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Capital One acquisition to test Dodd-Frank

The Federal Reserve’s reaction to Capital One’s proposed $9.2 billion dollar purchase of the online bank ING Direct could have a broad impact on what the Dodd-Frank Act means for larger banks in the United States.

The purchase would make Capital One the fifth-largest bank in the United States with more than $200 billion in deposits, according to NYTimes.com. Before the deal can become official, the Fed must weigh the systemic risk of the combined company.

If the Fed decides the risk outweighs the benefits, the deal will be prohibited.

Community interest groups argue that since Capital One has more than $50 billion in assets without the deal, it is already systemically important, or too big to fail, and the deal should not be allowed.

These groups claim that Capital One will use ING Direct’s deposits to finance its credit card business and that Capital One’s recent acquisition of HSBC’s $30 billion credit card portfolio in the United States will make it the fifth-largest credit card issuer, boosting its market share about nine percent, according to NYTimes.com.

The National Community Reinvestment Coalition suggested that this will result in ever more credit cards with high interest rates being pushed to American consumers.

Capital One said that compared to Bank of America, which has $2.26 trillion in assets, their recent acquisitions would not increase systemic risks, according to NYTimes.com.

Capital One also said that it simply takes deposits and lends money primarily on credit cards and that it does not engage in risky banking practices like writing derivatives.

The Fed’s decision on what constitutes a systemically risky acquisition could govern the entire banking system going forward, according to NYTimes.com.

Under the Dodd-Frank Act, the Fed must decide what constitutes a systemically risky acquisition and has the authority to break up banks that pose threats to the economy.

Rep. Barney Frank (D-Mass.) has asked the Fed to hold public hearings on the matter but no substantial action has been taken on the issue to date.

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