The U.S. Federal Reserve on Thursday cleared the way for Canada's second-largest bank to purchase South Carolina's South Financial Group Inc. (TSFG).

The transaction would make Toronto-Dominion Bank's (TD, TD.T) U.S. subsidiary holding company, TD Bank US HC, the 17th-largest depository institution in the U.S., giving it total consolidated assets of approximately $167 billion.

Standard & Poor's last month lifted its ratings for Toronto-Dominion Bank, saying it expected the company's pending acquisitions to provide a significant boost.

"TD Bank appears to have successfully exported its domestic business model into the [United States]," S&P said in a release.

The deal, valued at $191.6 million in cash and stock, also is of benefit to the Federal Deposit Insurance Corp., which has been battling a rise in bank failures throughout the financial crisis.

South Financial was considered at risk of failure when TD Bank snapped it up in May for 28 cents a share, or less than half the 67 cents apiece they were fetching only days before.

South Financial Group has total consolidated assets of about $12.4 billion and has operations in South Carolina, North Carolina and Florida.

Earlier during the banking crisis, stronger banks like TD Bank generally waited for troubled banks to fail and then negotiated sweeter deals with the FDIC, including loss-sharing agreements, where the FDIC's insurance fund would soak up much of the future losses from the failed banks' bad loans.

"Institutions are becoming more interested in making acquisitions, including open bank acquisitions," an FDIC spokesman said at the time. "Obviously, that's our preferred outcome, because it saves the deposit fund money."

Since the beginning of last year the FDIC has had to shut down more than 200 banks, assuming losses as it worked to find buyers for the banks, or at least some of their pieces.

Now, however, the FDIC is benefiting from stronger lenders' growing interest in buying banks before--not after--they fail. Should more banks follow TD Bank's lead and purchase heavily distressed institutions before they fail, bank regulators could find themselves playing a shrinking role in the cleaning up of the nation's most troubled banks.

-By Meena Thiruvengadam, Dow Jones Newswires; 202-862-6629; meena.thiruvengadam@dowjones.com
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