When talking about banks … is there a difference?

Why am I writing about banks?


Because the discussion about Wall Street often confuses which type of bank it is that is being talked about. People have been angry at banks. But what bank are they angry with? And why are they angry with it? People have also been angry at Wall Street. Oftentimes I see them angry at the wrong type of bank when they give their reason for why they’re angry.


There are three main categories.


I. Investment Banks

Investment Banks assist those who wish to raise money by acting as the clients agent or by underwriting. These are the “Wall Street” banks. They have two main lines of business: 1) Trading securities for cash or other securities; and 2) Promotion of securities (sell side) to pensions, mutual funds, and investing public (buy side). Note: If your bank has offers for you to buy investments (stocks, bonds, mutual funds, etc) through their investment arm (broker/dealer sales), then your bank more than likely falls into this category of bank.

There was a separation between Investment Banks and Commercial Banks until 1999 when the law allowed them to combine. The Financial Crisis of 2008 was a complex interplay of mis-pricing and misjudging risk. The confusion between banking comes from the 1999 repeal of the Glass–Steagall Act of 1933 which effectively removed the separation that previously existed between Wall Street investment banks and depository banks.

Because of the integration of the banks today, rules that cover banking in general trying to “fix” investment banking may also adversely affect depository banking, and vice versa.

The Squam Lake Report is an academic study and series of recommendation to address the issues of the 2008 crisis.

II. Depository Banks

Commercial Banks are part of the group that we typically think of as a bank as a consumer. Commercial Banks tend to work primarily with businesses while Retail Banks deal directly with consumers. Regional Banks are smaller banks near your local area while a Community Bank tends to be locally owned. Note: If your bank only offers CDs, checking and savings, etc, then your bank more than likely falls into this category of bank.


III. Custodian Banks

Custodian Banks are charged with safeguarding an investor’s financial assets. They are also the firm who reports required information to the IRS and provides you with the required documentation from that reporting (e.g., 1099’s, etc).


So … remember to separate these categories of banks in your mind when the media is talking.

PS. Central Banks manage a nation’s currency, interest rates and money supply.



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One Response to When talking about banks … is there a difference?

  1. Larry Frank, Sr. March 16, 2023 at 9:55 am #

    “If a Custody Bank Fails, Should Clients Fear for Their Assets?”

    Custody banks are not the same as depository banks covered by the FDIC. Your investments depend on the markets, not the bank.


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