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It's not easy being a bank

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David Karp/AP/File

(Read caption) The Federal Reserve Bank of New York. Regulators are makingit more difficult for financial institutions to call themselves banks

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In the heat of the 2008 financial meltdown, Goldman Sachs and Morgan Stanley figured being able to accept money from depositors that would be insured by the FDIC was a dandy idea after Lehman Brothers slid into the abyss. Not to mention, the other backstops the government provided commercial banks at the time so that “money would come out of the ATM machines.”

Now, the blunt end of the regulatory stick is poised to whack the likes of Goldman and Morgan Stanley, and the Wall Street giants may look to shed the bank holding company classification according to Susquehanna Financial Group analyst David Hilder.

“The regulators have proposed a massive new compliance burden on banks to prove that their market-making activities are just that and not proprietary trading in disguise,” wrote Hilder in a note to clients (reported by CNBC). “There will be large additional costs imposed on banks as market-makers that will not apply to market-makers not owned by banks. We would expect that to draw capital to non-bank market-makers, and cause Goldman Sachs and Morgan Stanley to examine whether it makes sense for them to exit the banking system.”

For those that remember, the Goldman Sachs and Morgan Stanley bank charter applications were approved in record time over a weekend no less. The Federal Reserve issued a statement at the time that in order,

to provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility

The average bank charter application process is measured in months and years, with new bank charter approvals in last few years being rare. There have been two so far in 2011 (through June 30th), 11 in 2010 and 31 were approved in 2009. But to say Goldman and Morgan Stanley have friends in low places is an understatement.

As handy as it was to be a commercial bank when liquidity dried up during the financial crisis, now it appears that being a commercial bank may turn out to be inconvenient for firms with business plans to be regulated by the Volcker Rule, which “aims to prevent banks from recklessly engaging in risky trades by prohibiting them from short-term trading for their own profit in securities, derivatives and other financial products,” reports Reuters.

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