Securitized banking vs. FDIC-insured banking

Discover Financial Services, a Chicago-based bank and credit card company, will buy about $1.1 billion in deposits from Allstate Corp., which is getting out of the banking business, Bloomberg News reported Tuesday.

Discover has been “trying to reduce their reliance on securitization funding and been growing their direct-to-consumer bank,” said Michael Taiano, an analyst at Sandler O’Neill & Partners LP, who has a “hold” rating on Discover, Bloomberg reported.

A move away from securitized banking and toward deposit funding would be a significant development for the credit markets. In the years leading up to the financial crisis of 2007 and 2008, consumers and businesses increasingly relied on securitized banking, rather than conventional banking, for their credit needs.

Securitized banking is the combination of repurchase funding and securitization.  It was a key site of the systemic panic during the crisis, and it is an important component of shadow banking, where companies borrow and lend outside the traditional FDIC-insured bank system of deposits and loans.

Allstate, the largest publicly traded U.S. home and auto insurer, said it made its decision in part because of the “changing regulatory environment” since the crisis.  Discover did not say what it is paying for the Allstate deposits.

The Bloomberg story did not mention the repurchase market.


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