So I understand that GS/MS and the other banks that failed are independent investment banks without commercial parts. And this having to do with risk exposure and etc. Can anyone write a paragraph not too technical explaining this? Thanks.
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One of the reasons is that IBs under Commercial banks are more diversified, therefore, less risky and better credit rating.
An investment bank under the wing of a commercial bank has access to customer deposits.
That is the main reason.
Don't tell David Viniar that.
Commercial banks have much larger balance sheets than pure-play investment banks.
The integrated model, which is the traditionnal one in Europe and has only come to life in the US recently due to the demise of Glass-Stegal, allows the investment banking arm of a commercial bank to use all the deposits of the retail bank to fund its activities.
I-banks don't have deposits so they rely on open-market funding methods such as repos and securitisation. Also, I-banks have moved away from the advisory model to taking an increasing number of actual positions, thus increasing reliance on open-market funding
Basically capital is cheaper for diversified banks.
Investment banks have to mark-to-market their assets daily. While Commercial banks can hold assets to maturity, and will only have to make a mark if they sell the asset.
Interesting, I didn't know this. Is this one of the FAS amendments?
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