Capital One Financial Corp. on Tuesday cleared the final regulatory approval needed to buy ING Direct USA for $9 billion after nine months of talks.
The Federal Reserve Board announced its approval of the acquisition by the McLean, Va.-based credit card company after U.S. markets closed, making it the fifth largest institution by deposit size with roughly $210 billion in consolidated deposits.
After careful consideration of several factors, the Fed said the firm would not pose a systemic risk to either the U.S. banking or financial systems and would bring a public benefit to consumers.
"Based on all the facts of record, including the commitments and conditions noted in this case, the Board has concluded that consummation of the proposal can reasonably be expected to produce public benefits that would outweigh any likely adverse effects," the Fed's order says.
In its 40-page order, the Fed went into detail about the factors — size, interconnectedness, complexity, and substitutability — it used to determine whether the firm would pose risk.
Additionally, the governors considered qualitative factors like "opaqueness and complexity" which are better indicators of how difficult it is to unwind a firm.
The Fed's approach was similar to the one taken last year by global regulators in identifying the 29 globally systemically important firms, but it differed in three key ways, including looking at a broader set of metrics.
Going through each criterion, starting with size, the Fed laid out its rationale for why the firm was safe in that category.
For example, based on deposits, Capital One would become the fifth largest U.S. institution, holding 2.3% of the total. The combined entity would also be between the 14th and 20th largest U.S. institution based on assets, liabilities and leverage exposure, between 1.1% and 1.6% of the entire U.S. financial system.
That's well under the limit imposed by Congress, which specified a maximum nationwide deposit level of 10% and a nationwide liabilities limit of 10% on potential combinations by banking organizations, the Fed noted.
"These measures suggest that, although the combined organization would be large on an absolute basis, its shares of [U.S. financial services'] assets, liabilities, leverage exposures, and deposits would remain modest, and its shares of national deposits and liabilities would fall well below the 10 percent limitations set by Congress," the Fed order said.
Next it specified that while Capital One would become the fourth largest provider of credit cards in the U.S. following approval of its acquisition of HSBC's credit card assets, its market share would not be disruptive in the event of a stress scenario.
Capital One's acquisition of HSBC is a separate transaction under review by another regulator, but if approved would lift the company's share of outstanding credit card balances in the U.S. to 11.8%, up from 7.7%.
"Capital One's share of credit card loans does not appear to be substantial enough to cause significant disruptions in the supply of credit card loans if Capital One were to experience distress, due to the availability of substitute providers that could assume Capital One's business," according to the Fed's order.
Additionally, the Fed said Capital One's activities wouldn't pose significant risk to other institutions and are not overly complex.
"Capital One and [ING] do not engage in complex activities, such as being a core clearing and settlement organization for critical financial markets, that might complicate the resolution process by increasing the complexity, costs, or timeframes involved in a resolution," the Fed's order said.
Taking into consideration that international regulators required the sale of the online banking unit; the Fed said the deal would offer ING customers a wider array of products, including 30-year fixed rate mortgages, full-access checking accounts, as well as auto, commercial and small business loans.
Those customers would also have access to Capital One's branch locations and ATM network.
Additionally, Capital One would have access to low-cost deposits, helping to diversify the credit card company's funding base, the central bank said.
Still, the Fed did place certain conditions on the deal, including ensuring that it would take specific steps to ensure that the combined company is managed appropriately according to its "new size and complexity."
"The various consumer complaints and legal actions against Capital One referenced in this order suggest that Capital One's processes and procedures for enterprise-wide compliance transaction testing could be improved," the Fed's order said.
The Fed is asking Capital One to change its procedures by adopting a plan within 90 days that will be approved by the Federal Reserve Bank of Richmond.
Community groups, many of which had lobbied the Fed to reject the deal, expressed disappointment with the Fed's decision.
"It appears the Federal Reserve waited until Valentine's Day to give Capital One a box of chocolates," said John Taylor, president of National Community Reinvestment Coalition. "It is shocking to us that the Federal Reserve did not respond to legitimate concerns about Capital One's record serving minorities and working class people, nor did they explain how this deal would benefit the public in a clearly significant way.
The group is considering its options to challenge the decision.
For its part, Capital One welcomed the decision, which had been delayed twice over the past week. The company expects the deal to close in the coming days as the details are finalized.
"We are very pleased that the Federal Reserve has approved our acquisition of ING Direct," said Julie Rakes, a spokeswoman for the company. "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."