The biggest reason for the dearth of deals, of course, is the surge of bank failures. Most buyers these days would rather buy deposits and branches of failed banks on the cheap than shell out big dollars for healthy banks.
Prospective buyers are also uneasy about what they might be getting. No matter how much time and effort they spend on due diligence, they can never be certain what dangers are lurking in sellers' loan portfolios.
Then there are accounting rules that require buyers to mark sellers' assets and liabilities to market at the time a deal closes. If the seller has loan-quality issues, this markdown can, in a flash, lower the buyer's equity capital ratios to the point that the deal becomes unpalatable.
"It can create a huge hole in the balance sheet," says Joseph Moeller, a managing director at Keefe, Bruyette & Woods Inc. Deals that make "all the sense in the world aren't getting done," he says, "because the arithmetic doesn't work."
So what can be done to unlock the dormant M&A market? Attorney Rodgin Cohen, who has been helping banks structure merger deals for nearly four decades, offers five suggestions.
First, like Moeller, he advocates relaxing the accounting rules so that a buyer would not have to take the hit on acquired assets all at once.
Second, he supports reinstating a temporary rule put in place last year that let buyers take larger-than-usual tax deductions on losses of acquired banks. (Without this favorable tax treatment, Wells Fargo likely wouldn't have bought Wachovia and PNC Bank might not have acquired National City.) Third, he says regulators should suspend a policy that generally only permits banks with Camels "1" or "2" ratings to make acquisitions and let banks with "3" ratings do deals as well.
Fourth, he suggests that banks stop using a "worst-case" scenario when evaluating deals, and, instead, be "more balanced and measured" in their approach.
Finally, he says the Fed should further relax its rules governing private-equity ownership of banks. New rules put in place late last year now allow a private-equity group to own up to a 33 percent stake in a bank without having to register as bank holding company. The catch is that no more than 15 percent can be voting stock, a potential deal killer for private-equity groups that would want a larger measure of control.
Cohen admits that the first two suggestions are long shots. He says the Financial Accounting Standards Board has shown little inclination to change rules that are based on accounting principles, not public policy, and that Congress is unlikely to go along with giving tax breaks to big banks.
He's more optimistic about regulators letting some - though not all - banks with Camels 3 ratings acquire banks if it would make them stronger institutions. And he says, "there's reason to believe the Fed will move on private equity," though he stopped short of guessing how far.
Absent of some policy changes, 2010 will look very much like 2009 when it comes to bank M&A, Cohen says. "There will be a lot more acquisitions of failed banks," he says.
