What does Capital One have in common with Goldman Sachs, Morgan Stanley and Bank of America?
It may soon be dubbed as yet another bank that is “too big to fail.”
Capital One is in the middle of a $9.2 billion purchase of the online bank, ING Direct, which, if successful, could potentially make Capital One (with currently over $200 billion in deposits), the fifth largest bank in the United States.
However, prior to obtaining clearance for this acquisition, it would require permission from Federal Reserve, Capital One’s chief regulator. As per the Dodd-Frank Act, the Fed must determine the severity of risk that is present should the institutions combine. If too much risk is deemed present, and outweighs the benefits, the deal must be blocked.
According to the Federal Reserve, the definition of a “risky acquisition” has yet to be determined, and the decision with respect to Capital One is a tricky one – for it can set the standard on Dodd-Frank’s relevance to the nation’s biggest banks.
According to New York Times Dealbook writer, Steven M. Davidoff, “It needs to put forth a definition that ensures that the banking system is adequately monitored under the current definition for systemic risk. The rules it makes for Capital One could govern the entire banking system going forward. For these rules will natural extend to other Dodd-Frank provisions that allow the Fed to break up banks that pose a similar threat.”
The National Community Reinvestment Coalition, a leading Community interest group, oppose the transaction, attesting that it is already categorized under Dodd Frank Act as a systemically significant bank due to its worth of over $50 billion in assets, and should not be permitted to increase in asset size.
In addition, they argue that such acquisition will help Capital One take advantage of ING Direct’s deposits for credit card issuances, resulting in an even higher interest rate for those who are already financially struggling.
Conversely, Capital One’s proposal to the Fed insisted that even after the ING Direct acquisition, and the HSBC deal to acquire $30 million of its credit card portfolio, which was announced earlier this year, the Bank size would still pale in comparison with Bank of America (with $2.24 trillion in assets). Therefore, systemic risk remains low. Additionally, the financial institution does not provide complex banking services, like its fairly larger counterparts.
As a result, in an effort to make a determination on what really constitutes a “systemically risky acquisition”, Dodd-Frank Massachusetts representative Barney Frank, has submitted a request that the Federal Reserve hold public hearings for comment on the matter.
Until the definition of such is revealed, the question remains, “What type of banking system do we want?”
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