Capital One’s acquisition of Discover will benefit consumers

Angus Mordant/Bloomberg

Critics Capital One acquisition Discover made unsubstantiated claims regarding the financial stability of transactions, payment processing, and compliance with anti-redlining regulations. Proposed connection offers a range of benefits to American consumers, entrepreneurs and small businesses in the form of diverse payment options, stability, access to capital across all communities and higher interest rates on deposits.

Consumers will have more options if the acquisition is approved. Visa is offering a new product that allows flexibility in choosing between debit, credit and installment credit without having to have separate cards. Capital One can choose different payment methods in addition to using Discover for debit card transactions. More payment options are good for consumers and merchants. According to one article“the card industry is not so concentrated that an acquisition would result in a lack of options for consumers or merchants.” Assuming other payment network options are the same, providing a variety of payment network options creates competition and reduces costs for traders without having to go through restrictive and unnecessary legislation such as the Act on Competition in the Credit Card Market.

Deposit interest rates do not necessarily fall after every bank merger. paper deposit and lending rates were found to be in line with the acquiring bank’s rates. Capital One and Discover offer 12-month certificates of deposit with an annual percentage rate 5% AND 4.7%accordingly. Under the document’s “single rate” provisions, Discover would adopt the rate of the acquiring bank — in this case, Capital One. Consumers would see an increase in some deposit rates.

Opponents of the merger have unfairly criticized how it would affect access to credit for low- and moderate-income communities. Capital One recently received the Community Reinvestment Act, or CRA, rating “outstanding” and Discover received rating “satisfactory.” There is no tangible evidence to suggest their ratings will deteriorate following the completion of the acquisition.

The real threat to a sound banking system is enabling activists to weaponize CRA ratings. Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation are already amending guidelines for bank mergers, which would make it easier for activists to stop mergers.

According to article published by the North Carolina Banking Institute, “(a)ctivists have used the charter to increase their political clout, obtain special favors for themselves and their leaders, obtain funds for pet projects, or obtain direct logistical or financial support for their operations.” Abuse CRA review process “to promote those goals is a perversion of its original purpose.” Regulators should not allow activists to control the bank merger review process.

The combined Capital One and Discover entity will likely continue to be adjustable as a Category III bank. Three of the four bank mergers that remained Category III banks have been approved by regulators. Because Capital One has experience with regulatory and capital requirements for Category III banks, financial stability concerns should not be an issue. Ironically, the federal regulators’ proposed implementation of the final Basel III capital requirements poses a real threat to stability. According to the bill, proposed capital requirements would significantly burden Category III banks by applying more stringent capital standards deferred tax assetswhich contains Capital One AND Discover loyalty programs and assets for servicing mortgage loans.

The proposed rules would also require Category III banks to include unrealized gains and losses on available-for-sale securities, or AFS, in their capital calculations. The combined entity of Capital One and Discover would be penalized for unrealized losses in its AFS securities portfolio, even though the purported impetus for the rule, Silicon Valley Bank, suffered from overexposure to long-term securities classified as held-to-maturity, or HTM. If any instability occurs in the future, it is likely to be the result of regulatory interference rather than internal bank weaknesses.

The reasons for Capital One’s refusal to acquire Discover are few and far between. Increased competition in payments and compliance with existing anti-redlining laws give little credence to activists who claim the merger will hurt Americans. On the contrary, if there are any problems after the acquisition is complete, it will be because federal regulators have imposed a new capital regime designed to punish regional banks after three bank failures. The fate of the Capital One acquisition should be decided on its own merits, not denigrated for the weaknesses of other failed banks.