NEW YORK (Reuters) - U.S. regulators may be tempted to force bank marriages and asset sales to fill multi-billion dollar capital holes exposed by their stress tests.
But a rapid redrawing of the banking landscape like the one last fall may not be in the cards, banking industry experts say, even though the capital shortfalls at the 19 largest U.S. banks are much larger than analysts had expected.
Citigroup analyst Keith Horowitz wrote that banks, other than his own, may need to raise $75 billion after the tests.
The results are due on Thursday, and about 10 of the 19 banks may need capital, according to media leaks.
While seeking stronger partners could be tempting to the weaker banks, their healthier brethren will likely want to repay money they got under the Treasury Department's $700 billion Troubled Asset Relief Program (TARP) before they use their capital for acquisitions.
And regulators may not have the needed leverage to force these banks to buy their needy rivals, the experts said.
Still as some banks find it hard to raise money, and with mergers often offering significant cost savings, regulators may try to forge a handful of deals, they said.
Some companies may try to sell assets to raise capital, but regulators are unlikely to give weaker banks six months to raise capital unless they have assets they can plausibly sell in that time, said Seamus McMahon, chief executive of bank consulting firm McMahon Advisory LLC.
"If what you are saying is that you are waiting for market conditions to improve and you have no plausible plans in place by June, I don't think they will hesitate to force some of these banks together," McMahon said.
Citigroup Inc (C.N), which a source said needs $5 billion, could be an acquirer as well despite all its troubles, as takeovers could be a way for it to get much-needed deposits, McMahon said.
In urging any mergers, though, regulators will want to be careful that they do not create a new problem instead of solving one.
"You don't want to put two stones together and see if they float," said Jonathan Weld, a banking lawyer at Shearman & Sterling.
"You would only want to put together a strong organization and a weaker one if you thought that you could restructure it and emerge with a strong single entity."
The regulators will be dealing with a situation much changed from last fall, when the U.S. financial system was at a risk of collapse and the government bailout money was seen by many as desirable.
Now, healthy banks are eager to give back taxpayer funds and, despite a recession, the end of the financial world doesn't appear to be at hand.
"The reality is they too want to get rid of their TARP money," said Marshall Sonenshine, chairman of the boutique investment bank bearing his name, referring to healthier institutions. "So they are not going to buy anything that slows down that process."
Regulators may have also lost some of their leeway after allegations they forced Bank of America (BAC.N) to complete its acquisition of Merrill Lynch.
"Already you have BofA feeling more than a little bit burned by having been pushed so hard to take over Merrill Lynch," Sonenshine said. "You are likely to see more banks fail at the bottom of the food chain."
Regulators may not want to create another giant through a merger, but they could urge one of the stronger banks to acquire a weak and smaller rival.
"If as a result of the stress test they realize there are two categories of banks -- banks with excess capital that are in great shape and banks that are deficient, then such marriages may make a lot of sense from a regulatory standpoint," said Joseph Vitale, a bank regulatory partner at law firm Schulte Roth & Zabel.
Editing by Ted Kerr