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Capital One Financial Corp. is aiming to become the largest credit-card issuer in the U.S. through a takeover of Discover Financial Services, in a combination that would test the Biden administration’s commitment to reining in the excesses of the financial-services industry, and economic concentration more broadly.

Many analysts are predicting that regulators will bless the move because of the pro-competitive implications of Capital One
one of the largest credit-card banks, buying Discover’s
credit-card network.

See: Why Capital One plans to buy Discover in a megamerger of credit giants

The combination of the two companies could boost the Discover network in its competition with Visa
and Mastercard
which some influential lawmakers have labeled a “duopoly” that preys upon the retail sector and American consumers with unreasonably high fees.

But the merger would represent a union of two financial institutions that would create the nation’s sixth-largest bank by assets, according to Federal Reserve data. That means the Fed and the Office of the Comptroller of the Currency are legally required to determine whether the combination is in the public interest before approving it.

“Do we really need another giant to add to the already significant suite of so-called too-big-to-fail banking institutions by elevating Capital One and Discover to that level?” said Saule Omarova, a Cornell Law School professor and onetime Biden nominee to head the OCC, in an interview.

Omarova argued that federal laws require regulators to pay special attention to the risks of concentration in the banking industry, and not just because bank mergers can affect the stability of the financial system.

“It’s high time that bank regulators began to appreciate how special banking is from an antitrust perspective,” she said, adding that the law encourages regulators to take a holistic view of the effect of a bank merger on the broader economy — including the “stability of the banking system and the responsiveness of the banking system to the needs of the real economy.”

Omarova’s 2021 nomination to run the OCC was blocked by Republicans and centrist Democrats in the Senate who opposed her views on banking regulation. The agency, housed within the Treasury Department, is now run by an acting comptroller, Michael Hsu.

From the archives (November 2021): Hostile hearing for Biden bank-regulator nominee Omarova: ‘I don’t know whether to call you professor or comrade,’ says Senate Republican Kennedy

Key Words (October 2021): Biden’s banking watchdog pick once called finance ‘a quintessential a—hole industry’

Hsu is viewed skeptically by anti-monopoly activists like Matt Stoller of the American Economic Liberties Project, who see a division within the Biden administration over whether to be concerned about growing concentration in the banking industry — with Hsu, Treasury Secretary Janet Yellen and Fed officials being more open to bank mergers than others, like Department of Justice Antitrust Division head Jonathan Kanter.

Yellen and Fed chair Jerome Powell “believe that American strength comes from our capital markets, not the industrial and commercial sectors underwritten by local banks,” Stoller wrote last summer after Kanter gave a speech in favor of stricter oversight of bank mergers. “Administrations always have conflicting factions, and the dispute between White House competition policy makers and Treasury is one of them.”

Hsu, Yellen and Powell will be the figures with the most power over the Capital One merger, but there is already intense pressure on the Biden administration from outside groups, as well as a bipartisan coalition of lawmakers voicing opposition to the deal.

Sen. Elizabeth Warren, a Massachusetts Democrat, came out against the deal Tuesday, saying it was “dangerous and will harm working people.” As did Sen. Sherrod Brown, an Ohio Democrat and chair of the Senate Banking Committee, who called on regulators to ensure the merger “doesn’t enrich shareholders and executives at the expense of consumers and small businesses.”

On the other side of the aisle, Sen. Josh Hawley, a Missouri Republican, on Wednesday called for regulators to block the deal, as well.

“This deal is much larger than any of our D.C. contacts have been telling us is possible for regulatory approval in the current D.C. climate, especially after the bank panic of last March,” wrote Raymond James analyst Ed Mills in a note to clients. He underscored that the deal, which would create a bank with more than $600 billion in assets, is more than 10 times the size that the OCC’s recent merger guidelines set as the threshold above which any deal would receive added scrutiny.

Jeremy Kress, a University of Michigan bank-regulation expert who has worked with the Justice Department on its forthcoming M&A guidelines, told MarketWatch that the review will “probably take a fair bit of time, given the size and potential consequences of the deal.”

That means that a review could easily last through the end of 2024 and that, ultimately, its fate may well depend on who is in the White House in January 2025.

“At a minimum, given the size of the transaction, we expect it to receive a lengthy review, and we are hesitant to bet against any kind of challenge given the aggressive track record of Biden’s antitrust regulators,” wrote Owen Tedford, analyst at Beacon Policy Advisors, in a Wednesday note. “Given the probable protracted review, the election may also impact the merger’s fate, with a win for former President Trump more likely to allow the deal to close.”

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