"Volcker rule" seen freezing M&A by U.S. mega-banks

WASHINGTON/NEW YORK (Reuters) - The “Volcker rule” provision of Wall Street reform legislation being finalized by Congress would put a lid on domestic mergers and acquisitions by the largest U.S. banks, analysts said on Thursday.

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 on Thursday, 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 percent of total U.S. 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 percent of U.S. 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 conference committee was expected to finish its work by the end of the month, with the resulting shape of the bill and the prospects for the Volcker rule still not decided.

“There’s going to be a lot of horse trading going on during this whole process, so it’s hard to say whether this will end up seeing the light of day,” said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.

Other parts of the bill being developed would require banks to hold more capital on their books to allow them to weather tough times in the future better than they did in the 2007-2009 credit crisis that hammered economies worldwide.

“Banks will be moving from not having enough capital to having extra capital, and I thought at least some of that capital would end up being for M&A. If there are size limits, there might be less of that,” McCormick said.

Editing by Andrew Hay