Compliance, not strategy, could be the biggest question about KeyCorp's agreement to buy First Niagara Financial Group.

Cleveland-based KeyCorp agreed to pay $4.1 billion in cash and stock for First Niagara in Buffalo, N.Y., on Friday. The $39 billion-asset First Niagara has struggled with operational problems and ill-fated acquisitions in recent years and was known to have been on the block, though KeyCorp, which has not bought a bank since 2008, was lightly mentioned as a possible buyer.

Buying First Niagara would be a splashy return to M&A for KeyCorp, and it would fit with its former strategy – the "tundra strategy," in one analyst's phrase – of targeting the less-competitive northern part of the country. There is also plenty of overlap between the companies' branch networks, which would allow for significant cost savings.

But buying First Niagara could test the $92 billion-asset KeyCorp's ability to get a deal past regulators. KeyCorp would be one of just a handful of big institutions that have made deals since the financial crisis, joining Royal Bank of Canada, CIT Group, BB&T and M&T Bank. On Thursday, the $49 billion-asset New York Community Bancorp announced plans to buy Astoria Financial, which would make the buyer a systemically important financial institution.

"The biggest headwind that might be confronting the [KeyCorp-First Niagara] deal would be regulatory," said Anthony Polini, an analyst at American Capital Partners. "It seems like regulators are finally approving deals after a very long drought, but you shouldn't assume you can, and you should iron out every detail before you make that deal public."

Calls to KeyCorp and First Niagara made Thursday, before the official announcement early Friday, were not immediately returned.

If regulators have begun to relax their restrictions on deals, they have also massively ramped up expectations for an acquiring bank's compliance programs, tech systems and capacity to integrate the seller, as M&T's purchase of Hudson City Bancorp showed. In approving that deal after a three-year delay, the Federal Reserve Board said it would no longer allow deals to sit in limbo as the buyer sorted out back-office issues.

So to avoid being the next M&T, KeyCorp needs confidence that its compliance and back-office operations are airtight.

"They're going to need to have ducks lined up ahead of time, and that has a considerable amount to do with their internal systems and how they handle" the Bank Secrecy Act and anti-money-laundering compliance, said Gerard Cassidy, an analyst at RBC Capital Markets. "When we look at the [Comprehensive Capital Analysis and Review] banks around the country, I'm not convinced many of them have their systems at the level M&T does to get it done."

Unlike many of its peers, KeyCorp has not had any run-ins with regulators over compliance and operational problems, and there is no reason to suspect that its systems are anything but top-notch.

However, a big acquisition is a unique test of compliance infrastructure, and the regulatory standard for approval is extremely high, Polini said, noting that M&T had not had any anti-money-laundering violations before its deal for Hudson City.

It is very hard to assess a banking company's internal operations from the outside, but KeyCorp has certainly spent a lot of resources on compliance in recent years, and it has also historically "been cutting edge" in banking technology, Polini said.

"Key certainly isn't a lazy Midwest bank that adopts new technologies later," Polini added.

First Niagara would be by far the biggest deal Beth Mooney has put together in her four years as KeyCorp's chief executive. She has made a specialty of shrewd, small deals – including the purchase of 37 First Niagara branches three years ago – that have provided KeyCorp with new streams of income that have offset depressed loan yields.

By her adroitness with these smaller deals, as well as her success at bringing KeyCorp's costs down, Mooney "has built up an enormous amount of credibility" that should instill confidence that the company can leap through the regulatory hoops to buy First Niagara, said Cassidy.

Not all analysts agree that it will be hard to get the deal through the regulatory net. "We have seen larger deals get approved," said Terry McEvoy, an analyst at Stephens. "BB&T has been walking down this path for a while now."

Others are skeptical of the deal on purely financial grounds.

Most acquisitions destroy shareholder value, said Mike Mayo, an analyst at CLSA. "The burden is on any acquiring bank management to explain why an acquisition is in the shareholders' best interest. … A bank acquirer should be guilty until proven innocent."

First Niagara is itself an example of the dangers of M&A. Under former CEO John Koelmel, the company bit off more than it could chew, particularly in its purchase of 195 of HSBC branches in upstate New York and Connecticut.

First Niagara's stock surged last month on a report that it had hired an investment bank to explore a sale, but investors don't appear to be impressed with the sale price reportedly being discussed – a "modest premium" to the company's $4 billion market cap, according to a Wall Street Journal article on Thursday.

First Niagara's stock spiked briefly after the Journal reported the deal was imminent, and it quickly declined, falling by about 4.2%, to $10.38, by the end of trading Thursday. KeyCorp's stock also fell by roughly 3.8%, to $13.39.

In premarket trading Friday, First Niagara shares were trading at $10.66 apiece, and KeyCorp shares were at $12.66.

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