With all these cos converting, what exactly happens to their balance sheet? I assume leverage comes down to some extent. Is there a certain amount of deposit base that’s required to be a bank, or is it just the capital reserve requirements that become more stringent?
I don’t know the answer to the question except that all these corporations are converting to bank holding companies to trade off more regulation for easier access to capital, most importantly gov’t bailout capital.
I don’t think you need a deposit base b/c AMEX doesn’t have a deposit base right? They just have A/R & A/P management but no checking accounts. It is capital reserve requirements, much less leverage, high tier 1 capital ratios, etc. This is why they got accepted so quickly I’m guessing because they aren’t horribly levered like investment banks were… Basically, no more Fortis leverage of 80x; I’m guessing a bank is closer to 15-25x max similar to Cdn Banks.
Commercial banks have access to the fed discount window, which is one of the main reasons for becoming a bank holdco I think. You get fed to support your illquid assets which noone else will fund. The assets will largely sit on the opco sub level. Yes leverage will also come down as you now follow FDIC limits on leverage. This will really affect the cash flow generating capacity of Goldman and MS. In AMEX’s case, and that of Goldman et al, there is a reliance on wholesale funding sources, which is much less 'sticky" than consumer deposits. Consumers don’t typically flee to treasuries when sh*t hits the fan, but institutional funding sources lenders do. Just my two cents on the matter. – I’m assuming AMEX was taking most of their CC receivables off the books and funding with bonds? Probably arb interest rate spreads on the bonds/cc receivables and use the cash proceeds from the sale to reload on CC receivables.
it means you are now regulated by the fed, that comes with all the onerous regualtory requirements that banks endure. you can take deposits which are covered by the FDIC. ultimately it allows for a “cheap” source of funds, but the cots are steep regulation. the IBs that did this, don’t know what they’re in for - their business going forward will be radically different, esp, GS.
it means you get free money