If you were ever unclear about the difference between a company like Goldman Sachs Bank USA and, say, Bank of America®, don’t worry; so was chairwoman of the FDIC Sheila C. Bair, who suggested at an American Banking Association (ABA) conference this week that legal constraints be placed on what firms are allowed to call themselves banks. Bair stated that the term should describe only FDIC insured institutions who guarantee customers deposits, rather than Wall Street investment banks and financial firms which offer no guarantees concerning their customers money.

Sheila C. Bair

Calling A Spade a Spade

If a law like this is passed, it could extend to other institutions like mortgage banks which link consumers with financial institutions, but unlike retail banks, do not take or insure consumer deposits. A similar sentiment was expressed last week by former Federal Reserve Chairman Paul Volcker, who cited the post-Depression Glas-Steagall Act as an example of a law which was passed to enforce a separation of retail banks from the riskier world of investment banking (read the full article here). This separation, however, is no longer mandatory.

Although this statement by Bair was only a suggestion, being the Chair of the FDIC her suggestions hold considerable weight, and reflects a sentiment widely held not only in the political field, but by consumers as well. The term bank brings with it certain connotations that in today’s financial world do not necessarily adhere to the companies that go by that name. When any financial institution is allowed to call itself a bank, it can be confusing as to which of these firms are traditional banks that guarantee that you will get your money back, and which are investment banks that are uninsured by the FDIC and are not obligated to protect your deposits.

Banks Redefined

Here are examples of a few financial institutions that all call themselves banks, but have very different practices and relationships with their customers:

  • Investment Banks – These are what you think of when you think of Wall Street; big, fast paced firms that take a lot of risk and do not guarantee that it will be able to return your investment. These banks deal primarily with capital markets.

Examples: Morgan Stanley, Merrill Lynch, Goldman Sachs Bank USA

  • Mortgage Banks – Mortgage-based banks have had a lot of attention lately due to the financial crisis, which primarily developed out of bad loans arising in the mortgage sector. Mortgage banks offer loans and mortgage services connecting customers with financial markets, but are usually not FDIC insured and are subject to different laws in each state.

Examples: Lending Tree, DiTech

  • Retail Banks – When someone is talking about a “normal” bank, they usually mean a retail or commercial bank. These are banks that offer the traditional banking services such as savings, checking and CD accounts. They are also generally FDIC insured, so whatever money you put into these products (up to $250,000) is guaranteed to come back out again.

Examples: Bank of America®, Wells Fargo, TD Bank

Although many of the larger banking firms now have crossover subsidiaries in each of these sectors which operate under the same or similar name (TD Bank vs. TD Ameritrade, for example), they are all very separate as far as rules and regulations they must follow, which can sometimes be confusing to the customer, who is uncertain when their money is safe and when it is at the mercy of the market. Bair and others hope that this can change if financial firms can only call themselves banks when deposits are insured and they are offering what consumers consider to be “regular” banking services.

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