News Analysis: Why Amex Wanted to be a Bank Holding Company
It's About Access to Deposits and Fed Dollars
The Federal Reserve waived the normal 30-day waiting period and approved the application, made more than two weeks ago by the credit card company. The Fed's quick action was because of the "unusual and exigent circumstances affecting the financial markets," according to a Federal Reserve statement. This move allows Amex to get up to $3.8 billion in government money.
Monday's announcement is also seen as the end of financial services companies focused on one line of business and the use of capital markets for a money source, says Gwenn Brezard, Research Director at Aite Group.com, a Boston, MA-based independent research firm focusing on the financial services industry.
Brezard sees American Express move to a bank holding company "as it is clearly bracing for a darkening scenario, especially in terms of credit card losses, which are mounting daily as consumers are not paying their bills." Amex is preparing for heavy losses on its portfolio, he says.
Amex joins Wall Street investment giants Goldman Sachs and Morgan Stanley, both of which recently turned into bank holding companies. Other large commercial lenders including GMAC, the finance arm of General Motors (GM) and General Electric's (GE) finance subsidiary are also considering the safety of becoming a bank. Amex leaders had previously said the company had no plans to become a bank holding company, though they quickly reconsidered when the commercial paper markets dried up and the company's financing costs skyrocketed.
The rationale behind the move to a bank holding company, Brezard says, allows Amex access to the $250 billion in federal bank bailout money and potentially allows the firm to make an acquisition of another bank. Brezard expressed doubts that Amex will acquire a regular deposit institution. (American Express already has two U.S. bank subsidiaries - American Express Centurion Bank, an industrial loan bank chartered in Utah, and American Express Bank FSB, a federal savings bank. These institutions issue proprietary credit and charge cards, fund cardmember loans and offer certificates of deposit.
Later, American Express may have to buy a regular institution to increase its deposits. Getting a new charter gives the company this option, Brezard adds. While American Express' future is dimmed amid the upheavals in the credit and stock markets, Brezard says if the company has to acquire another bank, "They will resign themselves to do it. It will be more focused, similar to a traditional bank, like Capital One."
He also suspects that American Express will use its sizable portfolio to retrench 'big time' to move its transaction model away from those of a traditional credit card company. Brezard's question: "How long can American Express stay simply focused on credit cards at a time when consumers are leaving credit cards and going toward the debit card model? Things are accelerating in that direction, old models are being torn down."
