New Justice Department Bank Merger Evaluation an Overdue Improvement
By Patrick Woodall, managing director for policy, Americans for Financial Reform
To speak to Patrick Woodall about this issue, email carter@ourfinancialsecurity.org
Today, the Justice Department released a new approach to bank merger enforcement that brings the woefully outdated bank merger guidelines into the 21st century. The Justice Department announced that it would apply the greatly improved overall merger guidelines, which were released in 2023, to bank mergers as well. The bank merger rules that are currently in place date from the era of dial-up modems and are totally insufficient to address the complex market power issues posed by many proposed bank mergers — including the pending Capital One-Discover merger.
The bank merger guidelines that DOJ is replacing were put in place in 1995 and initiated an immediate wave of mergers that still reverberates in today’s banking sector. Those guidelines were designed to prevent bank mergers that create hyper-concentrated local markets, which is one important consideration, but is a much too narrow and limited an approach to evaluate the overall impact of many mergers, especially larger ones.
The result was that the bank merger evaluations primarily looked at whether the combining firms had branches very close together — in the same shopping center or a few blocks apart. If the merging banks had a close geographic overlap, the Justice Department asked them to divest the nearby branches and then green lighted the merger. That may work for smaller or medium-sized banks that operate in the same markets, but it doesn’t address the kind of market power that can be amassed by megabanks buying into new markets or banks that buy up scores of banks in a series of mergers that create massive institutions.
The proposed Capital One-Discover merger is emblematic of the kinds of mergers that don’t neatly fit into the head-to-head branch competition framework of the 1995 bank merger guidelines. The two companies only have proximate offices in Delaware, where they keep their digital deposits but do not even have a single branch. But the merger is a major merger of credit card lenders and the combination of Capital One’s retail banking and Discover’s credit and debit payment platforms that have significant anticompetitive impacts — antitrust concerns that the 2023 merger guidelines are much better designed to evaluate than the 1995 bank merger guidelines.
The proposed Capital One-Discover merger would create the nation’s biggest credit card lender that would hold more than 30 percent of the credit card loans to people with non-prime credit scores, who are disproportionately Black and Latine. This would lessen competition, eliminate a key rivalry for middle income consumers, reduce choices, and enable the merged firm to use its market power to raise prices. People with non-prime credit scores would be vulnerable to price gouging because if the merged firm raised interest rates or fees, customers with non-prime scores could not easily switch to other cards.
Credit cards aren’t like candy bars, you have to apply to get an alternate product, not just pick a different one off the rack. More than half of all credit card applications are rejected and more than 80 percent of the applications of people with subprime credit scores are rejected. And even if people could find a new card, switching has real costs, both financial (balance transfer fees) and to credit scores (shortened credit history from closing accounts). These unique factors would make Capital One-Discover customers essentially captive consumers who could not avoid price hikes — the very thing that antitrust enforcement is intended to prevent.
The 2023 merger guidelines appropriately consider mergers that create such a steep increase and high level of concentration — such as in Capital One-Discover non-prime credit card lending — would tend to lessen competition and be presumptively illegal under the Clayton Antitrust Act. They also address vertical combinations, where companies purchase firms that provide goods or services to the acquirer, such as Capital One’s proposed takeover of Discover’s credit card payment networks. This also raises other issues under the merger guidelines, such as the evaluation of platform economics that would appropriately consider the proposed Capital One-Discover merger’s impact on both credit and debit network platforms that can raise prices for merchants and cardholders.
The 2023 merger guidelines address additional key strategies that banks have used over the past three decades under the ’95 guidelines to consolidate the industry into a handful of megabanks that shape the market, disadvantage smaller banks, and harm depositors, small businesses, and communities. They consider the harms of mergers that entrench market power or extend dominant positions — a common feature of mergers over the past three decades when bigger banks bought up rivals to enter new geographies that strengthened their market power. And the new guidelines address serial acquisitions, where companies pursue takeover after takeover to build up a very large bank. First Union (later Wachovia) ballooned through more than 90 acquisitions before it collapsed during the 2008 financial crisis.
Bank mergers can enrich shareholders and executives but rarely benefit customers or communities. Decades of research have demonstrated that bank mergers can reduce retail banking options, raise prices for depositors and small businesses, reduce access to credit for homes and businesses, erode community investments, and undermine financial stability. These negative impacts are more pronounced in Black and Latine neighborhoods that have structural barriers to financial inclusion that are exacerbated by bank mergers. Merger proponents claim that bigger firms can deliver more efficient banking services, but what they don’t say is that these gains are captured by the companies as profits. Depositors know this from their bank statements. Why have ATM fees, overdraft fees, and account fees surged over the past two decades if these bigger banks and their networks are so efficient?
The Justice Department’s extension of the 2023 merger guidelines to cover banking mergers is a necessary and long-overdue step to more fully evaluate the harms to competition from consolidation in the banking sector. The Justice Department plays a critical role in evaluating the antitrust implications of bank mergers. Federal banking laws incorporate the language of the Clayton Act in the evaluation of bank mergers and essentially delegates the antitrust assessment to the Justice Department.
Now it is time for the Justice Department to apply the 2023 merger guidelines to the deeply problematic Capital One-Discover merger and tell federal banking regulators that the merger poses irreparable harms to competition that hurt consumers, small businesses, and communities.