Wall Street’s opening bell Monday also served as a death knell to two of its biggest firms, Goldman Sachs and Morgan Stanley, who will abandon their investment bank status to try to stay in business.
The Federal Reserve announced late Sunday evening that it had approved the banks’ request to create commercial banks that can take deposits, bolstering the resources of both institutions.
Last week, investment broker Lehman Brothers filed for bankruptcy and Merrill Lynch said it had reached an agreement to be acquired by Bank of America, touching off a wild week for the market.
The two remaining investment giants faced the choice of partnering with a commercial bank, or becoming one themselves, said Elinda Kiss, a professor and banking expert at the University of Maryland’s Smith School of Business.
“What this means is we’re going to the model we have in a lot of other countries, which is called a universal bank,” Kiss said. “They will be able to take on deposits, which will give them a source of funds, so they don’t have to always raise capital on the open market.”
The move also placed the banks under the jurisdiction of the Federal Deposit Insurance Corporation, rather than the Securities and Exchange Commission. The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed’s emergency loan program.
Deposits have remained strong at Baltimore’s major locally based banks despite the economy’s struggles over the last year. At 1st Mariner Bank, deposits in the second quarter totaled $948 million, up 5 percent from last year. Certificates of deposit also increased by $164 million, which the bank said reflected a shift out of money market accounts.
At Susquehanna Bank, total deposits in the second quarter rose to $9.0 billion, up one percent from the quarter before. Non-interest bearing deposits increased 4 percent to $1.3 billion.
While the high-profile failures of larger investment “banks” have captured headlines, commercial, community-based banks have remained strong, said Chris Holt, regional president for Susquehanna Bank.
“Everyone started getting painted with the same brush,” he said. “In the media or in the public eye, it became just ‘bank.’ ”
Holt said local Susquehanna branches were getting questions from customers — but not withdrawal slips.
“We’re doing fine,” he said. “We’re getting questions; customers will come in an ask us about our FDIC insurance. There’s an education process going on.”
The changes to the large investment houses could leave opportunities on the table for smaller firms that specialize in certain sectors.
“There are opportunities for smaller investment banks, so-called boutique investment banks, to get employees, to get investments,” Kiss said.
The Associated Press contributed to this story.
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