On Tuesday, after much delay, the Federal Reserve approved Capital One’s $9 billion acquisition of ING Direct USA. The deal will make McLean, Virginia-based Capital One the fifth- largest lender by U.S. deposits. It is the latest move by Capital One to build a national banking franchise, in an effort to expand beyond credit cards.
Capital One is not currently in the top 10 but the combined institutions will have more than $200 billion in deposits, making the bank not only a bigger player but also a regional powerhouse.
The deal comes at a time when many banks are still taking heat for the last crisis but the Fed Reserve seems to be unconvinced that the two could cause the next wall street crisis. The deal also provides a glimpse at how the government will start to use its new powers to oversee bank mergers.
However, The Federal Reserve’s approval wasn’t all that simple. The Fed had stipulations that came with specific conditions. They ordered Capital One to revamp its internal controls, Citing consumer complaints and legal actions against the bank. This was to be done specifically around its lending and debt-collection practices due to what we’ve seen in the past.
The deal does leave room for seismic shift and many advocates are worried that this could be a big risk on taxpayers. They see Capital One as an aggressive subprime lender. Clearly the Fed disagrees with these accusations as it approves the deal
The bank now has 90 days to outline its plan to strengthen its compliance and other risk-management controls. The next few months see that in June, Capital one agrees to pay $6.2 billion in cash for ING Direct USA. Also, according to the terms of the deal, Capital One will issue $2.8 billion worth of new shares to ING. This will give the Dutch firm a 9.9% stake.
The bank promised a 10-year, $180 billion commitment to community lending and investments. Capital One also unveiled plans to create 500 jobs in Delaware, where ING Direct is based.
Critics feel that a bigger bank is likelier to leave taxpayers responsible for bailing out the company. With much at stake, the Fed last fall took the unusual step of holding three public hearings about the deal, providing a forum for critics. The word on the street is that about 1/3 of Capital One’s credit card portfolios carry loans to barrowers with credit scores below 660.
Capital One was smart though; they used the hearings in order to defend their record. While Capital One said, unlike Wall Street banks that deal in derivatives and other risky businesses, it focuses on mom-and-pop shops, leaving it immune to the unstable investment banking business.
In a 40-page order, the Fed analyzed the size and complexity of Capital One and ING Direct. They looking into the banks and the broader economy, and whether competitors could easily step in to replace the bank should it encounter “severe financial distress”. The Fed also examined the difficulty they would have in unwinding the two in case the bank should show signs of collapsing.
“These measures suggest that Capital One would be significantly less complicated to resolve than the largest U.S. universal banks and investment banks,” – the Fed
If you’d like to read the details click on the link below.