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Will Banks' Merger-Rule Easing Lead to More Consolidations?

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Last week, the Federal Reserve made it easier for big banks to merge by changing the threshold size of the combined entity. Thus, a bank merger leading to formation of a financial institution with total assets of less than $100 billion will not require broad regulatory review of a proposed transaction.

This represents four-fold increase in the threshold level, which was previously $25 billion. The change was announced while approving People's United Financial, Inc.’s (PBCT - Free Report) merger deal with Suffolk Bancorp , which will lead to the creation of a nearly $43 billion company.

Per the Fed statement, “the Board’s experience has shown that proposals involving an acquisition of less than $10 billion in assets, or that result in a firm with less than $100 billion in total assets, are generally not likely to create institutions that pose systemic risks.”

What This Means for the Banking Industry

Basically, a bank merger deal takes around six months to a year to get the Fed approval, depending on complexity and size of the transaction. At times, the review period is even longer, as in the case of M&T Bank Corporation's (MTB - Free Report) acquisition of Hudson City Bancorp Inc. It took over three years to receive the Fed nod.

Hence, by easing the threshold level, the Fed has removed a big hurdle in the M&As process for regional banks. This also signals that the regulatory environment for consolidations is gradually improving.

More importantly, this is beneficial for several regional banks including New York Community Bancorp, Inc. (NYCB - Free Report) , Hancock Holding Company , Comerica Inc. (CMA - Free Report) and Zions Bancorporation (ZION - Free Report) , having assets in the range of $24–$73 billion. These banks can now engage in acquisition deals without worrying much about getting the regulatory approval.

While the other review processes for the merger approval remain in place, the easing of threshold level is a big boon for the banking industry, where consolidations were few and far between in the last several years.

So, banks will take advantage of this change and we expect to see a rise in consolidations in the industry. Also, the gradually improving operating backdrop and optimism for lesser banking regulations will provide support.

Of the above mentioned banks, Hancock currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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