The recent financial crisis is illustrating how mergers and acquisitions are increasingly being brought to the forefront. Part of the reason for this, is because the too big to fail mentality has created a number of corporations so large. That if they were to go bankrupt, there would be inevitable ripple effects on the economy. For many financial institutions, this is one of the reasons why the government was offering them some kind of TARP assistance three years ago. However, with the passage of the Dodd Frank Act; the Federal Reserve is: playing an important role in looking at the kinds of transactions. Then determining if this would create a firm so large that it could pose a threat to the financial system. The first major test of these new powers and the law itself is with the Capital One – ING deal.
A Worried Federal Reserve
In a letter dated August 29th the Federal Reserve expressed concerns, that the proposed merger between the two companies would create another mega money center bank. As, they would have operations in everything ranging from: credit cards to brokerage services. At the heart of their concerns, is that Capital One will be merging their existing operations with several that are overlapping for ING. Most notably: their investment advisory business and consumer credit card operations through HSBC (a subsidiary). This is troubling for regulators, because Capital One currently is one of the largest firms that are involved in these activities around the country. As, the proposed merger would give them even greater amounts of influence in: the markets and to the financial system by creating the fifth largest bank. This is raising red flags about if this kind of entity could pose a major threat to the economy at some point in the future.
Capitol One’s Response
Commenting about these issues Capital One responded to the Fed by saying, “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. We will remain a traditional bank and hold just 1.5% of total U.S. deposits.”
However, many different consumer groups have expressed concerns that these kinds of mergers would create more institutions that could pose a larger threat to the economy if they were allowed to happen. Evidence of this can be seen with observations from the National Community Reinvestment Coalition who said, “In the past, there was this carte blanche adherence to the notion that bigger is better. However, because of the year-old financial-overhaul law, regulators are toughening their oversight to make sure they don’t allow for the creation of a riskier financial institution that taxpayers could be on the hook for.”
This is significant, because it is illustrating how the various provisions of Frank Dodd are being interpreted differently by the banking industry and consumer groups. As, financial institutions believe that they are in line with the various provisions of the law based upon select aspects of their business. While consumer groups think, that regulators need to be critical of the total transactions that are taking place.
The Ultimate Task of the Federal Reserve
As a result, this merger is being used as a test case in determining how the Fed will view various acquisitions in the future. This means that they are taking a very careful look at: what this will mean to the financial system and the possible risks that this combined entity will pose to the economy. Therefore, this is highlighting the ways they will be examining all of the different aspects of businesses and if the company has too much dominance in certain areas (when it comes to the world of finance). This is the point that they will be able to accurately assess the risks and how these kinds of transactions need to be structured.