Capital One: Another Too-Big-To-Fail Bank?

By Bartlett Naylor

With the American economy continuing to stumble amid the debris from the Wall Street crash, on February 14 the Federal Reserve added to the problem with the creation of the nation’s fifth largest bank, approving the acquisition by Capital One Financial Corp. of ING Bank.

Step back three years and five months to September 2008. President Bush’s Treasury Secretary frightened members of Congress about financial institutions so interconnected and “too big to fail” that lawmakers approved a taxpayer-funded bank bailout of $700 billion, an appropriation unprecedented in world history.

Not $698 million, or $721,454,231, but a round figure. The supporting budget memo spanned a few pages. As the first-hand accounts about that episode document, Treasury officials essentially conjured up the $700 million figure.
Congress responded with the Dodd-Frank Wall Street Reform Act to ensure against future bailouts. In numerous provisions, Dodd-Frank directed the banking agencies to measure risk from size, interconnectedness, complexity and other frailties that brought down the financial system. No more conjuring. And Dodd-Frank equipped agencies with tools to reduce these problems.
But in the Federal Reserve’s 40-page order justifying its decision to approve the Capital One acquisition, these factors absorb a scant eight, double-spaced pages. The conjuring continues. Most troubling, the Fed appears to argue from a bias to approve the deal, and then to emphasize why size, complexity or other factors are minimal.

The Capital One acquisition will create the nation’s fifth largest bank, as measured by deposits. But the Fed dismisses this size by asserting that the deposits would only aggregate to 2.3% of the nation’s deposits. Its quantitative analysis consists of describing this level as “modest.” Missing from the Fed’s analysis is exactly why 2.3% is “modest.” Such a figure certainly isn’t modest when compared with the FDIC’s Deposit Insurance Fund (DIF), which is congressionally mandated only to maintain a balance of 1.15 percent of outstanding insured deposits. In fact, the DIF currently maintains a negative balance.

The Fed acknowledges that Capital One becomes the fourth largest provider of credit cards. That’s apparently no problem, the Fed observes, because there would be “three competing credit card lenders” with larger portfolios. Based on this shallow, beside-the-point analysis, the Fed concludes that were Capital One “to experience distress,” there would “not appear to be … significant disruptions in the supply of credit card loans.”

What about the possibility of a credit card debt bubble? Regulators missed the housing bubble, where Wall Street clearly flooded the market with more financing than rational housing economics could withstand. Currently, homeowners sit on $750 billion more on mortgage debt than their homes are worth. Credit card debt stands at $800 billion currently. That’s 30 percent higher than 10 years ago and Americans are not making 30 percent more income. Capital One aggressively markets to subprime borrowers. Is it possible the firm and its larger peers are contributing to a culture of credit dependency?

Capital One’s reliance on securitization is so unimportant to the Fed it’s reduced to a footnote, despite the role securitization (or lack thereof) played in the financial crash. The system really melted down when lenders packaged the payments they receive from customers into bundles and sold them off to investors– obscuring the true risk in the bundles. Once the lender and investor’s oversight were separated, credit scrutiny by both parties was reduced. The Fed’s own supervision director once called elements of this securitization process an “abomination.” But the Fed’s footnote contends that “a number of factors align Capital One’s interest in ensuring sound underwriting of the underlying credit card accounts.” Such statements echo pre-crash reassurances.

Completely missing is any suggestion that the Fed performed a stress test, where it considered worst-case scenarios for Cap One, or how it would be affected by severe problems within the industry.

President Obama declared that “never again will America be held hostage by a bank that’s too big to fail.” The Fed’s analysis on Capital One does little to reassure Americans that this pledge can be honored.

[Image Credit: Hopefoote, Ambassador of the Wow, Flickr]

Bartlett Naylor is financial policy advocate for Public Citizen’s Congress Watch.

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2 responses

  1. Being that 75% of Capital One’s credit portfolio is “unsecured” credit card debt funded through deposits in FDIC insured accounts, I’d say Capital One poses a HUGE systemic risk to the banking system.  This point was argued in from of the Fed and they still rubber stamped this deal.  The promise by Capital One to create Jobs in the merger is a farse as well since Capital One is only MOVING staff from one state to another where tax incentives are guaranteed by the state of location.  Please see the multiple articles at for mor info.

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