2nd UPDATE: Debt Ceiling A Factor In Capital One's Accelerated Plans

Capital One Financial Corp. (COF) said it accelerated stock and bond issues and an earnings report to avoid potential turbulence related to the U.S. government's debt-ceiling impasse.

In an interview with Dow Jones Newswires, Capital One's chief financial officer said the bank wanted to ensure it didn't need to tap the capital markets around Aug. 2, when the U.S. is expected to hit its debt ceiling if a deadlock between Congress and the White House isn't broken. Such an event could trigger a default by the U.S. and a downgrade of the country's triple-A rating, roiling financial markets around the world.

Capital One, based in McLean, Va., and the nation's ninth-largest bank by assets, disclosed last month that it would acquire the U.S. online-banking business of ING Groep NV (ING, INGA.AE) for $9 billion in cash and stock. To raise the cash in the capital markets, Capital One first needed to report earnings for the latest period.

The bitter debate between the White House and congressional Republicans about the debt ceiling, as well as the European Union's struggle to contain its sovereign-debt problems, were among the reasons why "we accelerated our earnings release, so we could issue the equity we needed for the ING Direct transactions followed by $3 billion of debt," Chief Financial Officer Gary Perlin said Monday.

"Had we waited until our normal earnings date, we would have had to wait until [July 25] to be in the market" to raise equity and debt, Perlin said, putting the capital increases at risk "before the debt ceiling would have to be resolved."

Capital One reported its second-quarter earnings early--on July 13--and sold $2 billion in common stock the same day. The following day, it raised another $3 billion through a multipart bond offering.

Shares of Capital One finished 2.5% lower at $47.61 on Wednesday, a day when bank stocks were sliding over concern about the debt-ceiling impasse and soft economic data.

Overall, big banks have said little about how they are preparing for fallout from the debt-ceiling impasse--beyond saying they are monitoring the situation. A spokeswoman for the Federal Reserve said Wednesday, "We expect to be able to give additional guidance to financial institutions when there is greater clarity from Congress and when Treasury outlines its specific operational plans."

The Office of the Comptroller of the Currency "is working on guidance to address issues arising from a failure to extend the debt ceiling," a spokesman said Wednesday. The OCC, along with the Fed, regulates the nation's largest banks. "For example, there may be disruptions in the timing of various federal benefit payments that could cause some customers to inadvertently overdraw their checking accounts, and we will encourage national banks to work with their customers and exercise judgment related to overdraft or penalty fees."

Citigroup Inc. (C) has said failure to raise the debt limit "is one of several" scenarios "we have planned for in our exposure and liquidity management."

Bank of America Corp. (BAC) has said it is "working through a variety of contingency plans."

One issue lingering is how to handle government IOUs, known as "individual registered warrants," issued in lieu of paychecks. Banks don't yet know how to process such IOUs--as warrants or as checks--and it is unclear if the government could actually use such an instrument while in default.

Market liquidity remains a concern. A default by the U.S. government, or even a potential downgrade of U.S. Treasury notes and bonds if rating agencies aren't assured the White House and Congress can agree on how to reduce the federal deficit, could cause turbulence in stock and bond markets.

Stronger regulatory oversight and stress testing have improved banks' capital and liquidity positions, said Kathryn Dick, a managing director at Promontory Financial Group and a former regulator with the Office of the Comptroller of the Currency. Potential turmoil in the debt market "is a source of vulnerability, but the banks are in a position that is much stronger than in years past."

Her colleague, Wayne Rushton, added, "Banks are doing a better job with contingency planning, so I don't think this is a Big-Bang event" if a default or a debt downgrade were to occur.

Some banks are worried that commercial customers won't be able to issue or roll over their debt, and a decline in bond prices could mean banks might require more collateral from their counterparties in dealing with overnight repurchase agreements.

Some banks said they don't expect the kind of severe credit crunch that hit money markets after the collapse of Lehman Brothers in 2008. "There is no panic mode," said one person at a large U.S. bank.

Even if U.S. Treasurys were downgraded, they would most likely retain their benchmark status and would still be the most liquid asset short of cash--and trade in huge volumes--some banks said. And banks won't need to sell them.

U.S. banks held $1.6 trillion in Treasury and other government-agency securities on their books as of June 30, according to Federal Reserve data. Falling bond prices might require those securities to be marked-to-market by the end of the quarter, but by then the political impasse might be resolved and the market might well have recovered, some banks said.

"I don't think anybody is thinking we have a solvency problem" in the U.S., one banker said. "A default, if it occurs, is likely temporary."

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

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