The Federal Reserve appeared to stand alone by opting not to
Last week, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Department of Justice
Legal and policy experts say the pending
Jeremy Kress, a University of Michigan law professor and former Fed lawyer, flagged market concentration as an area to watch. If the Fed focuses on overlapping branches — of which there are none, because Discover has no branches — it would be an indication that it is still relying on the Justice Department's 1995 guidance, rather than the 2023 policy, which focuses less on location and more on product types.
"If the Fed is going to look at that merger solely through the 1995 Bank Merger Guidelines lens, that's going to be very revealing. If it instead approaches that deal with a more capacious understanding of what competition means in modern banking, as embodied by the 2023 Merger Guidelines that DOJ embraced last week, that will also be revealing," Kress said. "In some sense, if the Fed is going to act on the Discover-Capital One merger, it's going to have to lay its cards out in terms of how it's thinking, at least about the competition factor in the bank merger context."
In a Monday analyst note, Jaret Seiberg of TD Cowen Washington Research Group wrote that the reforms should not prevent the
The new guidelines from the Justice Department could be used to challenge the merger if it is approved, but Seiberg said it would be a hard case for the government to make.
"Justice would need to narrowly craft a market definition limited to cards for a subset of those without perfect credit," he wrote. "That means it must prove that other cards do not impact competition. We view that as a tough case as judges for 20 years have been rejecting gerrymandered market definitions like would be needed here. It is why we have not expected DOJ to challenge the deal."
A Capital One spokesperson said the new policies should not prohibit the merger from going through.
"We continue to believe we are well-positioned to receive regulatory approval," the spokesperson said. "Potential changes to the Banking Merger Guidelines have been discussed for some time, so it is not a surprise. Under either the 1995 Banking Guidelines or the 2023 Merger Guidelines, we believe our deal is procompetitive and will provide clear and meaningful benefits to consumers, merchants, and our communities."
Discover did not respond to a request for comment on this article.
In a note to clients on Monday, the law firm Davis Polk stated that disparate approaches taken by the four agencies more broadly could confound other would-be mergers, at least in the near term. The analysis did not weigh in on Discover-Capital One specifically, but noted that it is unclear to what degree the Fed, FDIC or OCC will conform to the Justice Department's new guidelines.
While the FDIC has pledged to conduct a more nuanced market analysis, the OCC explicitly opted not to specify how it would incorporate the new guidelines — its final rule states that because of the "complexities" involved in the process, the document is not the "appropriate vehicle" for discussing the agency's approach.
The Fed has given no indication of how it might respond to the new policies put forth by other agencies.
Last week, during his post-Federal Open Market Committee press conference, Fed Chair Jerome Powell
"I would bounce that question to Vice Chair Barr," Powell said. "It's a good question but I don't have that today."
Barr addressed the topic of merger reform briefly during a
"We have a set of statutory factors that we review on financial stability, on competition, on convenience and the age of the community and on financial and managerial factors. And we methodically analyze those factors," Barr said. "That's our job as regulators."
In May, Barr told the Senate Banking Committee that, while the Fed was not considering making changes to its own M&A review guidance, it was nonetheless working collaboratively with the other agencies on their revisions.
"We're working with the FDIC and the OCC and the Department of Justice on that matter," Barr said. "I don't anticipate us putting out a separate proposal on this. We're working with the other agencies."
The Fed's bank merger policy was once a top concern for Barr when he became the central bank's chief regulator in the summer of 2022. In his first speech — in which he outlined his vision for making the financial system "safer and fairer" — Barr listed mergers after capital requirements and resolution planning and ahead of issues such as climate change, stablecoins, consumer protection and community reinvestment.
In that September 2022 speech, Barr said mergers are a "feature of vibrant industries," but argued that the benefits of such combinations must be "weighed against the risks that mergers can pose to competition, consumers, and financial stability."
"These risks may be difficult to assess, but this consideration is critical," Barr said. "I am working with Federal Reserve staff to assess how we are performing merger analysis and where we can do better."
But, policy analysts say Barr's regulatory agenda was disrupted by a
"The bank policy staff at the Fed has been working on endgame and hasn't really had time to focus on these other policy issues," Phillips said.
Others see the Fed's decision not to join other agencies in reform its merger policy as part of long-running difference of views on the issue. Kress, who advised the Justice Department on its new bank merger policy, said the Fed has long taken a more supportive stance toward mergers.
"It's not bandwidth, it's not a bottleneck, it's just a desire," Kress said. "The Fed, institutionally, has long been a proponent of consolidation, and I think, institutionally, it's disinclined to go along with this administration's more aggressive approach to mergers."
President Biden issued an
Brian Graham, a partner at the consulting firm Klaros Group, said the FDIC, OCC and Justice Department are more beholden to these types of mandates because their agency heads can be changed more readily under a new administration. This puts them on a different timeline than the Fed.
Graham added that formal interagency rulemakings can consume a lot of time and resources. By moving separately — but in collaboration with one another — the agencies were likely able to complete their processes more efficiently.
"We don't know what's behind the Fed's decision making here, but we do know that the Fed, unlike the other agencies, is not fully under the control of the Democratic Party, because they've got a different board governance structure," Graham said. "As a consequence, they probably had a different outlook on this that either caused them to say they didn't want to participate in an interagency process, or signal the positions that they might take that might be inconsistent with what the other agencies really wanted to achieve."
