RPT-DEALTALK-U.S. accounting rules could prolong pain for banks

(Repeats article first issued on Tuesday afternoon)

By Dan Wilchins

NEW YORK, May 20 (Reuters) - Stronger U.S. banks are increasingly reluctant to buy weaker ones because accounting rules make these deals unpalatable, a trend that could slow consolidation in the sector and prolong the banking downturn.

The accounting rules, combined with the unusually deep pockets of some investors, have spurred banks, including National City Corp (NCC.N: Quote, Profile, Research, Stock Buzz) to issue shares and convertible securities instead of selling themselves at fire-sale prices.

But allowing weaker banks to limp along is not a positive for the broader banking system.

"It keeps the system from recovering as fast as it should," said James Ellman, president of hedge fund Seacliff Capital, which invests in financial stocks.

Under U.S. accounting rules, if a company acquires another, it must record the value of the target's assets and liabilities at their market value at the time of purchase. Any gap between the net value of the company and the purchase price is recorded as "goodwill" -- an intangible asset -- on the acquirer's balance sheet.

For banks acquiring banks, that is a problem -- the net value of the assets might be low or even negative. That would translate into high goodwill, which cuts a bank's regulatory capital. That is particularly problematic because many would-be buyers do not have much regulatory capital to spare these days.

"Banks are severely limited in their ability to do M&A -- ability in terms of buying other banks -- because of the purchase accounting impact that an acquisition has," said Neil Carragher, a managing director at Credit Suisse.