Capital One-ING deal gets U.S. approval

The entrance to a Capital One Bank is seen in New York August 17, 2009.

WASHINGTON (Reuters) - The Federal Reserve approved Capital One Financial Corp's (COF.N) bid to acquire ING Groep NV's (ING.AS) U.S. online banking unit in the biggest U.S. bank deal since the Dodd-Frank financial law of 2010 mandated stricter merger reviews.

All five Fed governors voted in favor of the deal, the Fed said on Tuesday.

Capital One announced plans last year to buy online deposit-taker ING Direct for $8.9 billion in a transaction that generated concern from consumer groups who have argued it would create another "too big to fail" bank.

As part of its approval, the Fed is requiring Capital One to increase its ability to monitor for internal risk due to "the size, complexity, and diversification of the business lines" that will result from the deal.

Capital One shares were up 2.1 percent to $49 in after-hours trade following announcement of the Fed's approval. The shares had dropped 1.1 percent to $47.98 during the regular trading session.

The Fed said the deal will make Capital One the fifth-largest U.S. bank, as measured by deposits.

Capital One welcomed the Fed's decision and said it expects to close the deal in the next few days.

But John Taylor, president of the National Community Reinvestment Coalition, which was a leading critic of the merger, said he was "disappointed" and was considering options to challenge the Fed's decision.

"The decision reinforces the perception and reality that the Federal Reserve serves the banking system first, and the American public second," he said. "Should Capital One fail, (the Fed) will deeply regret today's decision because the impact on the public will be catastrophic."

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

For Dutch financial company ING, the sale was part of a restructuring forced by a 10 billion euro bailout received in 2008 at the height of the financial crisis.

The Fed's review was seen as a test case for how U.S. authorities would view big bank mergers after taxpayers extended multibillion-dollar bailouts to large banks over fears their failure could have brought the financial system to its knees.

The Dodd-Frank financial oversight law did not force regulators to break up big banks, but instructed them to closely scrutinize future mergers, taking systemic risk into account in addition to public benefit, concentration of resources, unfair competition and other factors.

"This wasn't a knee jerk reaction or a rubber stamp approval," said Daniel Furtado, a Consumer and Specialty Finance Analyst at Jefferies & Co in San Francisco, California, who applauded the Fed's review that included public hearings.

Furtado said the approval was "a breath of fresh air in an otherwise sometimes overzealous regulatory environment."

Karen Petrou, Managing Partner at Federal Financial Analytics in Washington D.C., said big bank M&A was in a new era. "Because of the unprecedented nature of the Fed's review, any bank merger of size will be subject to scrutiny never before demanded by the Fed."

The central bank said in its order approving the application that concerns about Capital One's size would be greater if it were also highly interconnected to different segments of the U.S. financial system, or if it participated more heavily in the short-term funding markets.

The Fed also said its concerns would have been greater if Capital One had a level of complexity that would cause disruptions to the financial system if the bank fails.

"These measures suggest that Capital One would be significantly less complicated to resolve than the largest U.S. universal banks and investment banks," the Fed said.

Morgan Stanley (MS.N), Barclays Capital (BARC.L) and Centerview Partners LLC acted as financial advisers to Capital One and Wachtell, Lipton, Rosen and Katz, Mayer Brown and Loyens & Loeff acted as legal advisers. Deutsche Bank (DBKGn.DE) advised ING.

(Reporting By Alexandra Alper and Mark Felsenthal; Editing by Tim Dobbyn)