Another Frankenstein Bank?

Capital One’s (NYSE: COF  ) quest to become the No. 1 U.S. online banker by purchasing ING Direct from ING (NYSE: ING  ) has hit a bit more than a snag.

Congressman Barney Frank, the ranking Democrat on the House Financial Services Committee, has asked Federal Reserve Board Chairman Ben Bernanke for at least another 60 days of public comment on the acquisition. He also wants the Fed to hold public hearings on what such a deal would mean for consumers.

It starts to add up
A worry is that if Capital One keeps growing, it might turn into another too-big-to-fail institution. In the last six years it has acquired Hibernia National Bank, North Fork Bank, and Chevy Chase Bank, making it the 11th largest U.S.-based bank by size of deposits. If the $9 billion ING deal goes through, Capital One would jump up to sixth largest, behind JPMorgan Chase, Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , Citigroup (NYSE: C  ) , and US Bancorp (NYSE: USB  ) .

Rank

Bank

Deposits

1 JPMorgan Chase $1,183 billion
2 Bank of America $1,182 billion
3 Wells Fargo $887 billion
4 Citigroup $863 billion
5 US Bancorp $218 billion
6

Capital One

(With ING Direct)

$213 billion

Source: BankRegData.com.

Even with the steep falloff in bank deposits from the first four banks to the possible numbers five and six Capital One, it’s hard to escape the fear of more future bailout scenarios since Capital One at its current size is already considered “systemically important.”

If the Fed or Congress does scuttle Capital One’s acquisition plans, that could also spell N-O to other bank deals a-brewin’. It’s hard to see how PNC’s (NYSE: PNC  ) plan to buy the Royal Bank of Canada’s U.S. banking and credit card operations for $3.62 billion could survive. That marriage, if consummated, would bring PNC’s deposits to around $210 billion, a hair below the potential Capital One deposits.

Credit card worries
And consumer groups, such as the National Community Reinvestment Coalition, already concerned with the increase in high-interest credit card lending, feel that Capital One’s recent acquisition of HSBC’s U.S. credit card business would be funded by the ING Direct deposits. The group is uneasy about this pushing more consumers into a debt spiral.

Make or break...
On Friday, the Fed decided to grant Congressman Frank’s request, and will hold three days of public hearings on the proposed acquisition. It also agreed to allow the period of public comment to continue through Oct. 12.

The deal that started out as a source of annoyance to ING Direct customers unhappy having Capital One become their new banker may become the make-or-break determiner of bank consolidations for the foreseeable future. Keep track of your bank investments by adding them to your Watchlist.

Fool contributor Dan Radovsky has no financial interest in the mentioned companies. The Motley Fool owns shares of Citigroup, PNC Financial Services Group, and Bank of America. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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