Capital One-Discover: What you need to know

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QUICK FIX

Capital One’s proposed purchase of Discover, and the question of whether it will go through, is somehow both a great case study of policy issues affecting the banking industry and a completely unique situation. And it’s getting a lot of attention in Washington.

The proposed union comes at a time when regional banks are facing pressure from both markets and regulators after multiple lenders failed last year. Banks with between $100 billion and $250 billion in assets are expected to face tougher standards, increasing their motivation to grow bigger to survive. However, Discover — which has more than $140 billion in assets — doesn’t look like its peers. It doesn’t have the same issues with unrealized losses, uninsured deposits or exposure to commercial real estate.

What it does have are issues with regulatory compliance, a factor that might actually make Capital One’s bid more attractive to banking agencies. The merged bank would also be heavily concentrated in credit card loans, becoming the nation’s top issuer, something that could draw scrutiny with delinquencies on the rise.

But it’s very unclear what type of deals — if any — would be looked upon favorably by the banking agencies. They’re still updating their guidelines. They’ve sent mixed signals about whether mergers are welcome. And so this deal is a bit of a guinea pig.

The fact that the deal was announced at all suggests that regulators didn’t reject it out of hand, so there’s at least some chance for approval. But they’re already facing political pressure, with lawmakers like Sen. Elizabeth Warren (D-Mass.) calling for the deal to be killed, citing a recent CFPB report that shows larger card issuers charge higher rates.

Meanwhile, the Justice Department last year announced a shift in policy where it won’t play a formal role ahead of bank regulators’ decision on a deal, leaving open the possibility that the merger could get approved but then challenged in court.

The most salient competition issue relates to the credit card market. Visa and Mastercard are the dominant card networks and aren’t associated with any one bank. American Express is a card network for which it is the only issuer. Discover, in contrast, is sort of a hybrid, which would make it positioned to grow as a competitor if, for example, Congress passed legislation mandating that big banks use a network other than the dominant two. There really isn’t precedent for a larger card issuer buying a large card network, and that could get a lot of interest from the Justice Department.

“If you go back to Jonathan Kanter’s speech last June, I think he was trying to convey that bank mergers are largely within the bank regulators’ purview, and the DOJ largely only plays an advisory role,” said Jeremy Kress, who worked for the assistant attorney general at the time to help develop the new policy. But since this merger is particularly about credit card networks, which aren’t normally a big focus for bank regulators, “I wouldn’t be surprised if the DOJ has a stronger view on this deal than it would on the average bank merger,” Kress said.

Ed Mills, Washington policy analyst at Raymond James, said the competition angle could go either way: The deal would move more people onto the Discover network, adding competition to the big two, at least in the short term. But it might make banks less likely to join the network over the long term because they don’t want to boost Capital One, he added.

The deal is also facing a war from community groups. The National Community Reinvestment Coalition has had a beef with Capital One since its acquisition of ING Direct in 2012 and has consistently charged that the bank is failing to properly serve lower-income consumers.

The coalition commands a large army of community groups that are expected to at least cause huge headaches along the way for the proposed deal. “We think they’re one of the bad boys in the banking industry,” NCRC head Jesse Van Tol told MM. “We’re gonna go all out opposing this thing.”

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Driving the day

Fed Governor Michelle Bowman speaks at the Exchequer Club lunch at 1 p.m. … FOMC minutes from January are out at 2 p.m.

Cap One-Discover reaction — Sen. Elizabeth Warren (D-Mass.) on Tuesday wrote on X, Formerly Twitter, that the proposed Capital One-Discover deal “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families,” our Jasper Goodman reports.

Her post came after one top regulator, Consumer Financial Protection Bureau Director Rohit Chopra, underscored in an interview Tuesday the intense scrutiny the deal is likely to get.

“In the U.S., our credit card market is really dominated by a set of issuers, so there will be very important questions for the regulators to look at,” Chopra told our Kathryn Carlson on the sidelines of a conference in Brussels. He declined to comment on the acquisition directly.

Debt worries grow — Bloomberg reports that former IMF chief economist Olivier Blanchard said Tuesday that the U.S. is at risk of a fiscal crisis due to the federal deficit.

“In the U.S., I’m very worried because the primary deficits are very large and there’s absolutely no attempt to decrease them in any way, shape or form,” Blanchard said at the House of Lords Economic Affairs Committee.

On the pods — Former Kansas City Fed President Esther George is on a new episode of IntraFi’s Banking with Interest podcast talking about interest rates, woes in commercial real estate, financial regulation, payments, etc. She also touched on the Fed’s expanded lending facility that will wind down next month.

“Yes, the bank term funding facility probably should be put away, given that things have stabilized,” she said. “On the other hand, there’s no question that it could expose other weaknesses in the system when it does. … I think this is a time to really assess. What is it that is unique about the funding in the bank? How are we positioned relative to liquidity events? And I’m going to assume that this facility will phase out in a way that doesn’t create an abrupt change in that particular funding.”

ELECTION 2024

Warren officially draws crypto-focused challenger — From our Lisa Kashinsky in Boston: “A cryptocurrency advocate and attorney is challenging Sen. Elizabeth Warren as a Republican, giving the prominent progressive her first serious — though still long-shot — challenger and setting up an election-season clash over crypto.”

“John Deaton, a Detroit native, launched his Senate campaign on Tuesday “to continue my life’s mission to shake things up for the people who need it most,” he said in a video announcing his bid. Deaton moved to Massachusetts last month to take on Warren, a Democrat and Congress’ loudest crypto critic.”

Biden’s directive to campaign aides — President Joe Biden told senior officials on his campaign to dial up the campaign’s focus on “crazy” things his likely GOP opponent, former President Donald Trump, says, CNN’s MJ Lee reports.

Housing

SCOTUS lets NY rent stabilization law stand — CNN reports that the Supreme Court declined to take up challenges to New York’s rent stabilization laws on Tuesday. The statutes impose rules on how landlords can lease some units.

Crypto

GMAC meeting set for March 6 — The CFTC’s Global Markets Advisory Committee is set to hold a meeting on March 6 in Washington. The group’s Digital Asset Markets Subcommittee is expected to unveil the first-ever recommendations regarding digital asset taxonomy.