Capital One says its credit card focus is safe

(Reuters) - Capital One Financial Corp hit back on Tuesday at charges that its proposed takeover of ING Groep NV's U.S. online banking unit will help lay the groundwork for the next financial crisis.

Consumer advocates are arguing that Capital One's $9 billion purchase would allow it to supercharge its credit card portfolio. They are drawing parallels to the subprime mortgage boom that led to the 2007-2009 financial crisis.

John Finneran, general counsel for Capital One, told the Federal Reserve at a public hearing in Chicago that the bank's credit card focus would not pose a risk to the financial system.

"The credit card market is substantially smaller, far less complex and far less impactful on the broader economy," Finneran said.

Capital One is facing tough scrutiny for its proposed merger that would create the 7th largest U.S. bank by assets, according to SNL Financial.

Many are watching the regulatory review as a test case of how the Federal Reserve will treat large bank mergers after the market crisis forced taxpayers to bail out large financial firms.

McLean, Virginia-based Capital One gets over half of its revenue from credit cards and would access about $80 billion in deposits and 7 million new customers from ING.

But Finneran noted that securitization accounts for less than 20 percent of the company's total funding and noted that the card portfolio shrunk by $17 billion or 25 percent since 2008.

"This product diversification, combined with our conservative and industry-leading underwriting capabilities, helped make us one of only two credit card businesses not to lose money in any quarter during the Great Recession," he said.

The Fed announced the hearings after Democratic Representative Barney Frank wrote a letter urging more scrutiny of the merger. Frank is one of the co-authors of last year's Dodd-Frank oversight law that aims to get rid of the notion that some financial firms are "too big to fail."

Many community leaders want the deal blocked and dispute Finneran's claims that Capital One's credit card focus poses no risk.

"By saying yes to this deal, the Federal Reserve will likely enable Capital One to account for more than 32 percent of all outstanding credit card securities in the (asset-backed securities) market," said James Carr, chief business officer of the National Community Reinvestment Coalition, which has led the charge against the deal.

"Like the predatory and toxic subprime mortgages that eventually imploded -- taking the entire financial system with it -- Capital One's credit-card business is poised to become the next subprime lending crisis for America," Carr said.

Dodd-Frank requires U.S. regulators to take systemic risk into account when evaluating a merger, in addition to public benefit, concentration of resources, unfair competition and other factors.

Reverend Jesse Jackson echoed Carr, drawing a parallel with Bank of America Corp's 2008 acquisition of Countrywide, which is faulted for that bank's severe subprime mortgage losses.

"Like Countrywide, Capital One is pursuing a risky business model, where more than 75 percent of its profits come from a single source: credit cards," said Jackson.

The main difference, he added, is that Capital One's "poison pill" is credit cards, not subprime mortgages.

Capital One announced on Monday it would create 500 new jobs in Delaware, where ING has its U.S. headquarters, by 2013 if the merger went through. In exchange, Capital One would receive $5.6 million from the state and a rebate of up to $1.5 million for local capital expenditures. The incentives would have to be approved by a state panel.

Capital One's Finneran told the Fed his company's job growth plans were "a rare bright spot" amid the tens of thousands of layoffs recently announced by banks across the country.

The company has also promised to make $180 billion in new community-development loans and investments over the next 10 years, and touted its small business loans and affordable housing initiatives.

Critics have accused the company of failing to extend Federal Housing Administration-insured loans to people with lower but agency-accepted credit scores, and steering borrowers to subprime credit cards instead of traditional loans.

Fed representatives also appeared skeptical, questioning Capital One about how they arrived at the $180 billion figure and where the money would be invested.

Finneran and Dorothy Broadman, Capital One's community development banking officer, responded that they have not yet divvied up the money geographically. They also refuted the claim that the company pushed credit cards on loan seekers.

"These hearings are very much like a tale of two cities," said Sandra Braunstein, director of the Consumer and Community Affairs division of the Fed, to a panel opposing the merger.

"We have panels that come up such as yourselves that have very strong feelings about reasons to deny this application and then probably what will follow is a panel of folks who feel very strongly that the bank has done a very good job in the same communities that you have talked about," she said. "I'm just wondering, how do we reconcile this?"

The Fed will hold a final public hearing in San Francisco on October 5. The public comment period on the proposed merger will close on October 12.

(Editing by Andre Grenon, Gerald E. McCormick and Bernard Orr)