Mar 28, 2024
On March 28, The Capitol Forum’s Sara Sirota and Teddy Downey hosted a conference call with Shahid Naeem, senior policy analyst at American Economic Liberties Project, to discuss his recent report “Capital One-Discover: A Competition Policy and Regulatory Deep Dive.” The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good morning and welcome to our conference call with Shahid Naeem on Capital One-Discover. I’m Teddy Downey, Executive Editor here at The Capitol Forum. I’m also joined by my colleague, Correspondent Sara Sirota.
Our guest today is the author of a new report, “Capital One Discover: A Competition Policy and Regulatory Deep Dive”. I’m super excited to talk to Shahid Naeem today. He’s done a lot of work. I think he offers a really great perspective. Shahid, thanks so much for doing this today.
SHAHID NAEEM: Thanks so much for having me, Teddy. It’s good to be back.
TEDDY DOWNEY: Really quickly, we’re going to take questions from the audience. If you have questions, just email us at editorial@thecapitolforum.com. Sorry for the background noise. You can also enter questions in the questions pane of the control panel. Shahid, maybe you could just walk us through some of the highlights, the big high-level takeaways, from your sort of deep dive into the merger and how the companies are positioning themselves to try to get their merger through the sort of antitrust and bank regulator review.
SHAHID NAEEM: Yeah, definitely. So, folks are probably aware, but this is a $35 billion transaction. So, it’s pretty large on its own terms. But one of the fascinating things is the way that this transaction kind of flows through both banking, credit card issuing and payment networks, which are all already concentrated markets. And then it’s not just a merger of two banks. I think that’s kind of been one of the main things that we’ve been really trying to illuminate here is that this isn’t just some bank merger. This is really a platform merger, a network merger, with the involvement of the Discover payment platform.
So, I think that’s just kind of grounded in the markets that this deal takes place in, banking, credit cards and payment networks. And I think one of the things that is important to kind of lay out at the beginning is that the transaction is facing a pretty challenging regulatory environment. Even before you get to analysis of a deal, looking at the regulatory environment, you have a Justice Department, which has really kind of drawn a line in the sand on bank merger deals. We have Assistant Attorney General Kanter, who’s the head of the Antitrust Division, last summer give a speech on the anniversary of Philadelphia National Bank, which was kind of the seminal bank merger, bank antitrust, Supreme Court case that the DOJ won, where they challenged an anti‑competitive bank merger that bank regulators had already approved.
So, this isn’t necessarily the DOJ of old. I think talking to a lot of financial services reporters in the past couple of weeks, folks are really—and I think for good reason, because the DOJ hasn’t played such an active role in recent years until now‑‑ folks aren’t really too aware of what the DOJ’s role is in this deal here, and I’m happy to talk about that. But I kind of wanted to ground that and just really put that kind of up front, that the DOJ does have a role in the review of this deal and that I think, for a number of reasons, particularly the network and platform effects of this deal, the Justice Department is really going to take a keen look at this transaction on their own.
Then I think the counterpart to that is that you have the banking regulators, which are going to review this deal along the Bank Merger Act and Bank Holding Company Act. For this deal, it’s the OCC and the Fed. And these are both regulatory agencies that have come under a lot of fire recently. We don’t have to remind folks about the banking turmoil of 2023. I mean, pretty much exactly to the day this time last year. And the reports are still coming out from GAO kind of pointing the finger at regulatory and supervisory failures, kind of the FDIC pulling the systemic risk exception to guaranteed deposits at some of these major banks. And the OCC approving the JPMorgan ‑First Republic acquisition, which kind of circumvented the Riegle–Neal cap, basically designed to stop the largest banks from getting big or from getting bigger through acquisitions.
So, you have, on the one hand, an antitrust environment that was kind of really tailored to bring as much scrutiny as possible to this deal. And you have a banking regulatory environment where regulators are under a lot of pressure, both politically from the Elizabeth Warren camp. There are a lot of community groups that have come out against this deal. But then also in terms of their own regulatory and supervisory failings, those things are really on the radar here too.
And so, I think the question is really for banking regulators, not just how do you view this deal across the five prongs of the Bank Merger Act, but also do you really think that you can resolve the sixth largest bank in the country after this type of deal with the payment network involvement and everything like that? You know, is the FDIC going to be able to boots on the ground resolve this bank if necessary? And I think there are a lot of questions about that. And that’s really one of the things that I want to kind of put forward first is just kind of the challenging regulatory environment.
And the last thing I’ll add on that is that Capital One, some of this deal really is a mystery, I think. But the timing of it, some folks are kind of drawing this out as an election bet. But the election is still months away. And one could just wait until after the election where you might be guaranteed a Trump OCC potentially, if that’s the way the election goes, that certainly would look on this deal much more favorably than a Biden Federal Reserve and a Biden Justice Department.
So, I think just kind of Capital One, there are some mysteries to this deal in terms of timing and motivation and if they really think they can get this done. But I think one of the really fascinating things to pull out here is that there is a breakup fee here. But it doesn’t apply if regulators kill the deal. So, I think that suggests that Capital One is hedging its bets and might have less confidence in pushing this deal through than they’ve been saying to the public and to regulators. But I think really it’s just important to kind of ground the discussion in that.
TEDDY DOWNEY: Sara, I know you have a bunch of questions. Do you want to ask one?
SARA SIROTA: Yeah, sure. So, Shahid, thanks so much for joining us. And something I’ve been very curious about, we’ve seen a lot of Capital One executives come forward and defend this deal as a way of adding competition to the payment network market, which is obviously dominated right now by Visa and Mastercard. And so, the standpoint that your report is taking is the need for more competition within the financial services market, isn’t that a compelling argument that the Capital One’s acquisition of the Discover Network could present a valuable competitor to that duopoly that Visa and Mastercard currently have?
SHAHID NAEEM: Yeah. Sara, thanks so much. I mean, that is really the number one question here, I think. Now, whether the approval of this deal is going to hinge on the merge to compete argument, I think is a separate question, and I’m happy to get into that.
But Capital One has really planted its flag in terms of advocating for this deal, both to the public and to regulators. Their 582-page merger filing went public on Friday and they doubled down on this argument. This is the merge to compete argument. And it’s not new. And we’ve seen this a lot. A lot of industries are highly consolidated. And I think the best example of this kind of argument playing out in the current regulatory environment was JetBlue/Spirit. And I think we all know how that one ended up.
But when you have a market that is dominated by a duopoly‑‑ Visa and Mastercard have 85 percent market share here. Discover has about two or three in terms of payment volume. So, when you hear Capital One make the argument that it’s going to turn Discover into a viable competitor to Visa and Mastercard, that’s kind of a big claim, right?
And I know for myself, I was very, very interested to see, beyond the kind of vague assertions that this is going to happen and beyond the kind of vague description of how this is going to happen that they’ve offered thus far—which really can kind of be summed up in some of the phrasing and sentences from their merger application, which really just kind of boils down to we have more money than Discover. We are going to make strategic investments. We are going to “scale up” the Discover network. Beyond those assertions, I’ve really, really been interested in seeing what there’s going to be to back that claim up.
And I have to be really honest with you. Both writing this report, we go into this in detail from pages 17 to 19. But even after the report came out on Thursday, reading this 580-page merger application from Capital One to regulators, to OCC and the Fed, there really wasn’t a lot there to back that up more than ‑ the kind of assertions that they had given before.
So, I think I would be really surprised if regulators found this argument compelling. And there are a number of reasons for that. And I’ll kind of get into those briefly here. But I think I already mentioned Discover has had a pretty static market share. But that’s been true over decades. So, they have a two percent market share in 2022 by total card transaction volume. They’re the fourth largest network. They’re behind American Express and then the duopoly of Visa and Mastercard.
But in order for that—and I would add in 2008, that market share was about three percent. And this is something that Capital One really expands on in their merger application is just how poorly Discover has been competing with Visa and Mastercard. They make a great case for how Discover is currently not competitive. But they don’t make a great case for how they’re going to change that. And I think in order for Discover’s market share to compete, to increase, to become a real competitor with Visa and Mastercard, they’d have to do a couple of things, very concrete things. They’d have to lay out a plan for how to do this. And this is what we haven’t seen. They would have to somehow add significant purchase volume to the Discover Network. Or somehow manage to retool Discover’s methods of competition in a way that it previously hasn’t managed to do.
So, Capital One says that they’re going to move credit card and debit card volume over to the Discover Network when they buy it. But I think the analogy that I’ve been making here is that really it’s like you’re moving three fingers from your left hand over to your right hand. It’s a closed system. You might be moving volume over. And I think the differentiation here is that they’ve said immediately that they’re going to move as much as, if not all of, their debit volume over to the Discover Network immediately. And that makes a ton of sense. The Discover Pulse network, it’s larger than their credit card side. They do more on debit volume than they do on credit, which is, I think, something that folks are not too aware of.
And a lot of the synergies from this transaction, they’ve come out and said point blank, the significant majority of the network synergies are going to come from the debit side, not the credit side. There’s a lot of reasons for that or maybe a few. And I think number one is that the debit network is exempt from the Durbin Amendment, which means that there are no price caps and that debit cards issued by Discover aren’t required to have a competitor network on each of those cards. Which those are the Durbin Amendment rules that have really kept our debit networks competitive while our credit networks have kind of spiraled out of control.
So that’s the debit side. And then on the credit side, every opportunity that Capital One has had to talk about how they’re going to move credit volume over to the Discover network to bulk it up to compete with Visa and Mastercard. This is kind of your biggest argument here. And I was really expecting some numbers or some cohesive plan about how they’re going to get a significant amount of credit volume onto the Discover Network. But even in moving their own volume that they already have from the Capital One side over to Discover, it’s been all about very limited steps, very coy, shy communications to investors, for example, about moving very slowly on moving credit volume over.
And I think that the discrepancy there, their enthusiasm about the debit network volume, being able to move that all over immediately, and then the real hesitancy that you can see in their communications. I mean, we cite pretty much every quote that CEO Fairbank gave on the investor call on February 20th. We cite every mention of his on this concept. He was asked by some Wall Street analysts—at the end, during the Q&A on the investor call, kind of really asked to clarify—how are you going to move credit volume over? You’ve said it’s going to happen in small steps. You’ve said you’ll move a relatively small portion over. And I think the outcome here is that there are a lot of Wall Street analysts here that are not even convinced that Capital One intends to move significant credit volume over to the Discover Network, which is required for it to compete with Visa and Mastercard.
Sanjay Sakhrani at KBW is kind of a real veteran analyst in this space. And he went on Bloomberg basically and said that they’re just going to keep a substantial amount of their credit card volume on the Visa and Mastercard networks. And that makes total sense because they’re getting a fantastic deal from Visa and Mastercard. Because remember, Visa and Mastercard are sharing those high fees. We have some of the highest interchange fees in the world. Visa and Mastercard are sharing a piece of that pie with all their issuers. And that means that Capital One is really raking it in on the interchange fee side, not because they’re a network already, but because they’re an issuer and they get a piece of that pie from Visa and Mastercard.
So, kind of why fix it if it ain’t broke, right? They’re getting a really great deal from Visa and Mastercard. They’re being really coy about how much volume they’re going to be able to move over. And I think really that kind of leaves you with the impression that they might be signaling that this is their main leading argument to regulators for the deal, but it’s really hard to imagine that any regulator—even the banking agencies that are a little bit maybe less on the ball in terms of that competition analysis than the Justice Department would be—it’s really hard to imagine that they would find this compelling. And I think that’s probably one of the largest takeaways of our research here.
SARA SIROTA: Yeah. Shahid, you mentioned the possibility of shifting over their debit volume, questions about credit volume. What about the potential of Capital One investing in the Discover Network for the purpose of trying to attract other card issuers to the network? Is that something that could strengthen it to make it more of a viable competitor to Visa and Mastercard?
SHAHID NAEEM: Sara, that’s a great question. And I’m going to just do a flip flop here. I gave you a really long and detailed answer to the first question. And I’m going to do the opposite here and give you a short one. Yeah, basically that would be a great way for them to compete, to add credit card issuers, to open it up to more merchants. But they really haven’t laid any plans out to do that.
So, yeah. I mean, it’s really hard to imagine, right? You have a closed network. So, Discover’s, you know, there aren’t third party issuers. So, Visa and Mastercard, they’re payment networks. They’re open to all issuers, right? So, if you’re Wells Fargo, if you’re JP Morgan, you’re running your credit cards on those networks. And so, Visa and Mastercard, their purchase volume comes from their relationship with issuers that issue on their networks.
Discover is a closed network just like American Express. And so, it would be great if Discover could make an argument that they were going to scale up the Discover Network by opening their network up to third issuers to try to steal some issuer volume from JP Morgan or Citibank or something like that. I mean, that would be a great argument if they had the ability to make it, but they don’t and they haven’t made that argument thus far. They’re going to keep the Discover network closed is all the indication that we’ve been given.
And then I think you raise a good point too, which is there are other avenues they could potentially go down to increase Discover’s footprint. If they weren’t accepted by a lot of merchants, they could really kind of go on a campaign to get more merchants to accept their network, to be able to get more volume. But they’re already accepted pretty much nearly universally. Ninety-nine percent of folks that accept cards, businesses that accept cards, here in the United States, 99 percent of them accept Discover already. So, if they’re not going to get third party issuers and they’re not going to get more merchants and they’re going to keep the network closed, it’s really hard to imagine how they would be able to scale up. So, yeah.
SARA SIROTA: So, we’ve been talking a lot about the payment network. Another market that your paper focuses on, and Capital One’s application focuses on, is the credit card issuer market. And I know that you took a special interest in looking at submarkets, the sort of subprime, the near prime and subprime submarkets. And this isn’t really something that we’ve seen DOJ and the other regulators take a close look at in the past. There tended to be a broader analysis of concentration within the credit card market. And Capital One points to past statements that banking regulators have had saying that the broad credit card market is competitive. And so, what are you thinking in terms of the way that regulators might now, under the more assertive Biden administration, take towards looking at narrower segments of the credit card market? And what’s your point of view on that?
SHAHID NAEEM: Yeah, that’s a great question too. I mean, I think that any way you slice it, if you look at today’s DOJ under AAG Kanter, you’re looking at a Justice Department that has shown a willingness to define submarkets. JetBlue/Spirit is another great example of that. The DOJ made its case that the ultra low‑cost carriers, not necessarily that JetBlue represents, but that Spirit represented, the competition in that submarket really had a significant impact on pricing in the sector as a whole. And that JetBlue and Spirit and Frontier previously competing for a student that might not have a ton of money to travel and is looking for kind of a budget alternative to a classic American Airlines fare.
And I think we saw that play out to success in JetBlue/Spirit. And I think that in this case, you’d have to kick yourself if you weren’t thinking that DOJ would be looking to define a submarket, for example, say in subprime lending. I think it’s notable. And your piece this morning did a great job summing this up. But Capital One is‑‑ you just mentioned this now, but Capital One is citing OCC and Fed orders from 2003, 2004, 2012, Second Circuit opinions from 2003.
And so, what’s really missing here, I think, is an acknowledgment of today’s regulatory environment that is going to be more willing to define a submarket and is going to be more willing to drill down and not necessarily just look at credit cards as a whole market.
I mean, put it this way. If you’re a consumer–‑and you and I have credit cards, I’m assuming—our access to credit cards is dependent on our FICO score. You and I can’t just wake up one morning and decide we want to get a Capital One Venture X card or an American Express Platinum card, right? If you and I have lower credit scores, we are confined to the subsection of the market that will take us. And we’re going to get a worse deal because of it. We’re going to get lower rewards. We’re going to get higher interest rates depending on our FICO score, right?
So, there are material effects that these submarkets have on folks, depending on where you rank on the FICO score metric. And I think the fact that there’s such material effects on consumers, depending on their FICO score, means that certainly DOJ is going to take a look at these at these submarkets.
One other thing that I want to mention here, and it’s just pivoting a little bit back to our last question. But I want to make clear too, especially given that we’re talking about JetBlue/Spirit, one of the things about the merge to compete argument that I think really is important to mention here is that you and I were just talking about the merge to compete argument on its own merits, right? We’re kind of talking about whether this is an argument that has anything to back it up. We’re talking about moving credit volume from Capital One over to Discover. How can it scale up to compete?
But before that question, before the evaluation of the merge to compete argument on its own terms, comes whether that argument is even valid in the first place. And I think what we saw in JetBlue/Spirit pretty clearly, especially in Judge Young’s opinion siding with the DOJ in blocking the merger, is that argument is not going to be compelling to regulators in the same way that it might have been in the past.
Antitrust law—at the basis, on the statute, the Clayton Act, Section 7, ‑antitrust law is about whether a deal is going to harm competition in a market. Full stop. It’s not a balancing act of harms and merits overall. And Judge Young made this point quite clearly, whether that’s Supreme Court precedent or looking at his opinion, he made the argument that he was convinced by JetBlue and Spirit about their argument that the deal would have benefits to competition in the industry. This is the same Judge Young that denied the merger. Judge Young said he was convinced by JetBlue and Spirit that they made great arguments and that the government’s case, that there wouldn’t be competitive benefits to that deal, he didn’t find that compelling.
Now, do I agree with him? Maybe not. But I think the important thing to draw out here is that the merge to compete argument isn’t going to be valid on the law. Because it doesn’t display an accurate understanding of how antitrust law works. Again, it’s not a balancing act. It’s a test. And I think even before you get to arguing about the merge to compete argument on its own merits, that’s one thing that I think is really important to flag before then. So, I hope you don’t mind me going back to the previous question, but I’ll leave it there.
SARA SIROTA: No, that was all really helpful. Looking a little bit more broadly, we spoke earlier about the struggles that the sector faced last year. And I know that one of the biggest factors that regulators look at is the safety and the soundness of the banking system overall, and whether or not a merger could be beneficial or harmful within that broader context.
And so, I was wondering—and I apologize for going back to a subject that you brought up earlier on—but if you could just talk about the way that you see the merger situated within that context and the potential benefits or not benefits for the safety and soundness of the banking system, especially given what happened last year.
SHAHID NAEEM: Yeah, this is a really juicy subject. Like the safety and stability of the U.S. banking system. There’s a lot of ways you can kind of slice this. I think really day one, February 22nd or 21st, the day after this deal was announced, I think that was the majority of the analysis that we saw, from the nonprofit wing and from critics of bank consolidation, that creating the sixth largest bank, there’s just simply no reason to do that, given what we know about the competitive advantages that larger banks hold over smaller ones. There’s research that shows that large banks get a discount on their lending. Basically, because the market understands that they have an implicit government backstop, that if they fail, they’re going to be bailed out. And a smaller bank, you don’t have that. Regulators are willing to let smaller banks fail and not willing to let larger banks fail. We saw that in 2008. We saw that in 2023.
But what I think really raises some red flags here about this deal is that there’s a lot of questions about the banking regulators’ ability to apply the systemic risk element of the Bank Merger Act and the Bank Holding Company Act. So, after 2008, Congress amended the bank merger statutes to require regulators to take that into account when they’re approving mergers. And it doesn’t take a lot of investigation to see that framework has not been developed.
So, you have Daniel Tarullo, who’s a former Fed governor, now I think at Brookings. But he’s written extensively on this subject about how the banking regulators’ approach to this is lacking. Jeremy Kress has written about this. It’s ‑not contentious to say that bank regulators don’t necessarily have a clear framework in how they assess financial stability.
And I think the thing you can point to to make that even more clear is, look, SVB made an acquisition. I think it was maybe within a year previous to its failure. ‑It wasn’t an enormous acquisition, but the Federal Reserve basically indicated that,—I don’t have the exact quote in front of me,—but they indicated that this wouldn’t increase the relative degree of difficulty of resolving the bank. And so, when you have the Federal Reserve on record saying that SVB won’t be difficult to resolve or it won’t potentially fail about a year before it fails or even months before it fails, that gives you a sense that the banking agencies aren’t necessarily applying that factor to the degree that they should be.
And yeah, I mean, I think regulators looking at SVB’s acquisition of Boston Private, that was a maybe $100 billion bank acquiring a maybe less than $10 billion bank. This is potentially a $600 plus billion bank that would be larger than Goldman Sachs and Bank of New York Mellon, which are both global systemically important banks, GSIBs. And talking about what that effect would be on financial stability if Capital One were to go down, it’s really hard to imagine that this wouldn’t increase risk in the banking system.
The only other thing I’ll add here too is that Capital One and Discover share some similar risks. They’re both heavily credit card dependent. They both have higher percentages of their lending in subprime or near prime lending. They both score the worst on Federal Reserve stress tests that involve chargeoffs and higher delinquency rates. So, they’re both vulnerable to economic headwinds in the way that consumer-facing banks that have a lot of money tied up in a lot of assets, tied up in credit card loans and auto loans. They’re both vulnerable on that front.
And we saw the asset concentration problem really play out with NYCB on the CRE front, the Commercial Real Estate front. Where suddenly now, after New York Community Bank has really undergone some real tremors and real worries about it failing, you have folks coming out of the woodwork and saying, yeah, the FDIC should never have allowed NYCB to bid on the parts of Signature that it bought up after that bank failed. So, a lot of this analysis only emerging in hindsight gives you a sense that the banking regulators aren’t necessarily very well equipped to be making these forward-looking assessments properly and accurately.
And I think the last thing I would add on this is that if you walked through the halls of the FDIC and asked folks there in the large bank Resolvability Division, folks whose job it is to resolve these banks if they fail, if you walk through those halls and ask any of those professionals if they think it’s possible to resolve a Capital One ‑Discover merged firm, with the addition of the payment network, with the large amount of assets they’ll have, the complexity of the firm, if you ask those folks whose job it would be to resolve that bank, if they feel confident in their ability to do it, I would be shocked if you got any affirmative answers or enthusiastic answers on that front. But I’ll leave it there.
SARA SIROTA: So, within that context of how the FDIC, the Federal Reserve, and you mentioned DOJ, are going to be reviewing this merger, what are the next steps? I think listeners would be curious to know. Because you mentioned that the FDIC – sorry—that the OCC and the Federal Reserve are the two main banking regulators that are going to be reviewing this merger. DOJ is also involved. What does that interaction look like? And what is the process moving forward for that review?
SHAHID NAEEM: Yeah, that’s definitely a question that we’ve been getting a lot recently. So, the way that it works statutorily is that the Justice Department is going to submit a competitive factors report, which is basically just an antitrust analysis from the Justice Department’s perspective of the competitive impacts of a deal. So, the Justice Department is going to advise the OCC and the Fed on the competition prong of the banking merger statutes.
We talked a little bit about the politics of this. And it’s funny because there’s so much politics and policy around all of this. But this is a more aggressive Justice Department that’s probably going to be more willing to be very clear about what it sees as the harms to competition here. And so, because the Justice Department plays that role, it’ll then be up to the banking regulators to take into account that advisement, and perform their analysis across the other angles of the banking statutes. So financial stability, convenience and needs of the community and the other prongs there as well.
So, really the process here is that the Justice Department is going to weigh in with the banking agencies. And then the banking agencies are going to do their analyses. And then we get a decision, at some point, from the OCC and the Fed about whether this merger should or shouldn’t be approved.
Following that, then you have a window for the Justice Department to potentially intervene. So, if the Justice Department submits a competitive factors report to the banking agencies that says this deal is anti-competitive. We think it’s illegal. We think there are serious harms to competition in these markets for these reasons. If that’s the report they submit to the banking agencies and the banking agencies decide, well, we think that we’re going to approve this merger anyway, then the Justice Department has a window, statutorily, where they can sue to challenge the deal in court.
And they’d be going up against the banking agencies. But it’s important to draw the line here between the statute, the statutory process, which is kind of what we’ve been talking about, the kind of political and strategic willingness of these agencies to necessarily follow their mandates through.
So, the banking agencies haven’t proved particularly reliable in their stance, I would say, in applying any type of antitrust analysis. And if they decide that this deal doesn’t pose any risks to financial stability, that they think the merged firm is going to serve the needs of the community better, obviously, our research shows that they going to have the ability and incentive to raise prices both for merchants on the interchange fee side and for consumers on the credit card interest rate fee side.
So, there’s a lot of factors here too that the banking agencies will have to consider. And I would be very surprised if they decided to approve this merger. But if they did, they’d be going up against the Justice Department, potentially in court, to kind of weigh out the outcome of this deal. And I think it’s very new for the banking agencies to be worried about the Justice Department. They’re used to kind of getting a greenlit handshake deal from the Justice Department, maybe negotiating a few branch divestitures, which is kind of a classic, prior to now, Justice Department involvement in these mergers. They’re used to just kind of getting a green light from the DOJ and doing whatever they want.
And we’ve seen that in the past. Like since 2018, with some of the Dodd-Frank rollbacks, under the Trump administration, we saw just an enormous wave of bank mega mergers that created the sixth, seventh, 14th, 25th, like some of the largest banks in the country, these super regionals kind of all merged up after 2018.
And so, these are banking agencies that are used to green lighting and rubber-stamping bank merger applications. I think the last denied bank merger application was 2003. And they’re not used to kind of having the Justice Department in the room. They’re not used to worrying about whether the Justice Department is going to sue to block a merger that they approve.
So it’s all kind of very new territory. And I’m very excited to see how this all plays out. But with the Justice Department kind of on the prowl here in a very active way that they haven’t been previously, certainly folks at the banking agencies are going to be thinking about that. And whether or not they want to cross swords with Jonathan Kanter in court or in a conference room, arguing about whether this deal should go through or not, those things are hard to tell. But I think it’s important that at least we understand that those are considerations here. So, I hope that’s helpful on that front.
SARA SIROTA: Yeah, very helpful. Thank you. And so, you’ve mentioned this. We know that Jonathan Kanter is very assertive when it comes to antitrust policy. But what about at the OCC and the Fed? Do we know what their posture is towards this merger or how much agreement there is between the two agencies over how to pursue reviews of banking mergers? Do we know specifically who will be responsible at those agencies for reviewing this merger?
SHAHID NAEEM: Yeah, that’s a great question and I wish I had a good answer for you. I mean, I’m not really sure. I haven’t heard or seen much from the banking agencies thus far about what kind of stance or posture they’re indicating here. The opposite is true on the Justice Department side of things. I’m going to try to circle back to your question.
But I do want to mention the morning the report came out, it was exactly a week ago. So, exactly a week ago today, Jonathan Kanter and CFPB Director Chopra were at a Peterson Institute event in D.C., specifically about bank merger policy. And they had some great remarks on how they viewed bank consolidation and some of the harms and how they want to position their agencies to take on that challenge. But I was able to ask them, pretty directly or as directly as I could, about how they viewed this merger’s main argument, the merge to compete argument.
And AAG Kanter was pretty clear that this argument doesn’t necessarily hold any weight with his agency. And Director Chopra was also pretty clear that we’ve seen no empirics to back up these types of arguments. And I think he even mentioned that there’s not a lot of success out there for this argument in general. So Kanter will be holding the pen on that competition report to the banking agencies. So, I think that’s one thing I would mention there.
In terms of who at the OCC and the Fed are going to be making these decisions, obviously, they’re banking regulators. So, staff are going to inform principals on these types. But these are really high-profile decisions. It’s a very high-profile merger. I mean, just look at the number of politicians and Congress members and Senators that have come out to stake a position out on this deal already.
And it’s not just the usual. Elizabeth Warren has been very clear. She wrote an op‑ed in the Wall Street Journal about this. But even folks like Josh Hawley, for example, on the right wing, and other Senators have kind of come out against this. And I think for folks at the OCC and the Fed that are the highest-ranking officials that are going to be ultimately signing off on this, you’re looking at Mike Hsu at the OCC and you’re looking at Michael Barr at the Federal Reserve, the Vice Chair for Supervision, I believe.
So that’s I think really kind of the lay of the land here and how those two agency heads will interact with whatever antitrust analysis the Justice Department moves forward and how they will interact with Jonathan Kanter, I think that’s not necessarily something I can speculate on. But I think the content of those arguments,—not arguments—but the contents of those conversations, I think, is pretty clear. The Justice Department and the Elizabeth Warren’s of the world, I think, probably view a lot of the harms of banking consolidation as the direct result of this kind of pattern of rubber-stamping bank mergers that we’ve seen, from the OCC and the Federal Reserve and those agencies. So yeah, I think that hopefully should answer that question.
TEDDY DOWNEY: Yeah, and the OCC also released its own merger guideline proposal in January. Is there anything in there that would give indication as to how analysts there are going to be reviewing the merger?
SHAHID NAEEM: Yeah, that is also a great question. So, the OCC, I think in the last couple of days of January, released a policy statement, a policy statement attached to a notice of proposed rulemaking that kind of outlined how they were going to withdraw one particular loophole of auto approving bank mergers that they had previously had in there. But the policy statement kind of laid out these—I forget how many, maybe 12 or 13 “indicators” that the OCC is going to use moving forward to evaluate these deals.
And nothing really new in there. I mean, nothing really too new in this policy statement. But there were a few notable things that I think are worth mentioning. So, these indicators that the OCC kind of outlined, some of them had to do with size. So, they indicated that a healthy indicator indicating approval for a bank merger would probably be between firms that wouldn’t combine to create an institution larger than $50 billion. This merger would create one about $650 billion. So, already you have kind of red flags on that front.
And I think across—there was a former OCC lawyer, I think, one of their counsel, who I think she’s at a private consulting firm, but she kind of laid out in a spreadsheet each factor that the OCC outlined in its policy statement. And there are a number of those factors that this deal contravenes. One of them being a major policy issue that the OCC might find with the deal. And I would agree with her in that the way that the deal interacts with the Durbin Amendment, particularly kind of acquiring that regulatory loophole, would provide room for the OCC to kind of scrutinize that more heavily. And so, there are a number of those factors, I think, from that January 30th OCC policy statement that this deal contravenes.
So, yeah. I mean, it’s really tough to say. But one would hope that the OCC would be hewing to their own policy statement that they just released. But I think in some ways, OCC’s analysis of these things tends to be a little bit less clear in my mind, particularly contrasting with the Justice Department’s. The Justice Department and FTC released the 2023 merger guidelines last year—I believe at the end of last year—that laid out a pretty clear and kind of very detailed, but also concise, description of how they enforce antitrust law. And that’s meant, obviously, to help boardrooms and courts and other agencies understand how the Justice Department is interpreting and applying antitrust law and how they might be able to do the same.
And so, one of the things that we found is that across those guidelines, which were just released from the Justice Department, this acquisition would draw scrutiny across many of them. So, guideline one is about whether this transaction would take place in concentrated markets. We know that to be true. Whether these markets are trending towards consolidation is guideline seven. We know that to be true. Whether these firms compete head-to-head, we give substantial evidence in our report that is also true. That would be guideline two. And then I think there’s elements of the multi-sided platform analysis here, which would be guideline seven. And then kind of dovetailing with what I mentioned previously, the Durbin Amendment and the way this deal kind of acquires a regulatory loophole, would provide the Justice Department some room to scrutinize that along the lines of, you know, they kind of give examples of mergers previously or note that previous mergers have raised concerns along the competition angle when they seek to acquire a regulatory loophole. And so that’s the Justice Department’s angle.
So, I think whether you’re looking at new policy statements from the OCC or whether you’re looking at the way the Justice Department is outlining how it does its antitrust analysis, you’re looking at this deal really, really coming across some intense scrutiny. And I think for that reason, that’s really the main reason why we are not projecting this deal to receive kind of an enthusiastic approval here.
SARA SIROTA: And what about the Federal Reserve as the final thinking agency that’s also going to be reviewing this? Have they put forward their own interpretation of how they’re going to apply antitrust law in this case?
SHAHID NAEEM: They have not. They have not, Sara. And it’s a good question to ask. Because, I mean, at this point, even the OCC has put out some, you know, the OCC’s policy statement was mainly geared towards just “increasing transparency” about how they already do their bank merger review. Nothing in there was particularly new or exciting I would say. So that’s the OCC. The FDIC just put through their own merger guidelines, as you mentioned.
So, between the three banking agencies, the Federal Reserve really is looking to be lagging behind the other two and even behind the DOJ here. And I think for that reason, it’s kind of hard to project how the Fed is going to interact with this deal beyond their interaction with the Justice Department. It’s hard to tell how they would evaluate the competitive effects of this deal, the financial stability effects of this deal, all the other prongs of bank merger review. Hard to say how the Fed would do that given that they have not updated their bank merger guidelines.
And I mean, let’s remember too is the Biden administration, President Biden in his 2021 Executive Order on Competition, specifically called out bank concentration and tightening bank merger controls as a priority. And so, he basically asked the OCC, the Federal Reserve and the FDIC to assist the Justice Department in coming together with a plan to create a more robust bank merger review process that would guard against “increased” or “excessive” market power, I believe the executive order’s wording was.
So, we’re more than two years later and we have the FDIC just put something out. The OCC just put something out. And the Federal Reserve continually kind of skirting that executive order. So, yeah, one really has to wonder what is going on at the Federal Reserve on that front and how they’re going to evaluate this. Because they might not even know, to be honest. They might be struggling to come up with a framework, an opinion, on this deal because they are so used to rubber stamping them.
I mean, let’s be honest here. These agencies have not really had to engage in a rigorous review process because there hasn’t really been the pressure. They’re used to approving these deals. I think particularly at the OCC and the Fed, you have agencies that, unlike other agencies, derive their budgets from assessments that the bigger banks and other banks pay. So, they have a different income source. And there’s been kind of allegations of jurisdiction flipping where some of these agencies are trying to entice banks that they know they want the fees from to pad their budgets.
So, these are conversations that are quite open. And I think Director Chopra mentioned that very specifically last Thursday at the Petersen event. But I think there are a lot of questions about how the banking agencies approach these things. And I think particularly at the Fed, given that they haven’t put together any new bank merger guidelines, there’s a lot of question marks there.
SARA SIROTA: Now, I have just one last question that came in and that is about the Supreme Court decision in the American Express case from 2018, and whether or not you think that that would affect the balancing analysis if this case ended up in court.
SHAHID NAEEM: Could you say that question one more time? Sorry, I think you cut out for me.
TEDDY DOWNEY: Yeah, no worries. I just have a question that came in about the American Express Supreme Court decision from 2018 and whether or not that would affect the balancing analysis if this case did end up in court.
SHAHID NAEEM: Yeah, that’s a good question. I’m not entirely sure right now. I might have to come back to you on that one. But one of the things that I would mention is we did just see the Visa and Mastercard settlement, I think, was it a couple of days ago, earlier this week? That’s kind of being touted as Capital One. And I’ve seen some folks touting that this means that legislation like the Credit Card Competition Act or it might not be necessary. Or that this means that we definitely should allow Capital One ‑Discover through. But I think on the Visa Mastercard settlement angle from earlier this week, it’s hard to imagine that that’s anything more than a Band‑Aid given Visa Mastercard’s pretty heavy duopoly in the sector. And how the settlement, which is kind of being billed as providing merchants with $30 billion of relief over seven years, I think that really is a small fraction of the tens or hundreds of billions that merchants pay every year in interchange fee costs. So, I think with the Visa Mastercard settlement from earlier this week, it’s definitely a Band-Aid and probably not going to affect the competitive dynamics of the market too much and certainly wouldn’t affect the analysis of this deal moving through too much.
SARA SIROTA: All right. Well, I think that’s all the questions that we have for you today, Shahid. Thank you so much for joining us. Are there any other final points that you wanted to raise that we didn’t get to talk about?
SHAHID NAEEM: No, Sara, these have been really great questions. And I’m just really happy to have the chance to talk about our research and some of the work that we’ve done on this front. This is a really big deal. And not just because it’s a large deal on its own terms, but because I think folks have been talking about this as a test of the Biden administration’s bank merger policies and of the Justice Department’s stance in bank mergers. But I think the opposite is also true. This is also a test of whether corporate America can catch up to an antitrust environment, a bank regulatory environment, at least certainly on the antitrust side, that isn’t the environment of old.
And I think one of the things that I was really surprised by in reviewing the merger application from Capital One is just how little attention was paid to the current regulatory environment, not a word about the OCC’s new policy statement, not a word about the Justice Department’s new stance and bank merger review. And I think that really gives me pause here. So, if Capital One’s lawyers at Wachtell, if those folks aren’t taking into account the new regulatory environment, there might be a long way to go for the rest of the C-‑suites in the United States. And I think looking at the new antitrust environment and looking at the pressure on the banking agencies, I think it’s important to kind of take all of that into account when folks are looking at whether they think this deal is going to go through or not. So, I would leave it there. But I really appreciate all the questions and it’s been great to be on.
SARA SIROTA: Yeah, it’s great to have you. Thank you. Thank you again so much. Really appreciate you taking the time. And thanks to everyone for joining us.
SHAHID NAEEM: Thank you.
