On May 18, 2025, Capital One Financial Corporation, McLean,
Virginia (Capital One) closed on its acquisition of Discover
Financial Services, Riverwoods, Illinois (Discover) and the merger
of Discover Bank with and into Capital One's bank subsidiary,
Capital One, National Association (CONA), with CONA as the
resulting bank (the transactions collectively referred to herein as
the Merger). The transaction received the approval of the Board of
Governors of the Federal Reserve System (Federal Reserve or Board)
and the Office of the Comptroller of the Currency (OCC), in an
apparently coordinated effort, on April 18, 2025. As a result of
the Merger, CONA is the eighth largest insured depository
institution in the United States, with total consolidated assets of
$637.8 billion.
This Advisory highlights key aspects of the regulatory approvals
that provide further insight to the agencies' approaches to
evaluating bank merger transactions and discusses additional key
takeaways for financial institutions.
Key Aspects of the Regulatory Review of the Merger
Many Comments on the Applications
The deal was of great interest to the public for several
reasons, which was evidenced by an extended public comment period
for the applications that lasted approximately 119 days and
included a virtual public meeting. Over 6,000 public comments were
submitted on the applications, and the Board's approval order
notes that 552 comments were in support of the proposal, while 428
unique comments were received in opposition (with 5,152 copies of a
substantially identical form comment letter in opposition). While
the overwhelming majority of the comments were form letters, the
Federal Reserve still considered the comments to the extent that
the comments were relevant to the statutory factors under the Bank
Holding Company Act (BHC Act), and the Federal Reserve noted that
the comments were received from various sources, including
customers of the banking organizations, businesses, members of
Congress, state legislators, community groups and nonprofit
organizations, and other interested persons, in support of or
opposing the transaction.
The OCC received 1,370 public comments which focused on convenience
and needs, consumer protection and public benefits, competition (in
banking and payments), financial stability, and supervisory records
of CONA and Discover Bank with respect to anti-money laundering,
consumer protection, discrimination laws and regulations, as well
as data security, and the ability of CONA to integrate Discover
Bank within its risk management framework.
The Federal Reserve included a discussion of its consideration of
comments received within the approval order (Board Approval Order), while
the OCC included an appendix to its order approving the merger (OCC Approval
Order) to specifically address the public comments it received and
CONA's responses to such comments. The Federal Reserve took the
extra step in certain instances to specifically mention comments
that were submitted that raise social concerns that were
prioritized under the prior administration but deemed to be outside
of the scope of the statutory factors the Federal Reserve
considered as part of the merger. For example, the Board, in
response to one commenter's concern over providing financing to
companies engaged in fossil fuel projects and another
commenter's concern that certain business practices exacerbate
the racial wealth gap, made clear that "such matters are
outside the scope of the limited statutory factors that the Board
is authorized to consider." The Board also made clear that
"potential job losses resulting from a merger is outside of
the limited statutory factors that the Board is authorized to
consider."
The agencies' prioritization of addressing the public comments,
including those that were noted as not relevant to any of the
statutory factors, not only informs the public of what is required
to be considered as part of a bank M&A transaction, but
demonstrates that the agencies are focused on staying within the
confines of the statutory framework for review.
Supervisory Concerns Resulted in Conditions and Consent Orders
On the same day that the Federal Reserve approved Capital
One's application, the Board announced a Consent Order with Discover and assessed a
$100 million penalty for overcharging interchange fees for credit
cards issued by Discover Bank. The Board noted that Discover has
terminated these practices and is repaying overcharged fees to
affected customers. On the same day, the Federal Deposit Insurance
Corporation (FDIC) entered into an Amended and Restated Consent Order (2025 FDIC
Order) with Discover Bank, asserting that, for approximately 17
years, Discover Bank misclassified millions of consumer credit
cards as commercial, which resulted in merchants being overcharged
over $1 billion in interchange fees when accepting payments with
the misclassified credit cards. The 2025 FDIC Order amends and
restates the Consent Order issued against Discover Bank on
September 25, 2023 for shortcomings in the bank's compliance
management system for consumer protection laws. Significantly, the
FDIC also assessed a $150 million civil money penalty and required
a restitution plan to distribute at least $1.225 billion to
affected merchants and related parties.
Importantly, the OCC conditioned its approval on CONA submitting a
plan for supervisory non-objection that "details effective and
sustainable corrective action and timelines to address the
underlying root causes of any outstanding enforcement actions
against Discover Bank and plans for remediation of
harm."
The agencies have in the past noted an unwillingness to approve an
application if an acquirer has material unresolved issues, but the
agencies have been willing to approve applications with a troubled
target provided that the acquirer had adequate financial and
managerial resources to remediate concerns with the target and the
resulting institution remained strong. The agencies' decision
to approve the applications with conditions is consistent with
prior statements of the agencies that a transaction can be approved
even if there are concerns with the target if the acquirer has the
appropriate financial and managerial resources to address
identified deficiencies.
Competitive Review, the 1995 Bank Merger Guidelines Are Still Relevant
The Board Approval Order includes a detailed discussion of its
review of the proposed competitive effects of the transaction. The
Board acknowledges the U.S. Department of Justice's (DOJ)
withdrawal from the 1995 Bank Merger Guidelines, but affirmatively
states that none of the federal banking agencies have withdrawn
from the 1995 Bank Merger Guidelines, and "[t]he Board
continues to apply the 1995 Bank Merger Guidelines in evaluating
bank merger proposals."
The Board relied on the "cluster of banking products and
services" as the market for analyzing the competitive effects
but also reviewed the competitive effects with respect to certain
subsets of banking products and services, and specifically the
business related to the issuance of credit cards for purposes of
the competitive review under Section 3 of the BHC Act. Based on its
review, the Board found the transaction consistent with approval.
Interestingly, the Federal Reserve noted that when calculating the
HHI for a particular banking market, it weighs the deposits of
online depository institutions and other special-purpose banks, at
0%. Additionally, when the Board compared the pro forma
organization's share of deposits in each local banking market
in which customers of both firms are located, as compared to
commercial banks and thrift institutions with branches in those
markets using local deposit and market share data, the Board did
not include deposits of other institutions that solicit deposits
through the internet in these locations.
The transaction is expected to occur as a step merger, and the OCC
evaluated the competitive effects of the proposed transaction from
the vantage point that CONA and Discover Bank would be affiliates,
and the bank merger would be "generally considered
competitively neutral" once Capital One acquires Discover. In
the appendix to the OCC Approval Order, the OCC acknowledged
CONA's representation that the transaction would not exceed
concentration thresholds in either the 1995 Bank Merger Guidelines
or the 2023 DOJ and U.S. Federal Trade Commission (FTC) Merger
Guidelines. See our April 2022 Advisory, which discusses the
DOJ's withdrawal from the 1995 Bank Merger Guidelines and
adoption of the Banking Addendum to the 2023 DOJ and FTC Merger
Guidelines.
The Federal Reserve notes that it consulted with the DOJ as part of
its review of the application, as required by the banking
regulations, and the DOJ informed the regulators that it did not
see sufficient evidence of competition issues to block the deal.
The waiting period for consummation of the transaction noted in the
Board Approval Order is 30 days rather than the shortened 15-day
waiting period.
Causes of 2023 Bank Failures Were Considered Under Financial Stability Review
This transaction involves two banking organizations with over $100 billion in total consolidated assets and will result in the eighth largest insured depository institution in the United States based on total consolidated assets. In evaluating the statutory criteria as to the potential impact on the financial stability of the United States, both the OCC and the Board noted several distinctions between CONA and Discover Bank, and the banking organizations that failed in 2023, particularly as to CONA's and Discover Bank's higher proportions of FDIC-insured deposits and less reliance on non-core deposit funding and short-term wholesale funding operations. This signals that the agencies will continue to apply lessons learned from the failures in 2023 but are opting for a more pragmatic approach rather than applying broad restrictions across the banking industry.
Takeaways
- The agencies appear to be taking a more coordinated approach in bank merger review and acting on proposals. This is consistent with statements made by Secretary Bessent in coordinating banking supervision and regulation generally among the agencies.
- The agencies deciding to approve the applications (assuming with the nonobjection of the FDIC) rather than denying or further delaying action until the supervisory concerns were remediated moves away from the more conservative trend of the Biden administration to delay or withhold approval from such transactions and is more consistent with historical statements by the agencies that a merger is approvable if the resultant institution will remain strong, and the transaction otherwise meets the statutory factors.
- As set forth in footnote 30 of the Board Approval Order, the federal banking agencies continue to apply the 1995 Bank Merger Guidelines to evaluate competitive considerations, despite the DOJ abandoning those guidelines in 2023. The OCC Approval Order noted that the applicants addressed both sets of standards.
- For complex institutions, the banking agencies will go beyond a deposit concentration analysis by branch-based geographic markets and evaluate various subsets of the overall cluster of banking products and services as part of the competitive considerations analysis. For example, the Board Approval Order states the Board reviewed small business lending data, information on card payment networks and credit card issuance data broken down by number of customers, and balances and transactions for further subsets of subprime customers and new-to-credit customers.
- The Board made clear that its review will not consider "matters [that] are outside the scope of the limited statutory factors that the Board is authorized to consider" when addressing public comments on topics of applicants' providing financing to companies engaged in fossil fuel projects, the impact of business practices on the racial wealth gap, and potential job losses resulting from the transaction.
- In evaluating the statutory criteria as to impact on the financial stability of the United States, both the OCC and the Board noted several distinctions between the applicants and the banks that failed in 2023, particularly as to the applicants' higher proportions of FDIC-insured deposits and less reliance on non-core deposit funding and short-term wholesale funding operations.
- The approval of the transaction signals the agencies' willingness to consider and approve large merger transactions below the GSIB level and a more favorable environment generally for bank mergers under the Trump administration.
- The banking agencies under the Trump administration appear willing to approve transactions despite significant regulatory compliance issues at the target company so long as remedial steps are put in place and the resulting entity commits to follow through on those remedial steps.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
