Will New Rules for the Road Emerge for Bank Mergers?

The [proposed] Capital One-Discover merger is a terrible, horrible, no good, very bad idea.

Jesse Van Tol, CEO, National Community Reinvestment Coalition, conference keynote address, April 3, 2024

At NPQ, we have written from time to time about antitrust law—that is, legal restrictions that limit corporate concentration and monopoly power. But to date, such laws have not stopped corporate concentration from increasing. Unlike past years, however, at this year’s Just Economy conference, organized by the National Community Reinvestment Coalition (NCRC), antitrust law and banking took center stage.

Antitrust law tends to get very technical. There are complicated formulas, for instance, to measure corporate concentration in a given geographic area.

Yet antitrust is not always obscure. A century ago, antitrust debates roiled US politics. Famously, the 1912 presidential election centered on antitrust policy. The 1914 Clayton Antitrust Act, passed during President Woodrow Wilson’s first term, set key rules that were designed to put limits on mergers, monopoly power, and discriminatory pricing. But that was then. In 2019, the Washington Center for Equitable Growth found that federal filings against corporations for antitrust violations, which typically averaged 50 to 75 a year in the early 1990s, two decades later had fallen consistently below 25—and in some years, in single digits.

Now, however, antitrust policy debates and enforcement are coming back from the dead. In 2022, President Joe Biden’s administration initiated some 50 antitrust enforcement actions. And, in the past 12 months, there have been high-profile federal antitrust cases filed against major corporate giants, most notably Amazon and Apple.

Mergers in banking have been so common that even the existence of a law designed to restrain bank mergers seems surprising.

This shift also affects community finance and banking. Banking has been no stranger to mergers, with the total number of banks falling from over 14,800 in 1990 to under 5,000 in 2020. Moreover, the percentage of assets controlled by banks with $100 billion or more in assets has tripled from 21.8 percent in 1990 to 69.4 percent in 2020.

At the National Community Reinvestment Conference in 2024, merger policy was at the center of the conversation. The proposed merger of banks Capital One and Discover, alluded to above, generated the most heat, but the shift extends far beyond that one deal. 

Antitrust Law in Banking

Mergers in banking have been so common that even the existence of a law designed to restrain bank mergers seems surprising. But there is a law called the Bank Merger Act that Congress passed in 1960. Rohit Chopra, who directs the Consumer Financial Protection Bureau (CFPB), explained at NCRC’s conference this April how that law came to be. See, back in 1955, Chase National Bank, then the nation’s third-largest bank, merged with then 15th-largest Manhattan Company—two of whose founding members in 1799, history buffs might note, were Aaron Burr and Alexander Hamilton—to form the nation’s second-largest bank, Chase Manhattan.

The combined bank had $7.5 billion in assets, equivalent to 1.9 percent of gross domestic product (which in today’s $28 trillion economy would be about $530 billion). This, Chopra noted, “created significant public concern.”

In response, Chopra related, Congress passed the Bank Merger Act in 1960 during the Eisenhower administration “to rein in the merger spree.” By the way, the successor to that bank, JP Morgan Chase, is, according to American Banker, nearing $4 trillion in assets—in other words, more than seven times larger as a percentage of the economy than the merger that raised lawmakers’ ire more than 60 years ago.

A New Merger Wave Begins 

For a time, the Bank Merger Act was enforced. A 1982 New York Times article reported that in 1981, Bank of America had a “dramatic gain” of $9.5 billion in assets, making it the nation’s largest bank with $121.2 billion in total assets. That such numbers were once seen as dramatic reminds us of how much finance has changed. Even adjusting $121.2 billion both for inflation and the growing size of the economy, the equivalent amount in 2024 would be around $700 billion. By contrast, today, Bank of America, currently the nation’s second-largest bank, has a far greater $3.18 trillion in assets.

Why are banks so much larger today? To make a very long story short, in the 1980s and 1990s, policy shifted, and mergers were favored by policymakers. Without diving into the details, suffice it to say that the collapse of the Savings and Loan industry in the 1980s and other bank failures led policymakers to eliminate restrictions on interstate banking, with final restrictions lifted in 1994, during a session in which Democrats controlled both houses of Congress and the presidency.

A Clinton-Era Compromise

The relationship between the administration of President Bill Clinton and community finance is complicated. On the one hand, Clinton’s policies accelerated bank consolidation. For example, in 1999 Clinton signed the law that eliminated the separation of investment banking and retail banking, a measure that fueled mergers and is widely seen as a major contributing factor to the Great Recession, which had disproportionately devastating impacts on household wealth in communities of color.

On the other hand, Clinton’s support was critical to the passage of the Community Development Finance Act of 1994—which helped create what became known as the community development financial institution (CDFI) industry. There’s more. Clinton also supported new Community Reinvestment Act (CRA) rules in 1995 to encourage banks to invest in CDFIs. Put simply, bank support of CDFIs (typically through making below-market loans to them) would score points in the evaluation of whether banks were complying with the anti-redlining measure.

The Great Recession had a greater cost to communities of color than the benefits resulting from CRA-induced investment in those communities.CRA became federal law in 1977, but as NCRC noted in a 2017 report, “One of the greatest opportunities for CRA engagement is when a bank applies to merge with or acquire another bank.” With a rising tide of mergers, there would be a lot of opportunities. But it also meant that mergers would continue and accelerate.

The connection between the two is not coincidental. Notably, US Senator Don Riegle (D-MI) in 1994 was an author of the Riegle­Neal Interstate Banking and Branching Efficiency Act, which sped bank mergers, and the law that established the CDFI Fund.

The pattern would be set—mergers would be waved through by federal regulators, provided that commitments were made by merging institutions to invest in low- and moderate-income neighborhoods, as CRA legally requires. The impact? The FB Heron Foundation estimated that between 1977 and 1990, banks had made $6.4 billion in CRA commitments; by contrast, it noted, between 1990 and 2000, that number had climbed to $1 trillion, a “hundred-fold increase,” as Heron crowed. By 2017, NCRC reported that bank CRA commitments over a 40-year period exceeded $6 trillion.

The Bargain Unravels

So, how can it be that CRA was helping to drive trillions of dollars in investment capital into formerly redlined neighborhoods—and yet the racial wealth gap was not improving? The basic answer is that structural changes to the economy, which had helped lead to the Great Recession, had a greater cost to communities of color than the benefits resulting from CRA-induced investment in those communities.

Moreover, as Van Tol noted in an interview with NPQ back in 2021, bank industry CRA commitment numbers are often overstated, both because banks frequently self-report compliance and because the numbers typically include the restatement of already-committed dollars. By the mid-2010s, NCRC had switched its strategy to what it calls community benefits agreements, which are negotiated between banks and community coalitions, and which include the creation of community advisory councils, formed in large measure by coalition partners, that typically meet with bank officials two to four times a year to assess performance and co-develop course corrections when needed.

What was clear at this year’s conference, though, was a different approach than negotiating better deals on mergers. With the Capital One-Discover deal, NCRC is not seeking community benefits. They are simply opposing the merger.

At the conference, Van Tol explained why, addressing, in particular, the Capital One side of the equation, which he called out as a bad actor. “Their business model is luring LMI [low-to-moderate income] people into debt. Half of its profits come from fees and interest. It seeks them out: it hunts for them.”

In the merger, Capital One, with $475 billion in assets (the nation’s ninth-largest bank and fourth-largest credit card issuer), would acquire Discover, a bank with $150 billion in assets (the 27th-largest) and sixth-largest issuer. Combined, the company would become the nation’s largest credit card issuer and sixth-largest bank. Discover, of course, also has its own credit card payment network (Discover Card), one of only four companies nationally (the other three are Visa, Mastercard, and American Express).

A March 2024 report authored by Shahid Naeem, senior policy analyst at the American Economic Liberties Project, backs Van Tol’s description of Capital One’s business model. As Naeem writes, “The firm combines cutting-edge data science with an industry-leading ability to identify high-margin…higher-risk cardholders who are more likely to miss payments and revolve a balance.” Capital One may be the nation’s fourth-largest credit card issuer, but it’s the leading issuer for people with credit scores below 660 (considered “subprime”). The firm relies heavily on customers not paying off their balances at the end of the month and charges “interest rates above 30% that maximize return on cardholder balances.” 

It remains to be seen how regulators respond, but NCRC is hardly alone in its opposition. On March 21, NCRC joined over 30 other groups, including Consumer Reports and the Consumer Federation of America, in calling for the merger application to be denied in a letter addressed to the federal reserve chair, the comptroller of the currency, and the lead federal antitrust attorney general. A group of 12 congressional representatives also wrote a similar letter.

A Broader Lens 

The regulatory process for the proposed Capital One-Discover merger will take time. Many don’t expect a final decision until 2025. But the discussion of bank merger policy extends far beyond that one merger. At the conference, Martin Gruenberg, who chairs the Federal Deposit Insurance Corporation (FDIC), which insures federal bank deposits, noted that the agency he directs had just issued a request for comments on a proposed Statement of Policy on Bank Merger Transactions. “We had not updated that policy in over 20 years. The industry has changed dramatically.”

Finance “is as essential as electricity and roads.”

Gruenberg summarized four proposed changes.

1. Competition

In assessing how a merger affects competition, analysis should consider concentration of assets, such as mortgages and small business loans, not just deposits.

2. Safety and soundness

Merger applicants need to demonstrate that the merged entity is financially more stable than the two separate banks were previously.

3. Public interest

There should be specific analysis on how the merger benefits the “convenience and needs” of communities the merged bank intends to serve.

4. Financial stability

Any merger that would result in a bank with over $100 billion in assets should be reviewed more strictly.

In his remarks, Chopra, the CFPB director, noted that federal regulatory analysis had long focused almost entirely on competition while ignoring community benefit. The federal government, he said, needs to “make sure that mergers do not end up harming local businesses and residents who we have seen too often suffering.”

The stakes, Chopra emphasized, are high. The financial system, he explained, provides “economic and social infrastructure that facilitate democracy, money, and commerce.” Finance, Chopra added, “is as essential as electricity and roads.” For that reason, it is critical regulators get the balance right.