American Express to become a bank

The US Federal Reserve granted American Express’ request to become a commercial bank today, opening the door for the credit card giant to accept deposits and permanently access financing.

The Fed said late last night it had approved the application for American Express and a related company, American Express Travel Related Services Co, to become bank holding companies.

The approval represented the latest reshaping of the financial services industry, which is undergoing its worst credit crisis in decades.

In announcing the action, the Fed cited “emergency conditions”. AmEx filed its application with the Fed on November 5.

The Fed’s approval for American Express was similar to the decision it made in September to transform the country’s two biggest investment banks, Goldman Sachs Group and Morgan Stanley, into bank holding companies.

That move bolstered the two institutions after the collapse of Lehman Brothers, which became the largest bankruptcy filing in US history. The investment banks’ troubles stemmed from bad bets on the housing market, including mortgage-backed securities.

In the case of AmEx, with more consumers having trouble paying their bills, it is seen the value of its primary assets decline. That has made it harder for the company to borrow to pay for daily operations.

In a statement, AmEx said becoming a bank holding company would give it “maximum flexibility and stability in this challenging economic environment”.

In exchange for Fed oversight, AmEx said it wanted “greater access” to government-sponsored financial assistance programmes.

The company revealed severe financial troubles late last month, when it shed about 7,000 people, or 10% of its global workforce, and said it did not expect to meet its targets until the economic climate improved.

The transformation of AmEx into a commercial bank opened it up to “an infusion of funds”, said Red Gillen, a credit card analyst with research and consulting firm Celent.

“You can’t let AmEx fail, is basically what the Fed is deciding,” he said.

Last month AmEx reported that its profit fell 24% in the third quarter as cardholders restrained their spending and had more trouble paying off debt.

In its quarterly filing with the Securities and Exchange Commission on October 31, the company said it expected write-offs in its credit card portfolio to continue to increase in the fourth quarter and into next year.

The New York-based company has reported four straight quarters of profit declines as a rising number of consumers struggle in the face of the worsening economic downturn.

While Morgan Stanley and Goldman Sachs became bank holding companies in September, AmEx is the first card company to do so.

“It’s showing the trickle-down effect. This isn’t for mortgages; this is for cards,” Mr Gillen said.

“Credit cards were kind of the credit source of last resort. You could borrow against that as long as your credit wasn’t reduced. People have gone from mortgages to home equity loans to credit cards.”

Sung Won Sohn, an economist at the Smith School of Business at California State University, said that as a bank holding company, AmEx hoped to greatly expand its resources and avoid the fate of other companies that had to depend heavily on commercial loans to operate.