Capital One’s proposed purchase of Discover, and the question of whether it will go through, is somehow both a great case study of policy issues affecting the banking industry and a completely unique situation. And it’s getting a lot of attention in Washington. The proposed union comes at a time when regional banks are facing pressure from both markets and regulators after multiple lenders failed last year. Banks with between $100 billion and $250 billion in assets are expected to face tougher standards, increasing their motivation to grow bigger to survive. However, Discover — which has more than $140 billion in assets — doesn’t look like its peers. It doesn’t have the same issues with unrealized losses, uninsured deposits or exposure to commercial real estate. What it does have are issues with regulatory compliance, a factor that might actually make Capital One’s bid more attractive to banking agencies. The merged bank would also be heavily concentrated in credit card loans, becoming the nation’s top issuer, something that could draw scrutiny with delinquencies on the rise. But it’s very unclear what type of deals — if any — would be looked upon favorably by the banking agencies. They’re still updating their guidelines. They’ve sent mixed signals about whether mergers are welcome. And so this deal is a bit of a guinea pig. The fact that the deal was announced at all suggests that regulators didn’t reject it out of hand, so there’s at least some chance for approval. But they’re already facing political pressure, with lawmakers like Sen. Elizabeth Warren (D-Mass.) calling for the deal to be killed, citing a recent CFPB report that shows larger card issuers charge higher rates. Meanwhile, the Justice Department last year announced a shift in policy where it won’t play a formal role ahead of bank regulators’ decision on a deal, leaving open the possibility that the merger could get approved but then challenged in court. The most salient competition issue relates to the credit card market. Visa and Mastercard are the dominant card networks and aren’t associated with any one bank. American Express is a card network for which it is the only issuer. Discover, in contrast, is sort of a hybrid, which would make it positioned to grow as a competitor if, for example, Congress passed legislation mandating that big banks use a network other than the dominant two. There really isn’t precedent for a larger card issuer buying a large card network, and that could get a lot of interest from the Justice Department. “If you go back to Jonathan Kanter’s speech last June, I think he was trying to convey that bank mergers are largely within the bank regulators’ purview, and the DOJ largely only plays an advisory role,” said Jeremy Kress, who worked for the assistant attorney general at the time to help develop the new policy. But since this merger is particularly about credit card networks, which aren’t normally a big focus for bank regulators, “I wouldn’t be surprised if the DOJ has a stronger view on this deal than it would on the average bank merger,” Kress said. Ed Mills, Washington policy analyst at Raymond James, said the competition angle could go either way: The deal would move more people onto the Discover network, adding competition to the big two, at least in the short term. But it might make banks less likely to join the network over the long term because they don’t want to boost Capital One, he added. The deal is also facing a war from community groups. The National Community Reinvestment Coalition has had a beef with Capital One since its acquisition of ING Direct in 2012 and has consistently charged that the bank is failing to properly serve lower-income consumers. The coalition commands a large army of community groups that are expected to at least cause huge headaches along the way for the proposed deal. “We think they’re one of the bad boys in the banking industry,” NCRC head Jesse Van Tol told MM. “We’re gonna go all out opposing this thing.” IT’S WEDNESDAY — Who’s your favorite president? Send answers to vguida@politico.com, and send tips to your regularly scheduled MM host, Zach Warmbrodt: zwarmbrodt@politico.com. Ringing in policy coverage — As part of the launch of our new Pro Financial Services U.K. product, POLITICO opened the London Stock Exchange on Tuesday, featuring U.K. FS editor Fiona Maxwell, as well as colleagues from across the newsroom. Sign up for a four-week free trial of the Morning Pro Financial Services U.K. newsletter!
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