Title: “Challenges in Financial Sector Negotiations Amid Policy Changes”
By David French, Tatiana Bautzer, and Pete Schroeder (Reuters) – Major banks are approaching acquisitions with caution amidst uncertainty surrounding the Trump administration’s efforts to facilitate dealmaking, industry insiders report. Treasury Secretary Scott Bessent recently mentioned that bank mergers have been hindered by minor obstacles, while newly appointed regulators have moved to eliminate stringent rules implemented during the Biden era that increased oversight of large transactions.
Bill Burgess, co-head of financial services investment banking at Piper Sandler, acknowledged the slowdown in deals, attributing it to various factors such as market volatility, economic ambiguity, concerns about potential losses on banks’ balance sheets, and the intricacy of transactions involving heavily regulated institutions. Cheryl Pate, a senior portfolio manager at Angel Oak Advisors, anticipates consolidation among smaller regional and community banks but views larger mergers as challenging due to increased scrutiny.
Executives at larger banks are patiently waiting for suitable opportunities to expand their operations, with analysts often mentioning PNC Financial Services, U.S. Bancorp, and Truist Financial as potential candidates for expansion. The Federal Deposit Insurance Corp’s Republican-led board recently announced the reinstatement of earlier guidelines for bank merger reviews, stepping back from the more stringent approach adopted during the Biden administration.
The rescinding of the rules has been regarded as a positive step towards bringing certainty back to the industry by Randy Benjenk, co-chair of financial services at Covington & Burling. Secretary Bessent emphasized the administration’s goal to streamline financial regulation and address regulatory overreach during a speech to the Economic Club of New York.
Despite initial enthusiasm following President Trump’s election, the current cautious approach to deals starkly contrasts with the anticipated deregulatory wave. The new administration is expected to ease the process for U.S. banks, totaling over 4,500, to merge by revising some of the stricter guidelines implemented previously.
Concerns have been raised by industry insiders regarding the Biden administration’s stringent oversight of mergers, which they claim delayed transactions and discouraged new deals. The pending $35 billion merger between Capital One and Discover Financial Services announced in February 2024 is still awaiting regulatory approval a year later, serving as a test for the new administration’s willingness to expedite approvals.
Since March 2022, there have been only nine announced transactions valued at over $1 billion, compared to a dozen during Biden’s first year in office, according to S&P Global Market Intelligence. Industry executives point to Toronto-Dominion Bank’s aborted $13.7 billion merger plan as another example of the challenges faced in the current financial landscape.
The failed $10 billion acquisition of First Horizon serves as a cautionary tale of the risks involved in mergers gone wrong. The deal was called off in 2023 after facing delays in approvals for over a year. Although First Horizon’s share price has somewhat recovered since then, the bank’s value today stands at only 70% of the original deal price.
Regulators hesitated to approve the merger due to concerns about TD’s oversight of customer transactions. In 2024, the bank had to pay over $3 billion in fines to settle charges of breaching anti-money laundering laws.
The regulatory landscape remains uncertain as key agencies like the FDIC and Office of the Comptroller of the Currency are currently under interim leadership. Many banks are grappling with regulatory issues that must be addressed before any major mergers can be authorized.
A significant portion of large U.S. banks are still under regulatory scrutiny, with the Federal Reserve identifying deficiencies in governance and liquidity risk management. The fallout from the failures of Silicon Valley Bank and First Republic Bank in 2023 has further dampened investor confidence and deterred consolidation efforts. Additionally, the uptick in U.S. interest rates has resulted in banks holding substantial paper losses on their securities portfolios, which could translate into actual losses post-merger.
Analysts like Jason Goldberg from Barclays acknowledge ongoing hurdles and emphasize the importance of banks aligning with regulatory expectations and reducing policy ambiguity. As unrealized losses diminish over time, the potential for renewed merger activity in the banking sector is seen as promising.
