This story didn’t make front page headlines in the financial media but behind the scenes, a battle took place with Capital One emerging as the winner.
Capital One, well known for their “what’s in your wallet” commercials agreed to purchase ING Direct USA for $9 billion paving the way for Capital One to become the 5th largest bank in the United States based on total deposits.
This acquisition faced tougher than expected scrutiny by Federal Regulators although they recently approved the deal.
By banking standards, this was not a large deal so why did it face such tough headwinds?
Their advertising campaigns may be witty and clever but don’t mistake that for a company that isn’t a big player in the banking market.
Capital One has found a niche in the subprime credit card market.
With more than one third of their credit card portfolio subprime customers, some have seen this company as a small player who has contributed to the nation’s credit crisis by lending to customers who shouldn’t have qualified for a credit card.
Although they weren’t one of the top 10 largest banks, a string of acquisitions has changed that as Capitol One has not only purchased ING Direct USA, but also three other mid sized companies over the past few years raising the eyebrows of regulators and other interest groups that believe its $320 billion size puts it in the “too big to fail” category along with the nation’s four largest banks.
Bear in mind that Capital One is also waiting on approval to acquire HSBC’s American credit card business to add to their growing company.
Is that True? Would they be “too big to fail?”
The Federal Reserve didn’t agree.
After an extensive review along with a longer than usual public comment period, they concluded that Capital One operates differently than its four larger competitors.
First, the Fed concluded that the bank would be easy to unwind and sell off if they found themselves in the same type of situation as firms that were purchased in 2008 and 2009.
Next, Capital One and ING DIRECT don’t participate in the investment banking activities that the larger banks have been criticized for in the past. This, according to regulators, makes Capital One less vulnerable to downturns in the investment markets.
As Capital One said in their defense of the deal, they deal in mom and pop banking activities instead of complicated derivatives and other activities.
Finally, even as the 5th largest bank, they are still significantly smaller than the top four banks. Capital One may have more than $300 billion in deposits but the larger banks have trillions in assets.
As part of the approved deal, Capital One has agreed to make a larger commitment to more community based banking activities including a 10-year, $180 billion commitment to investment and lending in local small businesses and other community based practices. They also unveiled a plan to add 500 jobs in Delaware, ING Direct USA’s headquarters.
In a press release, they said that by adding ING’s portfolio of products they could expand their product offerings to reach a larger number of people.
The Federal Reserve issued a 40 page ruling explaining the methodology behind their ruling as well as their commitment to scrutinize all bank mergers in order to protect against creating “too big to fail” institutions and that Capital One is a not a systemic risk to the nation’s economy.