Foreign banks keen on buying U.S. banks should continue to expect long waits.
Scrutiny of such deals intensified after the financial crisis, industry experts said. And more delays should be anticipated, as more foreign banks finally find themselves in better condition to pursue deals.
"Any time you have a transaction that is unprecedented, post Dodd-Frank, you can expect a longer process," said Jorge Gonzalez, president and chief executive of City National Bank in Miami.
Gonzalez should know. It took more than two years for Banco de Credito e Inversiones in Chile to secure the regulatory approvals necessary to buy his $6.1 billion-asset bank.
"The Federal Reserve wants to make sure there are high-quality institutions that own U.S. banks, and I think that's the right approach," Gonzalez said after the central bank's OK in late September.
Foreign banks periodically enter and leave the U.S. banking system by buying and selling institutions. Royal Bank of Canada, for instance, is set to reenter U.S. retail banking through the acquisition of a Los Angeles bank four years after selling its operation in the Southeast to PNC Financial Services Group. Banks from Spain and South America are also scouting opportunities in South Florida.
Foreign banks' willingness to pursue M&A "shows you that the process is still there and available for banks with the financial strength and regulatory structure to come into the U.S.," said Mick Grasmick, a partner in the financial services and banking group at Manatt, Phelps & Phillips who has helped foreign banks buy U.S. institutions. "We may have the beginning of a postcrisis foreign-bank wave."
Foreign banks looking to complete U.S. acquisitions face added requirements during the regulatory approval process, which has only gotten harder since the financial crisis, industry experts said. First, the Fed determines whether the institution is subject to comprehensive consolidated supervision, or CCS, from regulators in their home country.
CCS means that the home-country supervisor receives sufficient data on the worldwide operations of the foreign bank to assess its overall condition and compliance, based on a description included in the Fed's Sept. 21 approval of BCI's acquisition. Though the Fed looks at this each time a foreign bank applies to buy a U.S. bank, the process usually gets easier as more institutions from a country apply and regulators get more comfortable with the home country's supervision, industry experts said.
BCI said in a press release that its deal for City National was the "first purchase of a U.S. domestic bank by a Chilean financial institution." BCI and other Chilean banks have U.S. branches, but getting approval for an acquisition is generally more difficult and invites greater scrutiny, experts said.
"If you're the first bank through, it becomes a fairly enormous process," said Bowman Brown, chairman of the financial services practice group at Shutts & Bowen. "You may have to translate the law and the Federal Reserve is interested in really detailed information."
The need for a detailed analysis of Chile's regulatory system was one of the reasons why BCI's deal took 26 months to get approval, said Eugenio Von Chrismar, BCI's chairman. The Chilean institution agreed to buy City National from Spain's Bankia in May 2013 for $882.8 million.
"There was a positive outcome from this process because BCI had an opportunity to get to know City National and our management," Gonzalez said. "We've made good use of that time over this approval process and we are well positioned."
The structure of foreign-bank ownership can also make it more complicated to complete a U.S. deal, industry experts said.
It is common in Latin America, for instance, to have a family own a bank while also having interests in other businesses unrelated to banking, said Fernando Capablanca, a managing director at Whitecap Consulting Group, which was the U.S. adviser to BCI. Sometimes those interests can intermingle, causing a problem for U.S. regulators.
In BCI's case, Empresas Juan Yarur, BCI's holding company, was part of a "complex structure of family-affiliated, nonbank companies that owned a controlling interest in BCI," but the other companies were not subject to supervision, according the Fed's approval of the deal. The company, in order to gain Fed approval, had to simplify its ownership structure so that no other business could own more than 5% of the voting shares.
"You need a simple structure," Capablanca said. "When you have a family that owns other business interests, you have to divorce them."
Other areas, like anti-money-laundering and Bank Secrecy Act compliance, are closely examined when a foreign bank wants to buy a U.S. institution. The character of a foreign institution's management and ownership is considered, and the Fed may look at information from the State Department or the intelligence agencies, said Oliver Ireland, a partner at Morrison & Foerster.
The approval process is very intrusive, which often deters potential buyers that are involved in other business activities that U.S. regulators may find objectionable, industry observers said.
The Fed "wants to know who will run the bank," Ireland said. "They are very careful about that, so a lot of people who might want to own a U.S. bank, but want to keep their other business dealings confidential, realize in that process they will have to make disclosures they don't want to."
Still, some foreign institutions are willing to navigate the regulatory requirements to make a deal happen. This was true for City National and BCI. There will not be a radical shift in City National's strategy, and it will retain local decision-making, Gonzalez said.
"We see a lot of opportunities," Von Chrismar said. "We have had some conversations with the people at [City National] about the possibilities between both banks. We have a good relationship and feel very comfortable with them."