News Release: Stress-Tests Show Capital One-Discover Merger Would Increase Systemic Risk


July 26, 2024


Carter Dougherty,

Stress-Tests Show Capital One-Discover Merger Would Increase Systemic Risk

WASHINGTON — The Federal Reserve’s 2024 stress-test results, which found that Capital One’s credit card portfolio is increasingly vulnerable to macroeconomic swings that could undermine its financial viability, highlights why federal regulators should block its proposed merger with Discover.

“The banking agencies should block the proposed Capital One-Discover merger to prevent the creation of another too-big-to-fail bank that today’s stress-test shows poses an increasing risk to the financial system and the broader economy,” said Patrick Woodall, managing director of policy at Americans for Financial Reform. “The wave of bank mergers after the mid-1990s contributed to the fragility and systemic risk that caused the 2008 financial crisis that disproportionately harmed the economic security of Black and Latine families.”

The Fed’s findings underscore how the proposed Capital One takeover of Discover Financial Services could pose significant, systemic risks to the stability of the financial system. The Bank Merger Act and Bank Holding Company Act, the controlling statutes in merger decisions, direct federal banking regulators to consider how consolidation can pose “risk to the stability of the United States banking or financial system.”

Some basic financial analysis reveals the risks of this proposed transaction:

  • Capital One, though nominally a deposit-taking bank, is heavily weighed down by credit card loans, representing nearly 30 percent of its assets. The combination with Discover would make credit card loans nearly 40 percent of assets, which would be more than 7 times the credit card asset share of JPMorgan Chase and 5 times Citibank, currently the two largest card lenders in the United States.
  • In 2023, both Capital One and Discover had much higher credit card delinquency rates than the average of the 100 largest banks (4.61 percent, 3.67 percent, and 2.97 percent, respectively) and Capital One’s charge-off rate was much higher than at the 100 largest banks (4.57 percent and 3.96 percent). The higher concentration of riskier-than-average credit card loans makes Capital One — and even more for Capital One-Discover — especially vulnerable to economic shocks.
  • The 2024 stress-test found that the value of Capital One’s credit card portfolio could fall by 23.2 percent in a severe adverse scenario (4.5 percent higher than its 2023 stress-test estimate of a 22.2 percent decline). The scale of those potential losses would significantly undermine Capital One’s earnings and financial viability before the Discover takeover.
  • The 2024 stress test found that an adverse scenario could cause losses for a combined Capital One-Discover credit card loan portfolio that amount to $53.6 billion, which would erode the viability and future prospects of the merged institution. (The stress test estimates 20.3 percent losses for Discover’s credit card loans.)
  • A severe shock could compromise the bank’s ability to provide critical functions including credit card lending as well as credit card and debit transactions and the sheer size of the combined bank would make it difficult for other players to fill the gaps.

“Even without the Discover takeover, today’s stress test shows the growing vulnerability of Capital One to macroeconomic stresses,” said Woodall. “Adding Discover’s massive credit card lending to Capital One’s already overweight credit card portfolio could substantially destabilize the financial system.”