In a recent American Banker op-ed, we defended CapOne’s acquisition of ING Direct in part on grounds that no one else could pick up a $9 billion tab. Well, how wrong we were. The Wall Street Journal yesterday reported that a private-equity firm in fact put in a bid for this book. So, clearly there were other options beyond letting a big bank get bigger. But, as in all matters of financial regulation, the choice isn’t clear-cut – were the FRB to deny CapOne and instead open the door to non-bank bidders, would systemic risk and community service be better or worse? We think a policy premised on barring M&A to big banks solely because they are both big and banks would in fact exacerbate risk and reduce funds for low- and moderate-income customers. It’s not that it’s a great idea to let big banks get bigger – it’s just that many of the options are even worse now that banks are as big as they are.

We don’t draw our conclusions on this transaction based on a specific view of CapOne’s wonders or the private-equity firm’s ills. For purposes of policy analysis – as opposed to transaction approval – the question at hand is not the parties involved, but the principles.

So, first to risk. How does sale of a retail book like ING’s stack up from a risk perspective when one compares M&A by a big bank to a private-equity (PE) deal? As the FDIC rightly noted when it expressed deep qualms about PE/bank deals, letting buccaneers into the business redefines the banking business model. Many embedded bank capabilities – enterprise risk management, inter-affiliate transaction limits, long-term investment – are not exactly the hallmark of the PE buy, slash, burn and flip business model. This isn’t to say that a PE can’t buy a bank, run it on a stand-alone basis and do fine – several have. It is, though to argue that, at the least, it’s harder.

We’ve seen this in our practice on more than a few occasions. When non-bankers contemplate getting into banking, they are uniformly shocked by how intrusive the regulatory standards will be. It’s not so much the rulebook – capital and the like – as the numbers here are well understood and usually factored into a transaction structure.

Rather, it’s the different culture that characterizes bank regulation. As one PE executive told us years ago, he’d be damned before he would let a bank examiner into his board room. When we told him he would have to, he said no to what otherwise would have been a tidy transaction.

Even PEs committed to (at least in theory) kow-towing to their supervisors have to learn how to do this; bankers understand that regulation is the price of entry. Or, of course, they should – if they don’t, then the FRB should turn down the deal. The problem in past M&A wasn’t that banks were involved. Rather, it was that the Fed was far too lax with regard to longstanding approval criteria – management capability, financial capacity and so on. It’s not banks per se that were the problem, but rather the way the Fed deferred to them. Can’t blame a guy for asking, but …

So, in our view, the risk call – absent review of individual parties to a transaction – goes to a bank, big or not, over a PE. Now, to the community-service question.

We would guess it will be a cold day in you-know-where before a PE would pony up $180 billion over ten years to get an M&A deal done. This is, though, what CapOne committed in the ING transaction. Critics might counter that it’s just what the bank planned anyway to spend in low/mod areas and maybe so. But, would a stand-alone PE have anything like this amount of capital to deploy in these communities? Not if there’s a good party in the Hamptons.