Antimerger activists have wrongly assailed Capital One and Discover in an effort to prevent the two financial institutions from combining. As the Department of Justice, Federal Reserve, and Office of the Comptroller of the Currency, evaluate the acquisition, they should focus on the untapped benefits to consumers.
The vilification of bank mergers and acquisitions is unjustified. Opponents of the deal arbitrarily claim that the concentration of subprime lending will limit credit options and raise fees on borrowers. This is not true. Two professors at The University of Chicago found that “in markets with a greater portion of high-risk borrowers, increased competition can actually increase prices.” The paper goes on to state that “antitrust regulators may want to allow some amount of concentration in these markets.” The argument that concentration among lenders is bad for riskier borrowers is utterly false.
For prime borrowers, the enhanced competition resulting from this acquisition will lower prices. The same paper found that for less risky borrowers “more competition leads to lower prices.” The enhanced competition among payment card networks, especially in terms of purchasing volume in the credit card market, will markedly elevate Discover’s market share.
Activists have also wrongly admonished the deal’s effect on small businesses. Preventing the acquisition will offer no meaningful benefit to small businesses. Republicans have proposed real solutions to alleviate genuine stress on small businesses—such as cutting both taxes and red tape. Sen. Tommy Tuberville (R-Ala.) and Rep. Warren Davidson (R-Ohio) have legislation to repeal the Corporate Transparency Act. Rep. Lloyd Smucker (R-Pa.) introduced a bill to enact permanency for the section 199A qualified business income deduction. Blocking this deal to help small businesses is an untenable argument. Tax cuts and regulatory relief will provide direct and substantial benefits to small businesses.
Activists are aligned with the Biden administration’s efforts to undo years of bank merger policy. The OCC is arbitrarily proposing to change its bank merger rules. The proposed rule has been described as “a more ambiguous, multifaceted and complex bank merger evaluation process than what bank regulators historically have followed.” Before succumbing to political pressure, regulators should be wary of exposing themselves to litigation. Past rules have been vacated because an agency “failed adequately to justify departing from its own prior interpretation.” Regulators should also be aware that they may not expand their authority merely because they believe their “preferred approach would be better policy.” Regulators need to keep the consumer welfare standard at the front of their minds and not cave to political pressure.
Some lawmakers understand the benefits of bank mergers and have proposed legislation that would streamline the bank merger process. Reps. Andy Barr (R-Ky.) and Scott Fitzgerald’s (R-Wis.) bill would require the Fed to approve mergers in a punctual fashion without leaving banks in purgatory. This would cast aside any political pressure from interfering in the decision-making process. After all, as the congressmen point out, the benefits of bank mergers are realized because “economies of scale and scope” both enhances competition and “generates cost savings that can be passed on to consumers through higher interest rates on deposits, lower interest rates on loans, and reduced administrative fees.” Consumers will have the opportunity to reap dividends with Capital One’s acquisition of Discover.
Economies of scale are real benefits that are clearly observed when banks grow. One study by researchers at the Federal Reserve Bank of New York observed a “statistically and economically significant negative relationship” between the size of a bank and noninterest expenses, such as “employee compensation, information technology, and corporate overhead costs.” As the size of a bank increases, operating costs decline. The growth of Capital One acquiring Discover could bring the same benefits. Opposing the deal and thus the growth and size of the two banks could “increase the cost of providing banking services.” Consumers may in fact be worse off in the status quo than if the deal goes through.
The fallacious and unsubstantiated arguments opposing the Capital One and Discover acquisition fail to realize the benefits that can emerge. As the DOJ, Fed, and OCC continue their analysis of the deal, regulators need to stay true to their statutory remit and refuse to genuflect to political activists that aim to block every proposed merger or acquisition, regardless of their own merits.
