Report: Fed Concerned Capital One/ING Direct Merger Could Create Another Too-Big-To-Fail Bank

Back in July, Capital One announced a deal to purchase online bank ING Direct USA for around $9 billion. And even though Cap One tried hard to quell ING customers’ screams of “nooooooo,” the folks at the Federal Reserve are reportedly a bit worried that the deal might create another bank so big that its failure would have a disastrous impact on the economy.

According to the Wall Street Journal, the Fed has sent Capital One some question about the deal to help it determine how potentially problematic the ING Direct purchase could be if things someday head south:

Capital One, the ninth-largest bank in the U.S. by deposits, was pressed by the Fed in an Aug. 29 letter for details about “the nature and dollar volume” of financial activities in which both companies are involved. The two-page letter also listed various financial markets that were troubled during the financial crisis, such as commercial paper, mortgage-backed securities, lending to foreign institutions through foreign-exchange swaps and derivatives trading.

Fed officials asked Capital One to describe any markets where the McLean, Va., bank and ING Direct USA are market makers and to report information about exposure to counterparties.

Banking insiders tell the Journal it can’t remember the Fed asking such probing questions about a bank merger. But last year’s slate of new bank regulations now require the Fed to consider the “too big to fail” factor in such deals.

Reps for Capital One tell the Journal the bank has since responded to the Fed’s questions and that the responses show “we are not engaged in the kind or level of activities that raise the systemic risk issues that the Dodd-Frank Act sought to address.”

The combined banks would allow Capital One to leapfrog its competition to become the fifth-largest U.S. bank by deposits, with assets of around $300 billion.

Fed Scrutinizes Capital One-ING Deal [WSJ]