Exploring impact of Wells Fargo acquisition
Some of the major news inbanks and savings institutions in the last few weeks was the purchase of Wachovia Bank by Wells Fargo for between $15 and $16 billion.
The purchase adds 10,000 branches to Wells Fargo's portfolio and puts the San Francisco based bank in the midwest and on the East Coast where it has had no presence before.
How will that affect local banking?
"It probably won't affect us very much at all," said Price Wells Fargo bank manager Kerstine Fausett. "In fact it will be a positive for our customers in that we will now have larger and better coverage in parts of the country where we have not had branches before."
But as the economic crisis deepens concern still floats in the community concerning credit availability and Fausett says some customers have said they are concerned.
"Actually I've been telling everyone it is business as usual around here," she stated. "The interest rates are the same as they have been in recent months and our underwriting has not become any tighter. We still can loan money to people as usual."
So with that and reports from other local financial institutions that things are not bad locally, where is all this bad news in the media coming from? It's coming from other kinds of banks; ones that loan money to big businesses or other financial institutions.
Wells Fargo, and the now purchased Wachovia are what are referred to as savings banks. But by many financial experts they are not called banks at all, because they don't offer all the services those people consider a bank should provide for customers. Savings banks are in the business of encouraging people to save their money. They lend money to some people that other people have saved, at a higher interest rate than they are paying the depositor, thus paying their expenses and making a profit.
Savings banks have regulations on them that only allow them to lend out a certain percentage of their deposits, so that there is always enough money for them to give to depositors when they come in to make a withdrawal. That money, called reserves, can range between three and 10 percent of the money that the bank actually has deposited in it.
Credit unions are a type of bank, but unlike savings banks they are non-profit banks they are non-profit financial institutions. Credit unions are owned and managed through a board by depositors. To belong to a credit union one must be eligible for membership. In the early days of credit unions that meant people had to work at the same place or belong to some organization. Over the years those restrictions have been liberalized and today almost anyone can belong to a credit union regardless of the name that is on the building it is housed in. Credit unions also loan money on what is deposited and what their assets are based on. Credit unions may also broker loans for members; for instance most do not carry mortgages to their longest term, but instead work with a company that does.
A third type of financial institution are commercial banks. These are considered to be business banks (ones that lend money to businesses) but have been known to extend services to individuals as well, usually people with business ties. Commercial banks usually deal in money that is loaned for a short term, such as 30, 60 or 90 days. They may even lend money overnight to keep businesses running. When one hears about the credit crunch this is one of the places where the system is stuffed up because many businesses rely on these kinds of banks and loans from the banks to pay their payroll or buy materials when cash is short because other companies or individuals have not paid them yet. Still they must have liquid funds to keep going, so these banks are vital to business.
Another kind of financial business is that of savings and loans. Savings and loans got into a lot of trouble for stretching rules on lending in the late 1980's, the last time there was a major mess in the financial markets. Thousands of these for profit savings institutions went out of business. They are much like a bank, usually providing savings accounts for individuals. Money deposited into these savings institutions are often lent out to those in a local area, and very often for real estate.
Then there are investment banks. These banks buy and sell stocks and bonds and provide investment advice to their clients. These are not savings banks in that they do not accept deposits, but instead work with peoples money to gain higher yields while taking money from those investors earnings to fund their operations and make a profit. Many investment banks offer advice for mergers, acquisitions, divestiture or other financial services for clients. This can include such things as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities. Recently some of the biggest banks that failed were investment banks, such as Lehman Brothers. Others like Goldman Sachs and Morgan Stanley have switched to being more than just investment banks but are now acting as savings banks as well.
Then there are central banks. The United States Federal Reserve is a central bank. Central banks are usually the bank of last resort during a cash crunch and provide funds for private banks to operate. Loans to these banks can be short term or longer term. These banks are run by a country or group of countries and are used to control monetary policy. Central banks are often used to monitor private banks to see that they are not working in illegal ways or are not operating in a reckless fashion. These banks control the stability of a currency and also often decide what the prime interest rate is for the areas they govern are.
There are specialty banks which may have different names than some of these, but most financial institutions fall into these categories.
Right now central banks around the world are struggling to keep up with the changes and the ripples that are going on in the economic markets. Banking is just one section of the economy, but since it regulates currency, it is a key part. One which cannot be allowed to fail if the other key components are to remain viable in any economy.
Editors note: This is the final of three articles concerning the global banking system, how it affects the economy and the average person.