In the grand scheme of big banks, Bank of New York Mellon (NYSE:BK) is relatively small. But that doesn't mean it's small in importance. In fact, it's one of the most important institutions in the world, and during this video segment, Motley Fool's senior banking specialist John Maxfield explains why.

Listen to the full podcast by clicking here. A full transcript follows the video.


Gaby Lapera: Bank of New York Mellon, which is a really interesting bank, right? It's deceptively small, its balance sheet, its assets are less than U.S. Bancorp. But what's really interesting about them is they're still required to attend all these meetings -- all the systematically important financial institutions, which we will shorten to SIFI for the rest of this episode because I woke up at 5 a.m. and I can't say that more than once in an episode when I'm that tired. It's required to attend all these meetings that all these other SIFI institutions are as well, I guess I said. Anyway, continue.

John Maxfield: Yeah, I mean so this is another New York bank and it's another unique New York bank.

So the Bank of New York Mellon... what's great is that this traces its roots actually all the way back to the founding of the United States of America because it was one of the first banks founded in the United States.

And what's so interesting about... I read an article about this last week entitled, "The Most Interesting Bank in America." And what makes the Bank of New York Mellon so interesting is what... If you look at its balance sheet, you're going to see, like Gaby just said, a bank that is small. And it's got $377 billion in assets on the balance sheet. Yes, that is a big bank, right? But that's nothing like J.P. Morgan Chase with $2.4 trillion in assets on its balance sheet or Bank of America with over $2 trillion in assets on its balance sheet. So it's a relatively small bank. It's a large regional bank, but it would be a small too-big-to-fail bank.

But the interesting thing about it is that, if you're a student of the financial crisis and you read through all the things that happened there, there were a number of key meetings that were going on during the crisis; where the country's leading bankers had to be present with members of the Treasury Department, members of the Federal Reserve, members of the FDIC, to figure out how they were going to create a unified front to attacking the financial crisis. And he invariably was among the roughly dozen bankers that were present at these meetings.

And on top of that New York Community Bancorp... now I've got both these banks in my head right now. The Bank of New York Mellon is a systematically important financial institution despite the fact... and it's a global systematically important financial institution, which is another layer up in terms of the regulatory and compliance burden on these banks.

So the question is why is the Bank of New York Mellon, that it just basically looks like a regional bank, why is it evidently so important in the whole scheme of things.

Lapera: I know our listeners are on the edge of their seats to find out. We should make this a cliffhanger episode.

Maxfield: Sure. And the answer to that is this: off its balance sheet it holds just short of $30 trillion worth of assets under custody of the administration and so the question is, "What are these?" And just again, that's trillion, $30 trillion worth of assets. That's way bigger than the U.S. GDP, right?

So this is a small regional bank holding all of these assets. And what the Bank of New York Mellon does is it acts as an intermediary in the credit markets. And it administers things like mortgage-backed securities, which are just trusts that hold thousands, hundreds, thousands of mortgages that then investors buy shares in these trusts or ownership rights in these trusts, but the Bank of New York Mellon is the company that's actually administering and doing the things that you need to do to keep a trust going on a year-to-year basis.

And because it controls so much of that business in the financial markets, that is why, despite the fact that its balance sheet is relatively small in the whole scheme of things, is still considered one of the most important financial companies in the world.

Lapera: And what's really interesting about this type of business is that although there is like federal compliance regulations that come along with it, it's not really to the same degree as say a J.P. Morgan would face with the amount of assets that it holds.

So there's not really a cap on a bank doing what New York Mellon is doing.

Maxfield: Right. So the Bank of New York Mellon, it doesn't face the same stringent standards that a J.P. Morgan Chase, the biggest bank in the United States faces.

Lapera: Of course, it has standards. Everyone should have standards.

Maxfield: Because it doesn't have as much credit risk on its balance sheet. All those assets, that $30 trillion worth of assets, those are not on the balance sheets.

So even if they do default in the worst-case scenario, that loss doesn't go the Bank of New York Mellon. That goes to the owners of those trusts. Whereas if those assets were on its balance sheet like a large quantity of assets are on the big four banks: Bank of America, J.P. Morgan Chase, Citigroup, and Wells Fargo, those assets if they go bad, they threaten the capital of those banks, which makes the regulators look at those banks much more closely.