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China Bank Deal Could Open M&A Floodgates

Stocks in this article: EWBCCATYPFBCMCBI

NEW YORK ( TheStreet) -- A proposed deal by Industrial & Commercial Bank of China (ICBC) to buy Bank of East Asia's U.S. subsidiary could be the first of many cross border retail bank transactions between the U.S. and China, though some believe big hurdles remain.

The deal is worth just $140 million, but it would represent the first acquisition by a mainland Chinese bank of a U.S. bank since 1991, when Congress passed legislation that places tougher restrictions on regulation of foreign banks operating in the U.S., according to a memo from Wachtell, Lipton, Rosen & Katz.

Chinese banks have long sought to acquire a U.S. bank, but U.S. regulators have stood in the way because to approve foreign institutions as buyers of U.S. banks the Federal Reserve must give official indication it has confidence in the home country regulator of the acquirer. Thus, once one deal has been approved, others should be "much less of an issue in subsequent acquisitions by the same bank or by other banks from that country," according to the Wachtell memo.

Wachtell believes the approval could take some time, but "given the larger political context and the events surrounding the announcement of the deal, it seems likely that the parties have vetted this transaction from all relevant angles," according to the memo. The "larger political context" refers to the fact that Chinese President Hu Jintao was visiting the U.S. at the time and, as The Wall Street Journal put it in its Jan. 22 story breaking the news of the deal, both Beijing and Washington are calling for greater commercial ties between the two countries.

Ken Thomas, an economist and independent consultant who has worked with Chinese banks looking to make U.S. acquisitions, expects institutions that cater to a Chinese-American clientele will be next on the list.

East West Bancorp (EWBC) and Cathay General Bancorp (CATY) are the largest U.S.-listed banks serving a mostly Chinese-American clientele, though there are others, including Preferred Bank (PFBC) in Los Angeles and MetroCorp Bancshares (MCBI).

Executives from these banks did not return calls.

Even if Chinese banks were to buy up all of these companies, however, it would just be a drop in the bucket in terms of Chinese ambitions in U.S. financial services.

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