BofA Deal May Trigger Bank M&A

NEW YORK (TheStreet) -- Bank of America's(BAC Quote) sale of First Republic Bank to a group of private equity investors may ramp up deal activity in the bank sector.

Few if any healthy banks have been acquired in the past year. Instead, distressed deals like Wells Fargo's (WFC Quote) purchase of Wachovia or JPMorgan Chase's (JPM Quote) acquisition of Washington Mutual (WAMUQ.PK) have been the norm.

One major reason for the lack of activity is that most banks are hoarding capital in anticipation of tougher new regulatory requirements that will require them to hold a bigger cushion against future losses. That's why it makes sense that the buyers would be a pair of private equity firms: Colony Capital and General Atlantic.

Private equity has plenty of cash to put to work. The problem for buyout firms in the banking sector has been regulatory uncertainty. But each transaction that gets done creates a new blueprint for other private equity firms and their attorneys, while suggesting a degree of softening from the Federal Deposit Insurance Corp. It also makes other potential acquirers start to worry they will get left behind if they don't do a deal.

Finally, the First Republic sale would seem to increase the likelihood that Citigroup (C Quote) will sell Banamex, its Mexican subsidiary. Recent press reports have signaled the Mexican government may force such a deal, but because the U.S. Treasury is Citi's largest shareholder, all major moves by Citi have a higher degree of political uncertainty than usual. That BofA was able to reach an agreement to divest First Republic while the U.S. Treasury remains a shareholder suggests Citi may similarly be able to pull off a sale.