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The Federal Reserve Board said Friday it will hold three public hearings on Capital One Financial Corp.'s proposed $9 billion purchase of online bank ING Direct USA.
August 26 -
Community groups in California are protesting Capital One Financial Corp.'s planned acquisition of ING Direct, saying the banks have done little to help low-income communities in a state that has accounted for a large chunk of their profits.
August 22 -
Traditionally, objections to a merger deal are primarily fought over Community Reinvestment Act and consumer protection concerns. But the Massachusetts Democrat raised a new concern by citing fears on the size of the combined bank.
August 18
WASHINGTON — Federal Reserve Board Gov. Daniel Tarullo said Thursday the Fed would not halt any proposed merger due solely to increased risk to the financial system.
"While Congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks," Tarullo said in a speech at a Fed conference on systemic risk.
His remarks come as the central bank is planning to hold the first of three hearings next Tuesday on Capital One Financial Corp.'s proposed $9 billion acquisition of ING Direct USA.
The pending acquisition being reviewed by the Fed has sparked criticism from community groups and affordable housing advocates who argue that the deal would create another too-big-to-fail financial institution. Capital One has said the deal's benefits would be significant to its customers and the economy. It has also insisted it plans to remain a traditional bank that has "none of the complexity that the Dodd-Frank reform bill addressed in ending too-big-to-fail."
Tarullo's comments suggest that an argument to block the merger that is based solely on Cap One's risk to the system is unlikely to sway the central bank.
While Congress has said an increase in systemic risk may be added to the list of adverse effects of a merger, it is not the only factor the central bank must consider, according to Tarullo. Instead, the Fed must weigh all the costs and benefits of a merger before deciding whether it will be approved.
"If, for example, there are few indications that scale or scope efficiencies would be gained, then anticipated adverse effects on systemic stability could be expected to have a greater impact on our own ultimate decision," said Tarullo. "If, on the other hand, there are genuine scale or scope efficiencies to be realized, then a more complicated set of trade-offs may be needed."
Speaking to an audience of academics, Tarullo pointed to a number of areas where more research is needed to help identify potential areas of systemic risk to better inform policymaking.
"The more developed our knowledge about economies of scale and scope in large financial conglomerates becomes, the more nuanced an analysis of these effects we will be able to make," said Tarullo.
He said such research would also help the Federal Deposit Insurance Corp. as it prepares for a possible large firm resolution in the event of a crisis. Resolution plans, he said, that "seek to preserve the scope economies even as a firm is dismembered might result in better liquidation outcomes," he said. "Both these examples suggest how regulators might, in certain circumstances, be required to make trade-offs between systemic risk and efficiency considerations."
But Tarullo also raised concerns about possible international discrepancies in dealing with the problem of too big to fail. While some nations might try to limit the size or structure of firms to curb systemic risk, others will not go as far, giving their institutions a competitive advantage.
Creation of the capital surcharge for globally systemically important institutions by the Basel Committee on Banking Supervision, he said, "should allay this concern but, depending on national choices associated with systemic risk mitigation, might not eliminate it."
That's why he stressed the importance of conducting research on how significant these trade-offs might be. Even so, he acknowledged how such studies present some practical challenges.
Additionally, he cited two other key areas that need more research including identifying how larger financial firms compete and cooperate with each other; and how market structures can impact firm incentives and impose externalities on the financial system.
"Understanding the role of cooperation among financial conglomerates that are interconnected through counterparty relationships and correlated exposures may be challenging, but it could be quite important for effective macroprudential regulation," said Tarullo.
Regulators, he said, must also weigh how the new resolution framework created under Dodd-Frank will impact "market participants'' belief about what will happen in the case of distress at a large financial institution, and consequently, how cooperative behavior among financial counterparties might change."
That's why requiring a living will could allow other firms to better gauge the consequences in the event of a failure, and potentially reduce the cost of uncertainty for those firms.
"This is obviously a complex issue, with potentially different conclusions depending on the context of a specific regulatory system and industry structure," said Tarullo. "But pursuit of this line of inquiry might yield notable policy implications."
