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Capital Requirements And Regulatory Uncertainty Have Prevented US Bank Mergers

According to transaction advisers and industry analysts, U.S. banks will likely put off closing agreements at the earliest until the end of the year as they wait for clarification on the new rules governing capital needs. The lengthy wait for regulatory clearances of deals is also discouraging potential buyers and sellers, according to the experts. According to the Institute of International Finance’s CEO, Timothy Adams, an organization that represents roughly 400 members from more than 60 nations, “everyone is frozen in place until they know what the rules of the road are.”

Regional Banking Crisis In The United States

Adams predicts that transactions would be delayed until 2026 when the United States implements standards that were agreed upon by the Basel Panel on Banking Supervision following the 2008 financial crisis but were not finalized until years later. An implementation deadline of the onset of 2025 was set by international authorities, who also agreed to grant banks a transitional period to comply with the new standards. Banks are also holding off on raising capital requirements until after this year’s regional banking crisis in the United States, as suggested by Michael Barr, the vice chair of the Federal Reserve for supervision. In addition to the “chilling effect” brought on by capital regulatory uncertainties and a potential economic slump, higher interest rates might further stifle merger activity, according to Adams.

However, struggling banks can be pushed to sell. According to statistics from Dealogic, deals involving banks that were either in receivership or under stress increased to $23.2 billion in the 1st quarter, the largest amount since 2019. Comparatively, bank handles for non-stressed institutions totaled $3.9 billion, which was the lowest amount recorded in the initial half of a year since 2010. The slow pace of deal approvals in recent years, according to the head of the group of financial institutions at the law firm Davis Polk, Meg Tahyar, has created an “unhealthy environment” for regional bank mergers. Political considerations have grown to be too significant when judging mergers, she claimed, as opposed to competitiveness and community requirements. Additionally, pricing adjustments brought on by regulatory changes are too unclear.

Future Mergers Among Smaller Banks

Although Janet Yellen, the secretary of the U.S. Treasury has hinted that regulators will probably be amenable to future mergers among smaller banks, current delays have impeded merger discussions. After failing to receive regulatory approval over a year following the deal was announced, Toronto-Dominion Bank, a Canadian institution, canceled its $13.4 billion acquisition of First Horizon in May. The global financial services head, Tim Johnson, for deal advice at KPMG, said: “We don’t notice many deals occurring shortly due to concerns that include low stock prices, unpredictability around regulatory approvals, as well as the possibility for higher capital requirements.” Nevertheless, “the long-term popularity of consolidation is inevitable.”

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