This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Capital One to Test Fed's 'Too Big To Fail' Cred

NEW YORK( TheStreet) - "Too big to fail" will get better definition as the Federal Reserve rules on Capital One Financial's (COF - Get Report) proposed $9 billion acquisition of ING's (ING - Get Report) U.S. online banking unit ING Direct on Monday, following a delay.

If the Fed were to reject the acquisition, which would make Capital One the fifth largest bank by assets in the U.S. to JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C), it would signal that the "systemically important financial institution" designation of the 2010 Dodd Frank Act may extend to a new range of large but not titanic sized U.S. lenders, putting industry consolidation in doubt. For Capital One, the deal breakup would cast a pall on its growth prospects.
Federal Reserve Chairman Ben Bernanke

The June deal is the largest U.S. bank acquisition yet to face regulatory inquiry into mergers that considers systemic risk in consolidation attempts, as post-crisis laws like the Dodd Frank Act seek to make the banking system less of a threat to the wider economy.

During the financial crisis, a string of bank failures precipitated hundreds of billions in bailouts and instability caused a near freeze of credit in the U.S. Still, the definition of what is a "systemically important" bank and what is just a large lender has not been defined by regulators, with serious implications to bank capital costs, earnings growth and M&A activity.

"This deal could be seen as a marker for what the Fed perceives is too big to fail," says KBW bank analyst Sanjay Sakhrani of the Federal Reserve's pending decision on the Capital One acquisition.

Sakhrani says that if the merger were to be blocked, it would signal that large regional lenders like U.S. Bancorp (USB - Get Report) and PNC Financial (PNC - Get Report) are also systemically important, making attempts at growth through acquisition unlikely.

A rejection would also be negative for M&A across the bank space, adds Sakhrani, who believes that the deal will be approved because, "it's a combination of two pretty simple banks that use deposits to make loans to consumers."

The Federal Reserve was expected to rule on the merger on Wednesday, but pushed a decision to next Monday. Capital One attributed the delay to a "scheduling conflict" in a statement.

On Wednesday, the National Community Reinvestment Coalition said hundreds of callers to the Federal Reserve expressed concern on the deal. The NCRC opposes the tie-up, calling Capital One a risky lender with large subprime holdings. The group has also asked for the Federal Reserve to be more transparent in its methodology for determining systemically important banks.

If the Federal Reserve were to approve a deal, it could signify that large banks without significant securities and trading operations can still make transformative acquisitions in the wake of post-crisis regulation. About what represents "too big to fail", FBR Capital Markets analyst Scott Valentin says "I think it would come down to the size and scale of the capital markets business." He expects the deal to pass because of Capital One's ability to bolster credit extension and its [business] of taking in deposits to make loans, or "spread based banking."

Capital One's shares have slightly outperformed the Financial Select Sector SPDR (XLF) in 2012, even as disappointing earnings weigh on share gains. In 2011, Capital One shares significantly outperformed the sector, as it unveiled an aggressive acquisitions strategy.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

For more on Capital One shares, see the 10 most profitable bank stocks.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
RBC $49.65 -1.68%
BBT $31.27 -0.19%
COF $62.24 -0.29%
ING $10.96 2.62%
PNC $81.51 -0.84%


Chart of I:DJI
DOW 15,914.74 -99.64 -0.62%
S&P 500 1,851.86 -0.35 -0.02%
NASDAQ 4,283.5920 +14.8290 0.35%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs