The Federal Reserve has quizzed Capital One Financial Corp to know whether the proposed purchase of ING Groep NV's U.S. online banking business would create a too big to fail institution, the Wall Street Journal said.

Capital One was pressed by the Fed in an August 29 letter for details about the nature and dollar volume of financial activities in which both companies are involved, the Journal said.

Fed officials asked Capital One to describe any markets where the bank and ING Direct USA are market makers and to report information about exposure to counterparties, the newspaper said.

The Fed declined to comment to the Journal.

Capital One told the Journal that it responded to the Fed's letter on Friday and that its answers show that we are not engaged in the kind or level of activities that raise the systemic risk issues that the Dodd-Frank Act sought to address.

Capital One told the newspaper it will remain a traditional bank and hold just 1.5 percent of total U.S. deposits.

Following last year's Dodd-Frank financial overhaul law, the Fed now must consider whether specific mergers and acquisitions would increase overall risk to the financial system.

Capital One and the Federal Reserve could not immediately be reached for comment by Reuters outside regular U.S. business hours.

In June, Capital One had agreed to buy U.S. online banking business ING Direct from ING Groep in a stock and cash deal valued at $9 billion.

ING had to sell the business, one of the jewels of its retail banking franchise, as part of a deal with the European Commission following its October 2008 Dutch government bailout.

(Reporting by Sakthi Prasad in Bangalore; Editing by Muralikumar Anantharaman)

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