GOLDMAN Sachs and Morgan Stanley were granted approval on Sunday to become bank-holding firms regulated by the United States Federal Reserve - killing off the investment-banking model that has dominated Wall Street for more than 20 years.

The move enables the two investment banks to take deposits and gain easier access to financing, and gives them more flexibility to buy retail banks.

The change, part of a wrenching transformation of the Wall Street landscape amid financial- market turmoil in the past two weeks, means that previously freewheeling firms will be subject to much tighter regulation by the Fed, including tough capital requirements.

That could curb their ability to leverage up their proprietary trading and other activity with mountains of borrowed money, reducing their chances of producing the kind of mega-profits they had been making until the credit crisis hit home this year.

Under a commercial-banking model, Goldman and Morgan will be able to take deposits which, in this shaky financial environment, are considered a stable source of funding.

Their ability to take risks will not only be more thoroughly questioned, but also be more measured because regulators will require stringent capital levels relative to the risks they take.

They must also maintain managerial and operational soundness and be subject to a strict regulatory ratings system.

Under the new set-up, the primary regulator of the parent companies switches to the Fed from the Securities and Exchange Commission (SEC), but the SEC continues to regulate their US securities businesses.

In exchange, Goldman and Morgan gain long-term access to the Fed's discount window and access to bank deposits insured by the Federal Deposit Insurance Corp.

Morgan Stanley is also now less interested in a merger with the banking group Wachovia Corp, though talks with other parties continue, a person familiar with negotiations said.

Goldman intends to expand its deposit base by acquiring deposits wholesale from other banks, particularly those in distress, said spokesman Lucas van Praag.

The bank said it would move assets from a number of businesses into an entity called GS Bank USA that would have more than US$150 billion (S$213 billion) in assets, making it one of the 10 largest banks in the US.