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Big bank deals will worsen systemic risks and unfair competition, said the ICBA, which called for a moratorium while new regulations are in the works. Capital One argued the deal would create a safer company.
September 20 -
Denying the application would ice large banks, spook foreign owners and deprive the central bank of a key consolidation tool.
September 19 -
The Fed governor said systemic risk could be a factor, but not the entire reason an acquisition is rejected. His comments come as the central bank weighs whether to block the merger of Capital One and ING.
September 15
WASHINGTON — One of the most telling details about the Federal Reserve Board hearing on Capital One's proposed acquisition of ING Direct USA was the "open microphone" portion of the schedule.
It excluded the nearly nine hours, fourteen panels and three-page long roster of speakers that were to precede it.
And don't forget — there are still two more hearings, in Chicago and San Francisco, to go.
In truth, public hearings on mergers are more about blowing off steam or exacting a pound of flesh than they are about determining the outcome or sifting out truths.
The Fed is expected to approve the $9 billion deal, and the script Tuesday was a familiar one: Big company (Capital One) makes a large community reinvestment pledge before the hearing ($180 billion over 10 years); small banks grandstand against the deal; and big company lines up as many allies in the community as it can to offset the many, yet not overly powerful, opponents. The result, in this case, was two incongruous portraits of the credit card-heavy Capital One as it seeks to buy the U.S. online banking unit of ING Group.
On one hand, financial contributions by Capital One to organizations like Housing Action Council in the New York Metro area, which helps provide housing to low- and moderate-income borrowers, or institutions like the Goodwill of Greater Washington, which helps to train and employ people with disabilities in the D.C. Metro area, helped win both their endorsements and accolades.
"Goodwill was seeking to jumpstart the job training program at our Arlington career center, and in early 2006, the budding relationship was solidified with a significant financial investment by Capital One," said Catherine Meloy, president and CEO of Goodwill. "Capital One's commitment [is]… to make a positive, measurable impact on the region's most vulnerable population."
However, similar organizations painted a different picture.
"This is an environment where banks are less inclined to invest in lower-income communities and individual asset development programs often because of circumstantial credit score profiles and employment stability," said Charles Perry, chairman and executive director of PERICO Institute for Youth Development and Entrepreneurship. "Our experience is that banks do not willingly become partners with grassroots organizations … designed to help move generations of people out of poverty and toward economic opportunities for economic freedom."
Perry's disapproval of the pending merger was echoed by others who questioned the risks such a deal would pose to the overall financial system.
"You have a duty to deny Capital One's plan to buy ING Direct," said John Taylor, president at the National Community Reinvestment Coalition. "This is a toxic recipe for growth."
The Independent Community Bankers of America also strongly urged the Fed to block the deal.
"Our main concern with the acquisition today concerns systemic risk," said Christopher Cole, senior vice president and senior regulatory counsel for the ICBA said at the hearing. If the Fed approved the deal, it would add to the number of potentially "too-big-to-fail" banks that could be bailed out if there was another financial crisis.
Instead, the ICBA called for a moratorium on all acquisition of institutions with assets more than $100 billion until there is a regulatory apparatus to deal with systemically important financial institutions, including the submission of living wills, another round of stress testing and other requirements for SIFIs called for by the Dodd-Frank Act.
Till now, Cole said, regulators have not found "an accurate way to measure systemic risk nor have the regulators come up with a method to identify the nonbank SIFIs." Until it does, such deals should be barred even if it takes several years.
Earlier in the hearing, Capital One defended itself against such arguments, saying the proposed deal would in fact reduce systemic risk.
"The combined organization will remain a traditional consumer and commercial bank with none of the complexity or interconnectivity that the Dodd-Frank Act sought to address in ending the concept of too big to fail," said John Finneran, the general counsel of Capital One. "In fact, the acquisition of ING Direct will further reduce, rather than increase, any risk to the financial system, as well as the overall risk profiles of both institutions on a stand-alone basis."
Reiterating a point made last week by Fed Gov. Daniel Tarullo, Finneran said that Congress did not prohibit acquisitions by bank holding companies with $50 billion or more in total assets based only on systemic risk.
"Congress, instead, chose to continue requiring the appropriate federal banking agencies to evaluate a proposed acquisition on a case-by-case basis," said Finneran.
ING's general counsel, Kristine Wellman, told Fed officials the deal would help stimulate the economy. "ING Group believes that a combination with Capital One would create a strong, profitable and leading consumer banking company." Finneran said Capital One would be adding jobs this year.
Even with such assurances, there was a running list of faults of Capital One repeated on a number of occasions by various panelists.
Like the three pending state attorneys general investigations of credit card lending practices; active complaints at the Department of Housing and Urban Development for unfair lending practices; and claims that Capital One favors of higher-cost credit card lending than making loans to low- and moderate-income borrowers.
"Capital One's acquisition of ING is precisely the type of merger that imperils our economic health," said Charles Harris, executive director of the Housing Education and Economic Development, whose statement was read into the record at the hearing. "While our economic recovery from this crisis is still uncertain, Capital One wants to aggressively expand its subprime credit card business by acquiring ING's deposits and HSBC's subprime credit card portfolio."
Joshua Silver, vice president of research and policy at the NCRC, took that argument even further. He warned of another repeat of the 2008 financial crisis if the deal was approved by regulators.
"This is a moment in history. We must apply the lessons from the recent past," said Silver. "A singular focus on abusive mortgage lending was so disastrous for Countrywide, Washington Mutual and several other financial institutions, that they're failure was a significant factor in plunging the U.S. and global economy into a great recession. Likewise, Capital One as a monoline and subprime credit card lender, poses a systemic risk to the United States economy, especially if it's allowed to grow by leaps and bounds. The Visigoths would not only pillage our wallets, but our economy. Let's stop this not before it's too late. Let us not have another double-dip recession."
Others questioned whether the two companies would blend well together given the loyalty of ING's customers.
"Will the two cultures mix well to the benefit of ING savers? Will Capital One still offer the attractive savings rate that ING promoted to build its 7.7 million customer base in the U.S.?" Perry asked.
Finneran said that Capital One would keep ING as a separate savings plan for some time. Of course, he noted, that could change over time.
