Election Throws Potential Wrench In Capital One-Discover Deal

Capital One Financial Corp.proposed $35 billion takeover of the company Discover financial services will require the new government to quickly reveal its cards on bank merger policy if approval drags into next year.

The deal, announced in February, is pending approval from the Federal Reserve and the Office of the Comptroller of the Currency and has been threatened with antitrust action by the Justice Department.

Industry watchers expect the agencies to approve the deal with further concessions from both banks, despite the Biden administration’s more assertive antitrust stance than previous administrations. But the upcoming presidential election adds uncertainty if the review process extends into 2025.

“Competition policy is now inherently political,” Isaac Boltansky, a policy analyst at investment bank BTIG LLC, said in a July 22 client note about the Capital One-Discover deal. “And this deal is likely subject to political winds.”

A victory for Republican Party candidate former President Donald Trump will likely ease the approval process, but the addition of Ohio Sen. J.D. Vance as Trump’s vice presidential running mate could mean less willingness to approve major deals.

Vice President Kamala Harris, the presumptive Democratic nominee, is virtually a blank slate compared to President Joe Biden when it comes to both financial regulation and antitrust policy.

Biden’s regulators have signaled that “the era of permissive review of bank mergers may be coming to an end,” said Jamie Grischkan, a law professor at Arizona State University who focuses on financial regulation and antitrust. “But it’s too early to tell. Discover-Capital One will be a test case.”

Personnel is politics

A Trump victory in the November election has the potential to change that stricter stance on mergers, but Vance is an unpredictable card, said Jeremy Kress, a professor at the University of Michigan’s Ross School of Business who has advised Biden’s Justice Department on bank merger policy.

Vance has publicly praised Federal Trade Commission Chairwoman Lina Khan for her aggressive efforts to oversee markets and mergers.

“Would Trump appoint Wall Street veterans and others sympathetic to the banking sector, as he did in his first term?” said Kress, a former Fed lawyer. “Or would he appoint more populist types, as his choice of vice presidential candidate J.D. Vance suggests?”

As in any administration, it will be staff who decide most of the policy.

And the possibility that Trump would appoint someone like Sen. Josh Hawley (R-Mo.), an economic populist who opposed the Capital One-Discover deal, to lead the Justice Department could upset conventional wisdom about how a Republican administration would handle mergers, Kress said.

One factor complicating Trump’s personnel situation is that all members of the Fed board of governors, including Biden’s appointees, have terms that end in 2026 at the earliest. Trump has said he has no plans to fire Fed Chairman Jerome Powell, whom he appointed and Biden has retained, and a move to oust other board members could spook markets, said Peter Dugas, an executive director at Capco, a financial services consulting firm.

“President Trump has been focused on keeping the Federal Reserve in its current state in recent comments,” Dugas said.

Bank mergers have proceeded more quickly under the Trump administration than under Obama, although regulators Trump might appoint in a second term may be wary of creating a new banking giant.

“While it’s far from certain, a second Trump administration could be skeptical of mergers between major financial institutions like Capital One and Discover,” said Kathryn Judge, a professor at Columbia Law School who studies banking regulation.

Biden’s pressure

The Capital One-Discover deal comes after Biden in 2021 ordered regulators to tighten scrutiny of corporate tie-ups as part of a broader focus on antitrust. While updated guidelines for U.S. bank mergers — last issued in 1995 — have yet to be released, legal experts say there is a perception that bank takeovers are harder to achieve.

In 2023, a year that saw a series of high-profile bank failures, banking activity in North America fell 42%, according to S&P Global. Higher interest rates and regulatory pressures were contributing factors.

“There’s a common perception that getting something approved is going to be a long, arduous process,” said Gregory J. Lyons, leader of Debevoise & Plimpton’s financial institutions group.

Justice Department antitrust chief Jonathan Kanter reinforced that view in a 2023 speech in which he said the department would revamp its review of bank mergers. The Justice Department’s merger review would expand beyond local deposits and branch overlaps to include an examination of fees, interest rates, interoperability and customer service, he said.

The comments represent a “significant shift” from the way bank mergers have been analyzed in the past, said Kathy O’Neill, a partner at Cooley LLP who served as senior director of antitrust investigations and litigation at the Justice Department until 2022.

The Justice Department issues “competitive factors” reports that assess banking mergers for antitrust harm and retains the ability to sue.

Banking reform advocates welcomed the renewed emphasis on competition.

“For a long time, antitrust enforcement has failed to deter massive consolidation, and the banking industry is no exception,” said Patrick Woodall, policy director at the nonprofit Americans for Financial Reform.

Capital One argued that acquiring Discover would create more competition while also benefiting consumers in the credit card market. The deal would create the sixth-largest bank and largest credit card issuer in the U.S.

Trump’s priorities

Critics have accused the Trump administration of using antitrust policy as a tool to attack perceived adversaries, such as by launching investigations into several automakers over their compliance with tougher California fuel economy standards.

If Trump returns to the White House, there is a chance his personal priorities will play a role in how he handles the bank merger, said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition.

“You could see that corporate policy was not just driven by vindictiveness, but by a real sense of picking winners and losers,” said Van Tol, a fierce critic of the Capital One-Discover deal.

Trump has reportedly already offered to roll back environmental regulations in exchange for large campaign contributions from the oil and gas industry, raising concerns among antitrust activists.

“The tendency to make deals with giants rather than try to minimize their impact on the economy is not the best approach,” said Morgan Harper, director of policy and advocacy at the American Economic Liberties Project and an opponent of the Capital One-Discover merger.

Trump is widely seen as a figure who would be more sympathetic to Wall Street, at a time when many banks are looking to expand. “There’s a lot of pent-up demand” for banking deals, Lyons said.

For now, the landscape is defined by uncertainty. A change in personnel, even under Harris, could lead to different priorities, said Kress, an opponent of the deal.

“If there’s staff turnover,” he said, “then you’ll see some agencies approach it differently.”