Bank Regulator’s Approval of Capital One and Discover Deal Shows Path Forward for Bank M&A Deals

On May 18, 2025, Capital One Financial Corporation, McLean, Virginia (Capital One) closed on its acquisition of Discover Financial Services, Riverwoods, Illinois (Discover) and the merger of Discover Bank with and into Capital One’s bank subsidiary, Capital One, National Association (CONA), with CONA as the resulting bank (the transactions collectively referred to herein as the Merger). The transaction received the approval of the Board of Governors of the Federal Reserve System (Federal Reserve or Board) and the Office of the Comptroller of the Currency (OCC), in an apparently coordinated effort, on April 18, 2025. As a result of the Merger, CONA is the eighth largest insured depository institution in the United States, with total consolidated assets of $637.8 billion.

This Advisory highlights key aspects of the regulatory approvals that provide further insight to the agencies’ approaches to evaluating bank merger transactions and discusses additional key takeaways for financial institutions.

Key Aspects of the Regulatory Review of the Merger

Many Comments on the Applications

The deal was of great interest to the public for several reasons, which was evidenced by an extended public comment period for the applications that lasted approximately 119 days and included a virtual public meeting. Over 6,000 public comments were submitted on the applications, and the Board’s approval order notes that 552 comments were in support of the proposal, while 428 unique comments were received in opposition (with 5,152 copies of a substantially identical form comment letter in opposition). While the overwhelming majority of the comments were form letters, the Federal Reserve still considered the comments to the extent that the comments were relevant to the statutory factors under the Bank Holding Company Act (BHC Act), and the Federal Reserve noted that the comments were received from various sources, including customers of the banking organizations, businesses, members of Congress, state legislators, community groups and nonprofit organizations, and other interested persons, in support of or opposing the transaction.

The OCC received 1,370 public comments which focused on convenience and needs, consumer protection and public benefits, competition (in banking and payments), financial stability, and supervisory records of CONA and Discover Bank with respect to anti-money laundering, consumer protection, discrimination laws and regulations, as well as data security, and the ability of CONA to integrate Discover Bank within its risk management framework.

The Federal Reserve included a discussion of its consideration of comments received within the approval order (Board Approval Order), while the OCC included an appendix to its order approving the merger (OCC Approval Order) to specifically address the public comments it received and CONA’s responses to such comments. The Federal Reserve took the extra step in certain instances to specifically mention comments that were submitted that raise social concerns that were prioritized under the prior administration but deemed to be outside of the scope of the statutory factors the Federal Reserve considered as part of the merger. For example, the Board, in response to one commenter’s concern over providing financing to companies engaged in fossil fuel projects and another commenter’s concern that certain business practices exacerbate the racial wealth gap, made clear that “such matters are outside the scope of the limited statutory factors that the Board is authorized to consider.”¹ The Board also made clear that “potential job losses resulting from a merger is outside of the limited statutory factors that the Board is authorized to consider.”²

The agencies’ prioritization of addressing the public comments, including those that were noted as not relevant to any of the statutory factors, not only informs the public of what is required to be considered as part of a bank M&A transaction, but demonstrates that the agencies are focused on staying within the confines of the statutory framework for review.

Supervisory Concerns Resulted in Conditions and Consent Orders

On the same day that the Federal Reserve approved Capital One’s application, the Board announced a Consent Order with Discover and assessed a $100 million penalty for overcharging interchange fees for credit cards issued by Discover Bank. The Board noted that Discover has terminated these practices and is repaying overcharged fees to affected customers. On the same day, the Federal Deposit Insurance Corporation (FDIC) entered into an Amended and Restated Consent Order (2025 FDIC Order) with Discover Bank, asserting that, for approximately 17 years, Discover Bank misclassified millions of consumer credit cards as commercial, which resulted in merchants being overcharged over $1 billion in interchange fees when accepting payments with the misclassified credit cards. The 2025 FDIC Order amends and restates the Consent Order issued against Discover Bank on September 25, 2023 for shortcomings in the bank’s compliance management system for consumer protection laws. Significantly, the FDIC also assessed a $150 million civil money penalty and required a restitution plan to distribute at least $1.225 billion to affected merchants and related parties.

Importantly, the OCC conditioned its approval on CONA submitting a plan for supervisory non-objection that “details effective and sustainable corrective action and timelines to address the underlying root causes of any outstanding enforcement actions against Discover Bank and plans for remediation of harm.”

The agencies have in the past noted an unwillingness to approve an application if an acquirer has material unresolved issues,³ but the agencies have been willing to approve applications with a troubled target provided that the acquirer had adequate financial and managerial resources to remediate concerns with the target and the resulting institution remained strong. The agencies’ decision to approve the applications with conditions is consistent with prior statements of the agencies that a transaction can be approved even if there are concerns with the target if the acquirer has the appropriate financial and managerial resources to address identified deficiencies.⁴

Competitive Review, the 1995 Bank Merger Guidelines Are Still Relevant

The Board Approval Order includes a detailed discussion of its review of the proposed competitive effects of the transaction. The Board acknowledges the U.S. Department of Justice’s (DOJ) withdrawal from the 1995 Bank Merger Guidelines, but affirmatively states that none of the federal banking agencies have withdrawn from the 1995 Bank Merger Guidelines, and “[t]he Board continues to apply the 1995 Bank Merger Guidelines in evaluating bank merger proposals.”⁵

The Board relied on the “cluster of banking products and services” as the market for analyzing the competitive effects but also reviewed the competitive effects with respect to certain subsets of banking products and services, and specifically the business related to the issuance of credit cards for purposes of the competitive review under Section 3 of the BHC Act. Based on its review, the Board found the transaction consistent with approval. Interestingly, the Federal Reserve noted that when calculating the HHI for a particular banking market, it weighs the deposits of online depository institutions and other special-purpose banks, at 0%. Additionally, when the Board compared the pro forma organization’s share of deposits in each local banking market in which customers of both firms are located, as compared to commercial banks and thrift institutions with branches in those markets using local deposit and market share data, the Board did not include deposits of other institutions that solicit deposits through the internet in these locations.

The transaction is expected to occur as a step merger, and the OCC evaluated the competitive effects of the proposed transaction from the vantage point that CONA and Discover Bank would be affiliates, and the bank merger would be “generally considered competitively neutral” once Capital One acquires Discover. In the appendix to the OCC Approval Order, the OCC acknowledged CONA’s representation that the transaction would not exceed concentration thresholds in either the 1995 Bank Merger Guidelines or the 2023 DOJ and U.S. Federal Trade Commission (FTC) Merger Guidelines. See our April 2022 Advisory, which discusses the DOJ’s withdrawal from the 1995 Bank Merger Guidelines and adoption of the Banking Addendum to the 2023 DOJ and FTC Merger Guidelines.

The Federal Reserve notes that it consulted with the DOJ as part of its review of the application, as required by the banking regulations, and the DOJ informed the regulators that it did not see sufficient evidence of competition issues to block the deal.⁶ The waiting period for consummation of the transaction noted in the Board Approval Order is 30 days rather than the shortened 15-day waiting period.

Causes of 2023 Bank Failures Were Considered Under Financial Stability Review

This transaction involves two banking organizations with over $100 billion in total consolidated assets and will result in the eighth largest insured depository institution in the United States based on total consolidated assets. In evaluating the statutory criteria as to the potential impact on the financial stability of the United States, both the OCC and the Board noted several distinctions between CONA and Discover Bank, and the banking organizations that failed in 2023, particularly as to CONA’s and Discover Bank’s higher proportions of FDIC-insured deposits and less reliance on non-core deposit funding and short-term wholesale funding operations. This signals that the agencies will continue to apply lessons learned from the failures in 2023 but are opting for a more pragmatic approach rather than applying broad restrictions across the banking industry.⁷

Takeaways

• The agencies appear to be taking a more coordinated approach in bank merger review and acting on proposals. This is consistent with statements made by Secretary Bessent in coordinating banking supervision and regulation generally among the agencies.⁸
• The agencies deciding to approve the applications (assuming with the nonobjection of the FDIC) rather than denying or further delaying action until the supervisory concerns were remediated moves away from the more conservative trend of the Biden administration to delay or withhold approval from such transactions and is more consistent with historical statements by the agencies that a merger is approvable if the resultant institution will remain strong, and the transaction otherwise meets the statutory factors.
• As set forth in footnote 30 of the Board Approval Order, the federal banking agencies continue to apply the 1995 Bank Merger Guidelines to evaluate competitive considerations, despite the DOJ abandoning those guidelines in 2023. The OCC Approval Order noted that the applicants addressed both sets of standards.
• For complex institutions, the banking agencies will go beyond a deposit concentration analysis by branch-based geographic markets and evaluate various subsets of the overall cluster of banking products and services as part of the competitive considerations analysis. For example, the Board Approval Order states the Board reviewed small business lending data, information on card payment networks and credit card issuance data broken down by number of customers, and balances and transactions for further subsets of subprime customers and new-to-credit customers.
• The Board made clear that its review will not consider “matters [that] are outside the scope of the limited statutory factors that the Board is authorized to consider” when addressing public comments on topics of applicants’ providing financing to companies engaged in fossil fuel projects, the impact of business practices on the racial wealth gap, and potential job losses resulting from the transaction.
• In evaluating the statutory criteria as to impact on the financial stability of the United States, both the OCC and the Board noted several distinctions between the applicants and the banks that failed in 2023, particularly as to the applicants’ higher proportions of FDIC-insured deposits and less reliance on non-core deposit funding and short-term wholesale funding operations.
• The approval of the transaction signals the agencies’ willingness to consider and approve large merger transactions below the GSIB level and a more favorable environment generally for bank mergers under the Trump administration.
• The banking agencies under the Trump administration appear willing to approve transactions despite significant regulatory compliance issues at the target company so long as remedial steps are put in place and the resulting entity commits to follow through on those remedial steps.

If you have any questions regarding bank mergers or regulatory approvals, please contact any of the authors of this Advisory or your usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist with any questions regarding bank mergers and acquisitions or assist with your broader financial regulation needs.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.