What's the difference between an investment bank and a retail bank?

Answers to your questions about the news.
Sept. 18 2008 6:29 PM

Banks, Firms, and Houses

Deciphering the terms in the financial crisis coverage.

Read more about Wall Street's ongoing crisis.

New York Stock Exchange. Click image to expand.
The New York Stock Exchange 

On Tuesday, the U.S. government announced that the Federal Reserve, the nation's central bank, would loan $85 billion to American International Group, an insurance firm, for fear that other financial institutions, such as investment banks and securities firms, would go belly-up in its wake.

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What are all these banks and other financial institutions in the news?

Banks

Central bank, reserve bank:A country's central bank maintains the stability of its national currency. In the United States, the Federal Reserve functions as the central bank and acts as a last-resort lender to failing financial institutions. The Fed was created in 1913 to provide financial stability in response to the Panic of 1907.

Commercial bank:A commercial bank, also known as a business bank, takes deposits and gives loans, mostly to corporations. After the Great Depression, Congress required that commercial and investment banks be separate with the Glass-Steagall Act; that restriction no longer applies today. Bank of America is currently the largest commercial bank in the United States.

Investment bank: An investment bank raises money by selling securities to companies and to the government. They also provide advice to corporations about mergers and buyouts. With Lehman Bros. and Merrill Lynch out of the picture, Goldman Sachs and Morgan Stanley are the two largest investment banks in the United States.

Retail bank: A retail bank deals directly with consumers instead of companies or other banks. (The latter business is conducted by a commercial bank.) A retail bank primarily handles savings and checking accounts, mortgages, and personal loans.

Universal bank: A universal bank participates in the banking activities of a commercial bank and an investment bank. Bank of America is a universal bank—in addition to being the leading commercial bank, it is also an investment bank.

Other Financial Institutions

Savings-and-loan association or thrift: A savings-and-loan association primarily accepts deposits from consumers and makes mortgage loans. During the savings-and-loan crisis of the late 1980s and early 1990s, the number of such associations declined by 50 percent after the housing market experienced a downturn.

Clearing house: A clearing house is a private company or a part of a bank that helps settle transactions. For example, it might ensure that a checking account has sufficient funds for a certain debit card transaction before the money goes through. LCH.Clearnet, Europe's largest clearing house, declared Lehman Bros. in default and suspended the bank from operating in the London market.

Brokerage firm, securities firm: A brokerage firm acts as a mediator between a buyer and seller of stocks or securities. When someone wants to buy something in the stock market, they usually go through a brokerage firm, such as Wachovia Securities. While brokerage firms aren't insured under any federal agency, they can register to be insured under the Securities Investor Protection Corp., which was created by Congress in 1970.

Got a question about today's news? Ask the Explainer.

Explainer thanks John Heine, deputy director of the office of public affairs of the U.S. Securities and Exchange Commission, and Josephine Wang, general counsel at the Securities Investor Protection Corp.

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