Despite the plethora of news churned out about the Fed-assisted bailout of Bear, Stearns & Co. Inc., confusion still reigns about how an investment bank differs from commercial and mortgage banks.
Investment banks, usually larger than most commercial banks, provide credit to businesses and public agencies, issuing stocks and bonds. Commercial banks provide loans to businesses and individuals, and take deposits.
Mortgage banks deal in only home loans but don’t take deposits, and usually obtain loan funds from investment banks.
Vince Siciliano, chief executive officer for 1st Pacific Bank of California in San Diego, says the confusion occurs because some commercial banks also act as investment banks, underwriting securities and packaging bundles of loans for investors. Bank of America and Washington Mutual Bank, which serve the San Diego market, fit into this category.
“I keep reading about Bear Stearns and other investment banks, and (the media) often refers to them as banks, but these much larger banks are really in a different business than most commercial banks, and all community banks,” Siciliano said.
The biggest differences are in the level of federal oversight and the ratio of capital each must maintain.
Investment banks are regulated by the Securities and Exchange Commission, while commercial banks have at least two regulators, Siciliano says. There’s the Federal Deposit Insurance Corp., as well as the bank’s main regulator, either a federal or state agency, depending on the charter.
Another distinction is the amount of capital lenders must keep on hand. For most banks, the range is 6 percent to 8 percent of assets. But investment banks, more highly leveraged, sometimes retain just 2 percent of assets in reserve capital, Siciliano says.
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Frontera Investment Inc., which said it is the “first company that has developed a ‘one-stop shop’ approach to delivering a full menu of financial services to the unbanked Hispanic consumer,” conducted a reverse merger with Bidnow.com Inc., a Pink Sheets firm, and now owns about 85 percent of Bidnow. First PacTrust Bancorp, parent of Pacific Trust Bank, reported net income of $3 million for 2007, down 37 percent. Nonperforming loans at year end were $14 million, compared with $2 million at the end of 2006, and included a $10 million construction loan. USA Federal Credit Union said it netted 1,348 new members following a recent ad campaign. The $700 million credit union said it also extended $11.7 million in new loans. San Diego County’s program of investing in local banks passed the $100 million goal recently, said county Treasurer-Tax Collector Dan McAllister.
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