Mark Lennihan/Associated Press
9:10 p.m. | Updated
Regulators on Tuesday approved Capital One’s $9 billion acquisition of ING Direct USA, casting aside criticism that the deal would create the next too-big-too-fail banking behemoth.
The deal provides the first glimpse at how the government will use its new powers to oversee bank mergers, authority granted in the aftermath of the financial crisis.
The Federal Reserve’s consent came with some conditions. Citing consumer complaints and legal actions against the bank, the Fed ordered Capital One to revamp its internal controls, specifically around its lending and debt-collection practices.
“The Board expects that Capital One will ensure that its risk-management framework and methodologies, including its compliance functions, are commensurate with its new size and complexity,” the Fed said in an order on Tuesday.
Some predicted that the Fed would rubber-stamp the deal. But the central bank was deliberate in its approach, delaying approval to hold public hearings and twice postponing plans to announce the fate of the acquisition.
In the end, the Fed was unconvinced that the union of two midsize players would cause the next Wall Street crisis.
“We are very pleased that the Federal Reserve has approved our acquisition,” a Capital One spokeswoman, Tatiana Stead, said in a statement.
The bank, according to Ms. Stead, plans to close the deal in the next few days. It will have 90 days to outline its plan to strengthen its compliance and other risk-management controls.
The legacy of the financial crisis has loomed over Capital One’s bid to buy ING Direct. As part of the Dodd-Frank financial regulatory overhaul, the Fed must now weigh the potential hazards of big bank mergers and kill any deal in which the systemic risks outweigh the rewards.
The Capital One takeover presented the first major test case.
With the addition of ING’s online banking unit in the United States, Capital One will transform into the fifth largest bank by deposits. The bank does not currently rank in the top 10. The combined institutions will have more than $200 billion in deposits, making it bigger than regional powerhouses like PNC and TD Bank.
The potential for such a seismic shift has alarmed community bankers and consumer advocates who cast the deal as a risk to taxpayers and painted Capital One as an aggressive subprime lender. By blessing the deal, the Fed delivered a blow to such critics, including the National Community Reinvestment Coalition and the Rev. Jesse L. Jackson, capping an unusually contentious eight-month battle that featured multiple public hearings and fiery debates.
“We’re extremely disappointed in today’s decision,” said John Taylor, head of the community coalition, adding that his group was considering challenging the decision. “It appears the Federal Reserve waited until Valentine’s Day to give Capital One a box of chocolates.”
Capital One argued that consumers would reap the benefits of the deal, as the bank rolls out a broader range of loan products to ING Direct customers.
“With the Fed’s approval, Capital One has the opportunity to build upon the strong foundation of ING Direct for the benefit of our customers, associates, shareholders and local communities,” said Ms. Stead, the bank spokeswoman.
In June, Capital One agreed to pay $6.2 billion in cash for ING Direct USA. Under the terms of the deal, Capital One would also issue $2.8 billion worth of new shares to ING, giving the Dutch firm a 9.9 percent stake.
It is the latest move by Capital One to build a national banking franchise, in an effort to expand beyond credit cards.
In the midst of the housing and financial crisis, the bank scooped up three regional firms, including Chevy Chase Bank in Maryland and North Fork Bank’s mortgage business in California. Last August, Capital One announced plans to buy HSBC’s American credit card business for $2.6 billion. Capital One expects the HSBC acquisition will gain regulatory approval in the second quarter of 2012.
But as the bank ballooned in recent years, it became caught in the crosshairs of a public outcry. Capital One has had to contend with loyal ING customers who feared change.
Competitors and consumer groups also assailed the acquisition spree for creating a subprime lending giant, a notion that Capital One disputes. About a third of Capital One’s credit card portfolio carries the subprime label, defined as loans to borrowers with credit scores below 660, according to the company.
Moving to blunt the criticism, Capital One offered some concessions in its bid for ING Direct. 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.
But the deal continued to draw ire. A bigger bank, critics reckoned, 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.
Capital One used the hearings to defend its record. While Wall Street banks deal in derivatives and other risky businesses, Capital One said it focused on mom-and-pop consumers, leaving it immune to the volatility of the investment banking business.
The Fed appeared to agree.
In a 40-page order, the Fed detailed its standards for systemically risky acquisitions. The Fed analyzed the size and complexity of Capital One and ING Direct, the interconnectedness between 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 how difficult it would be to unwind the combined banks should they 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 said.