(February 1) – “For more than a year now, Wall Street analysts have been wondering whether Merrill Lynch & Company, the nation’s biggest brokerage firm, would buy a commercial bank or be bought by one,” writes Patrick McGeehan in today’s New York Times.
“Now comes the response from Merrill: Why not just be a bank? The firm is preparing to make its biggest push to compete with banks for customers’ deposits. Merrill is taking advantage of recent changes in national banking laws to roll out new banking services, including a federally insured, interest-bearing account tied to its customers’ investment accounts.
“Merrill brokerage executives also are developing the first new version of the firm’s Cash Management Account, which broke new ground 25 years ago by combining interest-bearing checking with a standard brokerage account that held stocks and bonds. The new version, known internally at Merrill as CMA 2.0, would allow customers who are queasy about mixing investments and savings to choose how to segregate various assets within the account.
“‘We know that the vast majority of our clients have a fairly significant amount of money at banking institutions,’ said John L. Steffens, a vice chairman who runs Merrill’s brokerage operation. “I think we’re offering a better deal than banks.”
“In a Merrill cash management account, all the cash that is not invested in securities is regularly swept into a money-market fund that pays dividends; for taxable funds, the current yield is 5.43 percent. But that cash, which amounts to about $118 billion, is not guaranteed by the Federal Deposit Insurance Corporation, as most bank deposits are.
“Beginning in June, Merrill plans to automatically switch the cash that is being swept into taxable money market funds over to insured accounts at two banks Merrill owns.
Because Merrill owns two banks, it will offer federal insurance on up to $200,000 per account, twice the per-account limit for deposit insurance. The firm’s banks, in turn, will use the cash deposits to finance their lending and investing activities.
“‘What the brokerage firms couldn’t have previously was insured deposits,’ said Joan Solotar, an analyst with Donaldson, Lufkin & Jenrette. “Now, with the financial services reform legislation, there is no banking product that the brokerage firms can’t offer.”
“Merrill would not be the first financial services firm to offer insured deposits. The American Express Company has such an account through its online bank.
After Congress repealed the Depression-era regulations known as the Glass-Steagall Act of 1933 last fall, some analysts predicted a wave of mergers among banks, brokerage firms and insurance companies.