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After nine months of consideration, the Fed said the merger of Capital One with ING Direct USA did not pose a systemic threat, but placed conditions on the deal to ensure the combined institution did not become one.
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Market watchers would have been stunned if regulators blocked Capital One Financial Corp. from buying ING Direct USA. The Federal Reserve Board did give its green light late Tuesday afternoon, but its delays in reaching the decision underscored the political obstacles facing big merger deals in the postcrisis era.
February 14
Critics filed 575 official complaints against Capital One Financial Corp.'s plan to buy the country's biggest online bank, but just one gripe stuck.
The McLean, Va. credit card lender has been a serial screw-up when it comes to getting delinquent borrowers to pay up, the Federal Reserve Board found.
The Fed this week
Systems glitches related to a string of precrisis acquisitions were the main reason for those debt-collection mishaps. Regulators want Capital One to get its compliance and transactions functions up to snuff as it prepares to pay $9 billion for ING Direct's 7 million customers and $80 billion of deposits.
The mandate should not be too much a burden for the company and Chief Executive Richard Fairbank, the architect of a deal spree that has Capital One poised to become the country's fourth-biggest credit card provider and one of its largest deposit holders, experts say. Capital One basically has to set up a back-office testing system and conduct an annual review of that system for at least three years.
"I think it is reasonable. It's manageable. It is not for show," says James Kaplan, chair of the Midwest banking practice of the law firm DLA Piper in Chicago. There was a general sense that the financial crisis was "caused by a failure of risk management and compliance internally," Kaplan said.
Capital One's debt-collecting missteps were the only serious fault the Fed found with the 720-branch lender in its review of the deal, the largest to date under new rules aimed at blocking the creation of systemically risky conglomerates.
The bulk of its 40-page review delivers a glowing endorsement of Capital One and its back-to-back deals for ING Direct and the
Capital One is "well managed" and has a "demonstrated record of successfully integrating large organizations," the report concludes. "Management has the experience and resources" to buy ING Direct and run it "in a safe and sound manner."
Capital One declined to comment because the ING Direct deal has not closed yet, a spokeswoman said Wednesday. Its stock price rose to its highest level in nearly seven months on news of the Fed's approval. In heavy trading, its shares closed Wednesday at $49.19, up 2.5% from a day earlier, in an otherwise down day for bank stocks.
Consumer rights and fair-lending advocates
Most complaints did not jibe with reality, according to the order.
Critics alleged that Capital One charges illegal overdraft fees. The Fed said that its policies are "consistent" with the law and that it "provides consumer financial education about avoiding overdrafts." Others said Capital One employed "false, misleading or deceptive" practices to sell credit cards. The Fed said that it restricts customers to two general-purpose cards, and does not issue so-called "high-fee" cards.
There were charges that Capital One is stingy with loans to women, poor people and minorities. Though federal loan data showed it made fewer home loans to minorities in California and Chicago than elsewhere, the disparity was not great enough to show it "excluded or imposed higher costs on any group," the Fed said.
But there were clearly faults with Capital One's back-office systems.
Various consumer complaints and legal actions against Capital One suggest its procedures for "compliance transaction testing could be improved," the Fed said.
Last year Capital One mistakenly garnished the wages of a small number of its depositors. In 2008 it had to fix its auto finance processing systems after settling a number of class actions regarding its automobile seizure practices. And in 2007 it admitted that it had sought claims on people that had discharged their debts by filing for bankruptcy.
Experts blamed those errors on growing pains. Capital One is a credit card bank that began buying deposit banks about seven years ago to wean itself off of wholesale funding. It bought Hibernia Corp. in 2005, North Fork Bancorp in 2006 and Chevy Chase Bank in 2009.
Marty Mosby, an analyst with Guggenheim Securities LLC, said Capital One has struggled with glitches in managing those banks' legacy commercial mortgages, small business loans and checking accounts.
Capital One's
"They can get their arms wrapped around it," Mosby said. "It's manageable — but you have to have a focus on it. It's not something you can take for granted."
