March 1, 2024

DealBook: Capital One Denies ING Deal Would Make It ‘Too Big to Fail’

John Taylor, head of the National Community Reinvestment Coalition, told the Fed that Capital One’s plan was too risky.Joshua Roberts/Bloomberg NewsJohn Taylor, head of the National Community Reinvestment Coalition, told the Fed that Capital One’s plan was too risky.

8:08 p.m. | Updated Capital One on Tuesday delivered a sweeping defense of its proposed $9 billion takeover of ING Direct USA, aiming to allay concerns that the deal would create another “too big to fail” banking giant.

“The acquisition of ING Direct will further reduce, rather than increase, any risk to the financial system,” John Finneran, Capital One’s general counsel, told the Federal Reserve, which hosted the first of three public hearings to examine the controversial deal.

Consumer groups and smaller banks, warning that the deal could pose systemic threats to the economy, cast doubt on Capital One’s claims.

“Our main concern with the acquisition today concerns systemic risk,” Christopher Cole, senior vice president for the Independent Community Bankers of America, said at the Fed’s hearing in Washington. He called for the Fed to impose a “moratorium” on all acquisitions involving banks that house more than $100 billion in assets.

In June, Capital One announced plans to acquire ING Group’s online banking unit in the United States for $6.2 billion in cash. Under the terms of the deal, Capital One would also issue $2.8 billion worth of new shares to ING, giving the bank a 9.9 percent stake.

Capital One, best known for its profitable credit card business and catchy television ads, is quietly amassing a big national banking franchise. The ING deal would elevate Capital One, currently the eighth-largest bank in the United States, to the No. 5 spot. The combined institutions would have some $200 billion in deposits, raising questions about the deal’s impact on customers and the broader economy.

The hearing on Tuesday came at the behest of Representative Barney Frank, Democrat of Massachusetts, who pushed the Fed to gauge the potential pitfalls of the deal. Ultimately, it is up to the central bank to either bless or block the deal.

Under the Dodd-Frank act, the financial regulatory overhaul co-authored by Mr. Frank, the Fed must first examine whether the merger poses a systemic threat to the economy. When the risks outweigh the rewards, the Fed is required to scuttle the deal.

Consumer advocates are calling on the Fed to do just that. They argue that the takeover will create another behemoth bank that one day could come calling for a taxpayer bailout.

“We already have four too-big-to-fail banks. Why make a fifth?” John Taylor, president of the National Community Reinvestment Coalition, said this summer. At the hearing on Tuesday, Mr. Taylor told the Fed: “You have a duty to deny Capital One’s plan to buy ING Direct,” noting that the bank’s credit card portfolio was loaded with risky subprime loans.

While critics outlined a list of concerns — and pressured the Fed not to approve the deal — Capital One countered by painting itself as a plain-vanilla bank, focused on lending to mom-and-pop investors rather than writing complex derivatives and other securities that three years ago drove Wall Street to the brink.

The deal, Mr. Finneran said, “will not lessen competition or result in any undue concentration of resources.” He added that Capital One would open new loan products to ING customers and, in another crucial concession, would soon start a 10-year, $180 billion community development investment, a nod to concerns that the combined firms will ignore low-income communities. Mr. Finneran also announced that Capital One would operate ING Direct USA as a separate bank, at least for a while.

The Fed offered few insights into its perspective on the deal. In recent weeks, however, at least one Fed official shied away from broadly interpreting the central bank’s power over deal-making — even when an acquisition appeared risky.

“While Congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks,” the Federal Reserve Board governor Daniel K. Tarullo said in a speech last week.

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