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1 [1] (February 29, 2024)

handle is hein.crs/goveonz0001 and id is 1 raw text is: h j ni~ February 29, 2024 Capital One-Discover Proposed Merger: Systemic Risk and Market Competition Considerations In February 2024, Capital One announced a merger deal with Discover. This In Focus explores the policy issues raised by the potential merger that may be of interest to Congress, with particular attention to the competition and systemic impacts on the banking system. Capital One is the 9th largest depository institution in the country, with the 12th largest parent bank holding company (BHC) by assets ($478 billion). It is also one of the largest issuers of Visa and MasterCard branded credit cards. Discover is the 27th largest depository, with the 33rd largest BHC ($152 billion in assets). Discover also operates one of the four largest card payment networks in the country and is a major issuer of payment cards. If the banks do not divest any current assets, the merger would result in an insured depository institution with over $600 billion in assets, making it the 6th largest depository and 8th largest BHC in the country. As shown in Figure 1, the institution would be significantly smaller than the six largest BHCs, but comparable in size to four banking organizations currently in the next tier (over $500 billion in assets). Additionally, it would combine two of the five largest card issuers and one of the largest card networks into one institution. Figure I. Comparing Capital One and Discover to the 10 Largest Banking Organizations December 31, 2023 Source: CRS calculations based on data from Federal Reserve. Note: TD is an intermediate holding company. Others are BHCs. Re ulatoy A roal Process Statute requires bank regulators to review merger proposals for, among other things, their effects on competition, and grants them authority to block mergers that do not meet certain standards. This merger is subject to the approval of the Federal Reserve (because both banks are structured as BHCs), Office of the Comptroller of the Currency (because Capital One is a national bank), and Federal Deposit Insurance Corporation (because Discover is a state- chartered bank). In addition, the Department of Justice (DOJ) has the authority to block any merger on antitrust grounds. DOJ and the bank regulators review proposals for their effects on market power on the national and local level. Bank mergers are also subject to numerical statutory concentration limits to curb market power-the merged entity may not hold more than 10% of total deposits nationally or 30% of deposits in any state and, for BHCs, the merged entity cannot hold over 10% of all financial company liabilities nationally. The two bank's combined deposits and liabilities in this merger would not be close to the national limits. Bank regulators must also consider other aspects of a merger, such as whether the merged institution would have adequate financial, capital, and managerial resources. Regulators consider the convenience and needs of the community, and the banks' Community Reinvestment Act (P.L. 95-128; CRA) ratings. As of the date of the latest CRA rating, Discover held a satisfactory rating and Capital One held an outstanding rating. Regulators also consider the banks' effectiveness in combatting money laundering. According to the Fed, deficiencies that have resulted in the issuance of a formal or informal enforcement action 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, a withdrawn application (TD-First Horizon). To gain regulatory approval, applicants will often make changes to their activities or holdings, such as divesting branches in overlapping markets to allay concerns about market power, creating uncertainty on how a merger will affect factors such as competition and systemic risk until approval has been granted. Systemic Risk sues Regulators must also consider whether the merger poses systemic risk to the United States banking or financial &ssonaI Resedrch Service e egsaive db ate sin e 1914 e I ~