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Bank M&A Complicated by Failures

Stocks in this article: BAC WFC C

"What's happening in the current environment is that the regulators are taking a lot longer to approve transactions so there is no chance creating a problem by approving a deal," says Brett Rabatin, a Sterne Agee analyst who covers Sterling Bancshares.

Other examples of deals that didn't make it to the finish line include the proposed hookup between OceanFirst Financial (OCFC) and Central Jersey Bancorp (CJBK); and plans for First Capital Bancorp (FCVA) and Eastern Virginia Bankshares (EVBS) to merge. Both deals were scuttled with parties citing delays in obtaining regulatory approval as a reason for the cancellations.

Chip MacDonald, a partner at law firm Jones Day specializing in banking and finance, says that even with "stresses in the system and all the proposed regulator changes, it's almost surprising there are not more" canceled deals.

Logic would seem to dictate that the troubled financial sector would see a pickup in consolidation in order to avoid escalating bank failures. But the extra scrutiny by regulators seems necessary given that currently 552 U.S. banks are considered so-called problem banks by the Federal Deposit Insurance Corp., thanks to the credit crisis. More than 200 banks are expected to fail in 2010.

These terminated deals and others, while not new to the banking landscape, are an added repercussion of the financial crisis that has virtually taken bank M&A off the table unless it's a purchase of a failed institution with the assistance of the FDIC. Some observers suggest that regulators are overwhelmed with the number of failed banks.

Then there's the inherent appeal of the FDIC-assisted transactions to consider as to why more hookups between healthy companies aren't getting done. Not only can an acquirer get branches and deposits on the cheap, but the government provides downside protection by sharing the exposure to whatever troubled assets the acquired bank holds.

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