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ING approval lays out Fed criteria for big-bank mergers

by Ira Teinowitz in Washington | Published February 15, 2012 at 4:11 PM

In approving Capital One Financial Corp.'s $9 billion deal for Netherlands-based ING Groep NV's U.S. online banking division, the Federal Reserve Board on Tuesday, Feb. 14, unveiled its most detailed road map yet on how it intends to weigh too-big-to-fail risks in future bank deals.

The Fed also made clear that it intends to go beyond the international Basel standards in evaluating potential risks in U.S. deals.

The guidance was included in the 40-page order approving the merger and is likely to be closely scrutinized by many in the banking and antitrust communities. The Fed laid out a scenario when it would reject a bank deal because of systemic risk but said the Capital One deal for ING Direct, despite creating the fifth-largest bank by deposit size, didn't meet that test.

The Fed did, however, require Capital One to take some steps to ensure it could better evaluate risk and also to boost local lending but said that the combination of the credit card company known for its "What's in your wallet?" ad campaign and the large Internet bank would present risk factors.

Several consumer groups had opposed the deal, saying the Fed should be discouraging the formation of more too-big-to-fail institutions. The consumer groups also challenged McLean, Va.-based Capital One's local lending record.

The Capital One deal is the second big bank deal the Fed has reviewed since the 2010 Dodd-Frank Act required it to consider U.S. financial stability, particularly whether a deal would create another too-big-to-fail financial institution.

In December, when the Fed approved PNC Financial Services Group Inc.'s $3.45 billion takeover of the U.S. retail operations of the Royal Bank of Canada, it offered some discussion of how risk would be evaluated. This time it went much further.

Bradley K. Sabel, co-head of Shearman & Sterling LLP's financial institutions advisory and financial regulatory practice group, said the additional detail appeared to be a Fed effort to offer additional guidance about what it would do going forward. "They figured this would be the one that would serve as the template," he said.

Sabel said the details clarified the procedures the Fed would follow and the only surprise was a declaration that it could have different standards for risk than the Basel standards.

The guidance included the expectation that the board will generally have a negative view of a merger if the failure of the combined firm "would likely impair financial intermediation or financial market functions so as to inflict material damage on the broader economy."

The Fed said that damage could occur in a variety of ways, but that it would be watching for deals that could seriously compromise the ability of financial institutions to either conduct regular business or obtain credit or financial services.

While the size of the resulting firm would be one factor, so would availability of substitute providers, interconnectedness of the resulting firms with the banking and financial system and degree to which a deal adds complexity to the financial system or creates cross-border problems. The Fed said that some qualitative factors -- including the opaqueness and complexity of an institution's internal structure and the difficulty of resolving a firm were it to fail -- would also play a role.

The Fed made a point of differentiating its risk factors from Basel's.

"The board's methodology is compatible with the Basel Committee's approach but differs in three important ways. First, the board will consider a broader, somewhat different set of metrics. Second, the board will consider the systemic footprint of the resulting firm. Third, under the board's approach, it is possible that even a single category of metrics indicates that a resulting firm would pose a significant risk, the board may determine that there is a significant risk [to stability]."

The Fed said it approved Capital One's deal despite the size of the resulting institution because neither firm engages in the kind of very complex transactions that could pose risk to the financial system. "The board's level of concern would be greater if the structure and activities of Capital One were sufficiently complex that [its failure] would be difficult to resolve quickly," the board said.

The National Community Reinvestment Coalition, which was one of the consumer groups that opposed the deal, ripped the Fed for its decision, suggesting the conditions imposed were meaningless.

"We're extremely disappointed," NCRC president and chief executive John Taylor said. "We changed the laws governing the financial system, but the real question is whether or not regulators have learned from their mistakes and changed the way bank oversight actually works. Based on [the] decision, the answer to that question is no.

"To approve this acquisition without meaningful conditions confirms that it is business as usual at the Federal Reserve," he said.

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