Volcker rule to hurt M&A, warn analysts

City A.M. Reporter
THE “Volcker Rule” provision of Wall Street reform legislation being finalised by Congress would put a lid on domestic mergers and acquisitions by the largest US banks, analysts warned yesterday.

Further growth through M&A would be blocked for Bank of America, JPMorgan Chase, Citigroup and Wells Fargo, said Barclays Capital analysts.

“A law like this would restrict banks’ ability to do M&A,” said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.

International deals could still be possible for the mega-banks, however, depending on how the rule is applied and which liabilities are counted, Howells said.

The “Volcker rule” is part of a sweeping bill to overhaul financial regulation being drafted by a Senate-House of Representatives conference committee. It met again yesterday, but was not expected to debate the rule until next week.

As proposed, the rule would prohibit banks or the largest financial firms from merging with or acquiring another bank or large firm if the result would be an institution with liabilities exceeding 10 per cent of total US liabilities. A six-month study would have to be done, under the proposal, on how to implement the cap on liabilities.

If it is ultimately approved, as expected, the new cap would supplement an existing cap that limits banks from controlling more than 10 per cent of US deposits.

“It is not clear how the Federal Reserve will calculate the total liabilities for all of the types of financial institutions potentially subject to the concentration limit,” said an analysis last week by law firm Shearman & Sterling.

Investment analysts at Keefe Bruyette & Woods said Bank of America already exceeds the deposits cap.

The idea of the liabilities cap – proposed in January by White House economic adviser Paul Volcker and President Barack Obama – is to reflect that banks and financial firms today rely not only on deposits, but other liabilities as well.

The bill is expected to be finalised by the end of the month with the shape of the final regulation by then determined.