The Federal Reserve’s approval was made over the strong objections of consumer and community groups, who raised concerns about creating the nation’s fifth largest financial institution by deposits without putting in place safeguards to prevent widespread systemic risk.  Capital One has a large subprime credit card portfolio and the ING Direct customer base represents an opportunity to expand that line of business dramatically.

“By approving this acquisition, the Federal Reserve Board has made it clear that when it comes to creating large, systemically risky financial institutions, it is business as usual,” said Woodstock Institute president Dory Rand.

The approval highlights the need to modernize the Community Reinvestment Act, which requires that financial institutions invest in the communities, including low-wealth communities, where they have a branch presence.   Capital One has a limited branch presence on the East Coast, and ING Direct carries out the majority of its business through its website.  In California and the Chicago region, two areas where Capital One does significant business but has no branch network, the Federal Reserve found that the bank’s mortgage market presence in communities of color was lower than the industry average.  Without a branch presence in its major markets, including the Chicago region, the combined bank’s community commitments are unenforceable despite its large market share.

During public hearings on the merger held last year, Capital One made a large national pledge to provide mortgages, consumer credit and other products to low-wealth communities, but provided no local commitments to the Chicago region.  In the only concessions to objectors’ demands, the Federal Reserve conditioned its approval on Capital One fulfilling the voluntary commitments it has made and providing the Federal Reserve with the results of an internal audit of consumer compliance.

Regulatory changes are needed to address how banks with a large market share, but limited branch presence, would be evaluated at the local level for their community reinvestment activity.  Consumer and community groups expected federal banking regulators to announce a proposed rule to modernize the CRA last year.

“We are still waiting for the federal banking regulators to modernize the CRA,” said Rand.  “We simply cannot have another merger of this size without local, verifiable, and enforceable commitments to serve low-wealth communities.”