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) --

Bank consolidation

-- as well as what to do about the prolonged residential mortgage mess -- seemed to be recurring themes in the bank stock sector over the past week.

The Keefe, Bruyette & Woods bank stock index, which tracks the performance of the 25 largest U.S. banks, ended the week down 2.5%.

The topic of bank consolidation has been hinted at in the sector for several months now as more banks turn back to strategic


deals rather than acquisitions of failed banks. Until this week, just a few small traditional M&A deals had been done this year.

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First Niagara (FNFG)

pushed out of the gate Thursday by saying it would acquire

New Alliance Bancshares

( NAL) for $1.5 billion in a cash and stock transaction.

First Niagara CEO John Koelmel

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The deal represents a 24% premium for New Alliance shareholders and is the largest bank acquisition deal since late 2008. The First Niagara-New Alliance combination represents one of the first true signs that the sector is returning to normal M&A deals and that

more deals

could be on the way.

New Alliance shares rose 12.5% on the day of the announcement.

Early in the week market rumors abounded that

M&T Bank

(MTB) - Get M&T Bank Corporation Report


Banco Santander

( STD) were rekindling acquisition talks. The two banks had been in merger discussions about a possible tie-up earlier in the year, but those talks stalled in the spring. The speculation is that one possible combination could be for M&T Bank to acquire

Sovereign Bank

, which is owned by Santander. The Spanish bank would then take a minority stake in the newly combined bank.

Shares of M&T rose 5.2% this week on the speculation. The stock is up roughly 36% year-to-date.

(At press time no official announcement of a deal had been made, but check back at


Monday morning at 7 a.m. EDT for Maria Woehr's and Laurie Kulikowski's

Bank Stock Buzz

video on what an M&T/Santander deal would mean for both banks and the industry.)

The big debate over the future of the government's role in the housing markets was another big topic of the week. (See


coverage of the

residential mortgage


Fannie Mae



Freddie Mac

( FHLMC) shares, relegated to the pink sheets, slid even lower over the past week.

Earlier in the week


(BCS) - Get Barclays PLC Report

reached a $289 million settlement with the U.S. Justice Department regarding allegations that the U.K.-based bank had violated trade sanctions and embargoes against Cuba, Iran, Libya, Sudan and Myanmar. Although prosecutors and bank lawyers seemed content with the settlement, U.S. District Judge Emmet Sullivan called it "sweetheart deal" before endorsing the agreement a day later.

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.