At the heart of their opposition is concern that the $9 billion deal will create another behemoth bank whose failure could cripple the financial system. Under Dodd-Frank, the Fed, which has to clear the merger, must consider the risk of the union to the stability of the financial system.
The agency has yet to define what constitutes a systemically risky merger, making its decision on Capital One all the more important as it may set the tone for future deals.
Industry watchers expected the Fed to fast track the acquisition because McLean-based Capital One had largely steered clear of mortgage-backed securities investments, derivatives trading and haphazard loan underwriting that kneecapped other firms.
Capital One does stand to expand its dominance of the revolving-credit market, if it uses the injection of deposits to back more credit cards and other consumer loans.
On the other hand, the size of the merged banks, some say, would be like placing a sapling next to redwoods. Rolling up ING Direct would give Capital One a combined $206 billion in deposits, a total that would still be a distant fifth from the next largest bank, Wells Fargo, with $853.6 billion in deposits.
“I thought this was going to be a slam dunk,” said David A. Walker, a banking professor in Georgetown University’s McDonough School of Business. “The pressure from Dodd-Frank and the too-big-to-fail concern ... seems to be weighing on the Fed.”
Officials at the Federal Reserve Board would only say the decision to extend the review was to give consumers more say. That in itself may represent a shift from recent practice. Adam Drimer, assistant vice president of the Federal Reserve of Richmond, said in an interview last month that the agency rarely hosts public meetings on such matters these days, unless prompted.
Prior to the shotgun mergers of 2008, following the bankruptcy of Lehman Bros., the Fed frequently held hearings on proposed mergers, such as Citigroup and Travelers in 1998 or Chemical Bank and Chase Manhattan in 1995. Which leads analyst Jaret Seiberg of MF Global to believe the Capital One review is a return to normal.
“This is a very positive message to the industry because this means the Fed is going back to treating large bank mergers in a normal fashion; we’re no longer in crisis mode,” Walker said. “At the end of the day, you’d be hard pressed to argue that any of the hearings in the past have had any impact on the Fed’s consideration.”
The greatest impact of the meetings, he continued, may be for community activists. Banks, to avoid negative publicity, have historically made new community reinvestment agreements with activists.
In Capital One’s case, community interest groups led by the National Community Reinvestment Coalition are accusing it of discriminating against low- to moderate-income mortgage applicants.
NCRC said the bank has failed to extend Federal Housing Administration-insured loans to people with credit scores of 580, though it is permitted by the agency. The organization also said Capital One has reduced its FHA loans to the detriment of minority borrowers, who frequently turn to that market. Activists say these issues will be exacerbated if the bank grows larger.
Capital One has already agreed to adhere to the FHA credit score requirements by 2012.
“Our strong record of investing in low- to moderate-income communities is a matter of public record,” said Capital One spokeswoman Tatiana Stead, in an e-mail statement. “In every prior merger, we substantially increased community development lending and investments beyond that of the banks we acquired.”