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Regulatory Black Hole Puts Banks Off Deals

Regulatory uncertainty is putting large banks off buying the assets of smaller rivals, complicating the sector's restructuring and giving hedge funds and private equity a golden opportunity to swoop in.

With U.S. banks facing tough regulatory hurdles on acquisitions in the aftermath of the financial crisis, Canadian, Japanese and Australian banks, which emerged largely unscathed from the credit crunch, are the most obvious trade buyers.

Japan's Mitsubishi UFJ Financial Group bought U.S. bank Pacific Capital Bancorp for $1.5 billion in February this year, while Sumitomo Mitsui Financial bought Royal Bank of Scotland's aircraft leasing business for $7.3 billion in the summer.

More recently, private equity houses have been the buyers, with Apollo Global Management acquiring a 1.47 billion pound book of troubled Irish property loans at a 90 percent discount from Britain's LLoyds.

Spanish lender Popular this month finalised the sale of a 1.14 billion euro portfolio of distressed consumer loans to Nordic distressed debt group Lindorff and private equity firm AnaCap, a source told Reuters.

One international investor said a stricter, more uniform approach to dealing with banks' bad debts across Europe would trigger more asset sales, particularly in Spain, which recently created a so-called "bad bank" to take over the soured assets of some banks.

"We have been in very, very regular communication with banks in Spain. Our inclination is it is a bit early to do things there," said the investor, who requested anonymity.

"They (the Spanish) haven't really worked through the good bank/bad bank scenario, and there really hasn't been crystallised yet the framework for pan-European banking regulation."

BASEL IV OR V?

Confusion over financial regulation is set to continue as efforts to introduce universal standards for banks go awry.

Both the United States and Europe, the world's two largest banking markets, are delaying the introduction of tougher global capital rules for banks, the so-called Basel III accords, which were meant to start rolling out on Jan. 1, 2013.

While the biggest European and U.S. banks already comply with Basel III's minimum requirements, investors are worried that a delay in introducing the new regime will encourage some regulators to devise their own firewalls, leading to a series of escalating responses.

"If you always go for more capital, more safety, more everything, then you get into a position where you stop shoplifting by not having any shops," said Robert Hingley, director of investment at the Association of British Insurers, which represents some of the UK's largest investors.

The U.S. Federal Reserve has proposed raising the capital requirements on foreign banks to ensure they are in line with domestic lenders.

The Bank of England, meanwhile, signalled last month that UK banks still needed to raise tens of billion of pounds in additional capital as many of them had underestimated the cost of loans going sour and future fines for misconduct.

Despite the problems in getting it off the ground, there are also fears that Basel III will not be the final word.

The current accord relies heavily on banks using in-house models to assess risks and capital. But with investors increasingly wary of the wide variety of methods used, the committee that oversaw Basel III is probing these in-house models and will report back next year with its findings.

"We don't know whether Basel III is it, or whether we'll have Basel IV or V," said Gallagher.

Copyright 2012 by Reuters. All rights reserved.

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