors considered overlap
focuses on deposit concentration, but regulators will also
with those used to classify Globally Systemically Important
sometimes consider competition in product markets,
Banks, or G-SIBs. G-SIBs are classified on the basis of a
notably for mergers involving specialty banks, such as
dozen standards related to size, interconnectedness,
credit card banks. As with any merger proposal, there is
substitutability, complexity, and cross-jurisdictional
some uncertainty around how it could materialize—in this
activity. To mitigate systemic risk, large banks are subject
case, with respect to the impact it would have on
to enhanced prudential regulation (EPR). Under EPR, banks
competition in retail payments. This is because Capital One
are placed in four categories and subject to progressively
and Discover are each one of the largest credit card issuers
more stringent regulations. Capital One is currently a
in the country, and Discover operates a large card network
Category III bank, and the EPR category of the merged
that processes credit and debit cards. Further, Discover’s
entity is unlikely to be different, so it would not be subject
debit card network structure is currently not covered by
to more stringent EPR requirements than Capital One
certain provisions of Regulation II (which implemented the
currently is. The merged entity is unlikely to meet the
“Durbin Amendment”), which regulates debit card
definition of a Category I (i.e., G-SIB) or Category II bank.
transaction fees. Capital One could keep its card issuance
The entity would not initially meet the asset or cross-
and network acquisition separate, but if they choose to
jurisdictional activity threshold for Category II banks. The
integrate these operations, the impacts could vary.
merged entity would also score relatively low on all of the
metrics used to identify G-SIBs except size, intra-financial
For example, Capital One could use its existing card
system assets, and securities outstanding. All of the other
issuance customer base and the newly acquired network
banks in Figure 2 also remained Category III banks
technology from Discover to create a new network that
following their mergers.
competes with Visa and Mastercard. It is uncertain whether
this would help Discover better compete with Mastercard
Figure 2. Duration of Recent Merger Applications
and Visa in retail payments, driving prices (i.e., “swipe
fees”) down, or reduce competition through the merger of
two major competitors, driving prices up. Competition in
this market has perennially drawn congressional attention,
and promoting competition in the credit card market is one
of the primary goals of legislation such as the Credit Card
Competition Act of 2023 (S. 1838/H.R. 3881). Regulation
II caps permissible debit transaction fees. Currently, Capital
One does not have a large debit card business, but its debit
card issuance is covered by the regulation, meaning the
revenue it can generate from a transaction (i.e.,
“interchange”) is limited by the price cap. In its February
2024 8-K securities filing, Capital One noted that it would
benefit from moving its debit portfolio to Discover
networks, which are not covered by Regulation II price
Source: CRS calculations based on data from S&P Capital IQ
caps.
Notes: The post-merger bank is not in parentheses. For TD-First
Horizon’s merger proposal, figure shows length of time from
CRS Resources
announcement to withdrawal.
CRS In Focus IF11956, Bank Mergers and Acquisitions, by
Marc Labonte and Andrew P. Scott
Retail Payment Issues
While making loans and accepting deposits are the core
CRS In Focus IF11893, Merchant Discount, Interchange,
operations of a bank, there is a third critical function banks
and Other Transaction Fees in the Retail Electronic
serve: payments. Banks are crucial in the facilitation of
Payment System, by Andrew P. Scott
retail and wholesale payments. For example, banks are the
institutions that issue payment cards (retail) and settle
CRS In Focus IF12548, How the Credit Card Competition
transactions (wholesale) at the Federal Reserve.
Act of 2023 Could Affect Consumers, Merchants, and
Banks, by Andrew P. Scott
At the end of 2023, more than a quarter of Capital One’s
total assets and nearly half of its loan portfolio were credit
CRS Report R41913, Regulation of Debit Interchange
card loans. Credit card loans were 68% of Discover’s
Fees, by Darryl E. Getter
assets. According to Capital One’s regulatory filings, it was
the third largest issuer of Visa and Mastercard payment
CRS Report R47876, Enhanced Prudential Regulation of
cards. Capital One credit card users purchased around $587
Large Banks, by Marc Labonte
billion in transaction value in 2022. Discover credit card
holders purchased around $224 billion, with an additional
Andrew P. Scott, Analyst in Financial Economics
$550 billion run through Discover proprietary and affiliated
Marc Labonte, Specialist in Macroeconomic Policy
debit card networks. Absent changes, the merger would
Graham C. Tufts, Research Assistant
result in a depository institution with a retail card issuer that
accounts for over $1 trillion in annual transaction volume.
IF12607
https://crsreports.congress.gov
Capital One-Discover Proposed Merger: Systemic Risk and Market Competition Considerations
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https://crsreports.congress.gov | IF12607 · VERSION 1 · NEW