United States: Federal Reserve Board Confirms Template For Financial Stability Test: Board's Way Or The Highway

Last Updated: March 1 2012
Article by Michael E. Bleier and Lauren A. Abbott

On February 14, 2012, the Federal Reserve Board ("Board") announced its approval of Capital One Financial Corporation ("Capital One") to acquire the shares of ING Bank, fsb ("ING"). In its order approving the acquisition, the Board reaffirmed its test for determining financial stability in light of the new criteria required by Dodd-Frank to the analysis of expansion applications pursuant to the Bank Holding Company Act (12 U.S.C. §§ 1842 and 1843) ("BHC Act"), which was first utilized by the Board in its order approving the merger of PNC Bank and RBC Bank. The Capital One order reiterated the template of criteria the Board would examine to determine financial stability. It also illustrated that nonbank acquisitions would be subject to the same test for financial stability as bank acquisitions. In addition, in the Capital One order, the Board specifically distinguishes itself from the Basel Committee in its analysis of global systemically important banks ("GSIBs").

The Parties Involved

Capital One, headquartered in McLean, Va., will acquire ING of Wilmington, Del. and, by doing so, indirectly acquire ShareBuilder Advisors, LLC and ING Direct Investing, both of Seattle, Wash. At the time of application, Capital One had total consolidated assets of $200 billion and was the 24th largest depository organization in the United States, controlling deposits of $127 billion. At the time of application, ING had total consolidated assets of $90 billion and was the 17th largest depository organization in the United States, controlling deposits of approximately $82 billion. As a result of the acquisition, Capital One will become the fifth-largest depository organization in the United States and the 20th largest depository organization by asset size.

Financial Stability

On December 19, 2011, the Board issued its first order under the new Dodd-Frank regulatory requirements approving the acquisition by PNC Bank of RBC Bank. The PNC Bank order set forth a framework for analyzing the financial stability of proposed acquisitions between financial institutions. In that order, the Board set forth a template of six factors to analyze relating to financial stability. The PNC Bank order was discussed in Reed Smith's Client Alert No. 2012-012. A copy of that analysis is attached.

The Capital One order confirms that the Board will analyze financial stability criteria for both bank and nonbank acquisitions. The Capital One acquisition involved a thrift and, therefore, the Board issued its approval pursuant to sections 4(c)(8) and 4(j) of the BHC Act.

The Capital One order is more comprehensive than the PNC Bank order. This is in part because of the fact that the Board received a significant number of public comments regarding the proposed acquisition.1 In total, the Board received 915 public comments from individuals and organizations regarding the proposed acquisition, a large number of which were opposed to certain aspects of the proposal and expressed concern about the impact the proposed acquisition would have on the financial stability of the U.S. banking system.2 In determining whether to approve a bank or nonbank acquisition under the BHC Act, the Board's decision must set out the rationale for its decision in sufficient detail so that its ruling is not overturned on appeal by a court of law. Section 9 of the BHC Act (12 U.S.C. § 1848) provides that any party that has been aggrieved by an order of the Board may appeal to the U.S. Court of Appeals.3 A court will uphold the Board's decision so long as the Board's decision is "supported by substantial evidence."4 Therefore, the Board must take the time to analyze and respond to the comments so that there is a thorough record that sets forth the basis for the Board's decision, which would be upheld if it was ever subject to judicial review.

Community Impact

As part of the approval process for the proposed acquisition of a nonbank entity by a banking institution, the Board must examine the benefits to the community as part of section 4(j)(2)(A) of the BHC Act, as well as section 604(e) of the Dodd-Frank Act. The commenters that opposed the approval were critical of the performance of both Capital One and ING under the Community Reinvestment Act ("CRA").5 Specifically, 575 individuals and groups expressed concern with the mortgage, small business, and consumer-lending records of both Capital One and ING. In evaluating the CRA performance of both companies, the Board analyzed the comments, supplemental filings by the companies, and confidential information obtained from other federal agencies. Upon completion of its analysis of section 4(j)(2)(A) of the BHC Act and the impact on the community, the Board determined that the CRA performance records of both companies were such that the proposal should be approved.

Risk Management

The Board determined that Capital One needed to improve its "risk-management systems and policies to account for the size, complexity, and diversification of the business lines that would result from the acquisition [of ING]." The Board instructed Capital One to adopt and submit a plan to make these improvements to the Federal Reserve Bank of Richmond within 90 days of the order, as well as (1) provide for periodic reporting to management and the Audit and Risk committee of the board of directors for Capital One, (2) provide improved employee training, and (3) require an annual review through an internal audit of the implementation of these new policies and procedures for the next three years.

In the PNC Bank order, the Board articulated the six criteria it would examine to determine if a proposed acquisition would cause a more concentrated risk to the "stability of the United States banking or financial system." These criteria were in addition to the other criteria the Board normally considered when analyzing an acquisition application under the BHC Act. The six criteria were size, substitutability, interconnectedness, complexity, cross-border activity, and financial stability factors in combination. The Board did note that certain transactions would only have a de minimis impact on an acquisition and therefore would not raise concerns about financial stability. The Board specifically referenced an acquisition (1) of less than $2 billion in assets, (2) that results in a company with less than $25 billion in total assets or (3) that represents a corporate reorganization, "may be presumed not to raise financial stability concerns absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities or other risk factor." To summarize:

Size: The resulting size of an institution is an important indicator of the risk a transaction would have on the entire financial system. The Board noted that Congress imposed a "10 percent nationwide deposit limit and a 10 percent nationwide liabilities limit on potential combinations by banking organizations." In examining the assets, liabilities and leverage exposure of the resulting institution, as well as the deposits, the Board determined that Capital One "would fall well below the 10 percent limitations set by Congress."

Substitutability: This criterion evaluates whether there would be an adequate substitute service provider should the combined entity suddenly be unable to do so as a result of severe financial distress. The Board noted that Capital One engages in more traditional banking activities that overlap some of ING's service offerings. The Board determined that the resulting entity would "continue to have a small share on a nationwide basis and, numerous competitors would remain for each of the activities" should Capital One be unable to provide any of those services.

The Board specifically noted that with the acquisition of some additional credit card assets, Capital One would go from being the fifth-largest provider of credit cards in the United States to the fourth-largest, with an 11.8 percent share of outstanding credit card balances. The Board noted that other lenders have outstanding credit card balances that are one-third to two thirds larger than those of Capital One, and that numerous other credit card lenders operate on a national basis. The Board concluded that Capital One's resulting "share of credit card loans does not appear to be substantial enough to cause significant disruptions in the supply of credit card loans if Capital One were to experience distress, due to the availability of substitute providers that could assume Capital One's business."

Interconnectedness: The Board examined data to determine what the impact on other institutions in the U.S. financial system would be if the combined entity suffered financial distress. The Board noted that the resulting entity would use less than 1 percent of wholesale funding and that the intra-financial system assets and liabilities would be less than 1 percent. Based on this data, the Board determined that the risk to other institutions in the marketplace was not significant.

Complexity: The Board examined whether the resulting entity would contribute to the overall complexity of the U.S. financial system. The Board noted that neither entity engaged in complex activities that would cause a significant increase in the risk to the stability of the U.S. financial system.

Cross-Border Activity: The Board examined the businesses of each entity to determine if the cross-border presence of the combined entity would pose a risk to coordinating any resolution that would increase the risk to U.S. financial stability. Capital One has somewhat of a presence in the United Kingdom and Canada that is similar to its operations in the United States. ING is owned by a Dutch financial institution, but ING Bank, fsb operates exclusively in the United States. The Board noted that the combined institution is not expected to "engage in any additional activities outside the United States as a result of the proposed transaction." Therefore, the combined organization's cross-border activity would not create coordination difficulties.

Financial Stability Factors in Combination: The Board noted that the combined organization would not be highly interconnected. Significantly, the board considered the degree of "difficulty with which Capital One could be resolved in the event of a failure." The Board determined that Capital One would not be as complicated to resolve as other institutions in the event of a failure.

Basel Committee Distinction

Most interestingly, the Board distinguished its methodology for financial stability from that of the Basel Committee's in identifying GSIBs in three ways: (1) the Board will consider a broader and somewhat different set of metrics, (2) the Board will consider the systemic footprint of the resulting firm relative to the U.S. financial system, and (3) unlike the Basel Committee, "if a single category of metrics indicates that a resulting firm would pose a significant risk to the stability of the U.S. banking or financial system, the Board may determine that there is an adverse effect of the proposal on the stability of the U.S. banking or financial system." The Board also noted that each of these factors will be considered individually, rather than the Basel Committee's approach of focusing on the weighted average metrics. By making these distinctions, it appears the Board is allowing itself some flexibility in determining the risk associated with some potential acquisitions.


  • The Board has more definitively set out the template for how it will analyze the financial stability standard for bank and nonbank acquisitions under the BHC Act.
  • The Board is allowing itself some flexibility in approving bank and nonbank acquisitions by taking a broader approach to examining financial stability factors than the Basel Committee.
  • The Board has set out some of the acquisition parameters that will presumptively pass the financial stability test.
  • Both parties to a bank holding company transaction need to review in advance any CRA, consumer, or examination criticisms, and address as best they can the concerns before filing an application.
  • In acting on bank or nonbank expansion applications under the BHC Act, the Board's decision needs to set out, in sufficient detail, the basis or rationale for its decision so that its ruling is not overturned upon appeal.


1. In fact, the Board extended its initial deadline by which to submit comments to more than 85 days. In addition to soliciting written comments, the Board held public meetings in Washington, D.C., Chicago, and San Francisco, at which members of the public could provide comments on the proposed acquisition.

2. Actually, 425 of the commentators that opposed the proposal submitted comments in substantially identical letters.

3. 12 U.S.C. § 1848.

4. Id.

5. The CRA is a federal statute enacted to ensure that financial institutions meet the credit and deposit needs of the communities they operate in. 12 U.S.C. § 2901.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions