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The United States is said to be evaluating new rules for regional banks to add more financial protections in times of possible crisis, a measure that is delaying some pending big bank mergers.
Federal Reserve and the office from the Comptroller of the Currency talks about whether regional lenders should be required to hold more long-term debt that would absorb losses in a downturn, The WSJ reported on Saturday, citing people familiar with the matter. Regulators are looking to see how such requirements would apply to large regional banks currently seeking to close already announced large transactions.
The big three bank deals being delayed by the potential rules include Toronto-Dominion Banks (NYSE:TD) planned $13.4 billion purchase of First Horizon (NYSE:FHN), Bank of Montreal’s ( BMO ) announced deal to buy Bank of the West from BNP Paribas ( OTCQX:BNPQF ) for about $16.3 billion and US Bancorp’s $8 billion deal for MUFG Union Bank’s (NYSE:MUFG) core regional banking franchise announced in September.
The US evaluation of the regional banks delays the closing of the big three regional banks and US Bancorp (NYSE: USB) already missed its original goal of completing its deal by the first half of 2022. A key player in what will happen is Michael Barr, the Fed’s new top Wall Street regulator, who officially took office last month, according to the WSJ report. Barr is vice chairman for supervision, which oversees America’s largest banks and the central bank’s stress testing process.
The US scrutiny of large regional banks comes as Acting Comptroller Michael Hsu telegraphed in an April 1 speech that he is concerned that a recent wave of bank mergers could create more “too big to fail” companies like those that led to the 2008 Financial Crisis.
The WSJ report comes as TD Bank’s ( TD ) acquisition of First Horizon ( FHN ) has already been a concern for investors after U.S. lawmakers in June asked a banking regulator to block the transaction. Senator Elizabeth Warren (D-MA) sent a letter to the Office of the Controller of the Currency asking the regulator to block the deal due to concerns about aggressive sales tactics at TD Bank.
Last month, Stifel analyst Mike Rizvanovic cut TD Bank’s ( TD ) price target to C$93 from C$97, citing concerns that the First Horizon ( FHN ) deal could be blocked by U.S. regulators.
“Ongoing risks surrounding the FHN acquisition potentially being blocked by US regulators are reflected in the significant discount in FHN’s share price to TD’s offer price, and are unlikely to abate anytime soon,” Rizvanovic wrote at the time. “We expect uncertainty to remain an overhang on TD’s stock for the foreseeable future, justifying a modest relative valuation discount to its Big Six peers.”
And a Bank of America analyst in June said the transaction could see an extended timeline due to regulatory scrutiny. The most likely effect of the increased control is that the deal closing may be extended beyond the management’s current target for Q1 2023.