The New Fall Fashion: Converting to a Bank Holding Company

Credit card company American Express Co. today announced that the Federal Reserve approved its application to become a commerical bank holding company. The reasons for the move are similar to those offered by investment banks Morgan Stanley and Goldman Sachs Group Inc. when they converted to bank holding companies: to reassure investors and creditors and to gain access to U.S. government funding programs.

On September 21, 2008, Goldman Sachs announced that it would become the fourth-largest bank holding company. As the credit crisis deepened and pressure on Goldman Sachs’s common stock threatened the investment bank’s ability to continue its operations, converting to a bank holding company, thus coming under the regulatory authority of the Federal Reserve, offered a path to restoration of investor and lender confidence in the firm. The move also provided the company continued access to the Federal Reserve discount window. Earlier this year, regulators had taken the extraordinary step of allowing investment banks access to the discount window as part of measures undertaken to alleviate the credit crisis, but the Federal Reserve planned to remove such access in January 2009.

American Express funds much of its daily operations through short-term loans in the credit markets, especially in commercial paper. When those markets froze up, American Express found itself squeezed. By converting to a bank holding company, the company will have access to the Fed’s discount window and other recently announced federal programs designed to ease the credit crunch, such as the Troubled Asset Relief Program.

One interesting twist that has come out of the Goldman Sachs conversion is that Goldman subsequently applied for a New York state bank charter. Goldman Sachs has two active deposit-taking entities under its corporate umbrella: a Utah-based industrial loan company, GS Bank USA, and a European banking concern. The company merged assets from a number of its businesses, including those that engaged in lending operations, into GS Bank USA. This resulted in GS Bank USA instantly becoming one of the 10 largest banks in the United States, with over $150 billion in assets. Goldman Sachs also has a New York-chartered trust company, Goldman Sachs Trust Company, which is the entity the company plans to convert, pending the approval of its application for a state bank charter, into a full service New York bank with trust powers under the name Goldman Sachs Bank USA, according to Governor Paterson’s statement. The company further plans to merge GS Bank USA into the new Goldman Sachs Bank USA.

“Wall Street is undergoing a transformation,” said New York Superintendent of Banks Richard H. Neiman. “The decision by Goldman Sachs to convert from an investment bank to a bank holding company with increased capital requirements, lower leverage and continual on-site examination will provide a high level of assurance to investors, customers and counterparties. The New York Banking Department will be able to help smooth the transition by leveraging its broad experience with wholesale and capital market activities.”

As of the time this story went to publication, Goldman Sachs had not commented on its application for a state bank charter.

It will be interesting to see whether American Express eventually plans to open one or more American Express bank branches, and whether the company chooses to pursue a federal or state charter.