Deutsche Bank AG's takeover of Bankers Trust Corp. poses no novel legal questions, but the expected deal is sure to spark political debate.
Reaction on Capitol Hill was muted Monday because most lawmakers are out of town for the Thanksgiving holiday. But if it comes off, the $9 billion sale would be the first instance of a foreign behemoth buying one of the country's top-10 banks. It would also create the world's largest bank, with $849 billion of assets.
The concentration of financial power as well as threats to U.S. economic dominance are expected to concern lawmakers. Congress will be debating legislation revamping U.S. financial laws when the merger is expected to close, in the second quarter. Supporters predicted the headline-grabbing deal would give financial reform a boost.
"It underscores the existing arguments we've been making for a while: The markets are moving along, and the legal-regulatory structure we have here is out of sync," said Samuel J. Baptista, president of the FinancialServices Council.
"It moves the ball forward in showing how the American legal structure impedes the integration of financial services," said Dennis J. Lehr, of the law firm of Hogan & Hartson LLP here. "This now gives them greater access to our 250 million-person market. It shows we are way behind the curve here."
But while "a major transaction like this will have people yelling and screaming" as one banking lawyer put it, Deutsche Bank is not expected to have much trouble getting the deal approved by regulators.
"This is not going to be a problem," predicted William J. Sweet Jr., a partner in the Washington office of the Skadden, Arps, Slate, Meagher & Flom law firm. "There isn't anything here that hasn't already been dealt with in other mergers."
At midyear, 5.2% of total assets in the U.S. commercial banking system- or $269 billion-were controlled by foreign banks. For instance, HSBC Holdings PLC, based in London, owns Marine Midland Bank in Buffalo; Amsterdam-based ABN Amro Holding owns LaSalle Banking Group in Chicago; and Allied Irish Banks PLC of Dublin owns First Maryland Bancorp in Baltimore.
The deal is unlikely to draw as much opposition as recent major U.S. bank mergers because Bankers Trust is primarily a wholesale bank that does not serve consumers. It will require approval by the Federal Reserve Board and the New York State Banking Department. Neither agency would comment Monday, though the banks are scheduled to brief regulators in Washington and New York this week.
Two laws come into play-the Bank Holding Company Act and the International Banking Act. Collectively, the laws require foreign banks operating here to be subject to comprehensive supervision by their home country regulator.
The Fed already has verified that German bank supervision satisfies this requirement. "Because Germany has already been considered to have met this standard, it makes it much easier for subsequent applicants to get approved," said Paul S. Pilecki, a partner in the Washington office of the Shaw, Pittman, Potts & Trowbridge law firm.
On Monday the banks confirmed they were discussing a merger and said a final decision would be made Nov. 29. It is expected to be a cash deal, which would require Deutsche Bank to write off $5 billion of goodwill that Bankers Trust now counts as regulatory capital, lawyers said.
International accounting rules also would require Deutsche Bank to value all of Bankers Trust's assets and liabilities at market prices, a move that could cost the German giant as much as $8 billion in regulatory capital, lawyers said. (Most banks avoid eliminating goodwill and re-valuing assets by essentially combining balance sheets. This pooling of interests option, however, was not available to Deutsche Bank because it is not registered with the U.S. Securities and Exchange Commission.)
But Deutsche Bank is loaded with capital and is expected to easily handle the hits.
"Deutsche Bank is probably one of the best-capitalized banks in the world," Mr. Sweet said. "The German regulators require the strongest capital in the world. I would be shocked if Deutsche Bank could not pick this up."
According to Deutsche Bank's Sept. 30 financial report, the bank had a 10.1% regulatory capital ratio. This means it exceeds the 8% threshold for adequately capitalized banks by more than $16 billion. That is $3 billion more than it would need to close the Bankers Trust deal.
The deal is subject to traditional bank merger reviews. This includes antitrust, Community Reinvestment Act, and financial reviews. Gilbert T. Schwartz, a partner in the Washington law firm of Schwartz & Ballen, said the deal should easily clear all three hurdles. "If anything, you can argue this is better from a supervisory standpoint because Deutsche Bank is such a strong parent," he said.
Mr. Sweet said Deutsche Bank would not have to curtail any European operations to win approval. This is because Regulation K lets foreign banks with U.S. operations own commercial firms outside the United States, provided the banking companies earn at least half their profits and revenues overseas and hold more than half their assets abroad.
