Gold­man's bank deal swaps one risk for another

The Pak Banker - - OPINION - Antony Cur­rie

Gold­man Sachs is swap­ping one too-big-to-fail dilemma for another. The Wall Street firm is buy­ing an online bank­ing plat­form and $16 bil­lion of de­posits from GE Cap­i­tal. The deal has a num­ber of ad­van­tages for Gold­man, but car­ries plenty of risk. From Chief Ex­ec­u­tive Lloyd Blank­fein's per­spec­tive, it's a smart move. Granted, the amount of de­posits be­ing ac­quired is tiny com­pared with the firm's $860 bil­lion of as­sets. But with $89 bil­lion al­ready on Gold­man's books, the ac­qui­si­tion means de­posits will ac­count for 14 per­cent of li­a­bil­i­ties.

That's still less than the 18 per­cent at ri­val Mor­gan Stan­ley, which has a large wealth man­age­ment unit. But ev­ery lit­tle bit helps: Re­tail de­posits are a cheaper form of fund­ing than bonds. And Gold­man clearly in­tends to at­tract more cus­tomers, ei­ther or­gan­i­cally or with ad­di­tional ac­qui­si­tions. The pur­chase should keep fi­nan­cial watch­dogs sweet. They have been push­ing for Gold­man to ex­pand its de­posit base in re­cent years. That's be­cause in a cri­sis bond in­vestors of­ten won't lend to any com­pa­nies for a time, whereas only re­tail banks that are in se­ri­ous trou­ble tend to be vul­ner­a­ble to a run by cus­tomers. Fi­nan­cial in­sti­tu­tions that are less ex­posed to cap­i­tal mar­kets should, there­fore, be safer.

Gold­man and Mor­gan Stan­ley both plan on us­ing de­posits to fund more loans to wealth man­age­ment and in­vest­ment bank­ing clients. Gold­man is even pre­par­ing to let re­tail cus­tomers and small busi­nesses bor­row small amounts. Nei­ther bank has a costly branch net­work, so the in­crease in in­ter­est in­come from lend­ing will of­fer bet­ter re­turns than tra­di­tional com­mer­cial banks earn. There are two prob­lems, though. First, both in­sti­tu­tions are es­sen­tially in­vest­ment banks, and as they in­crease de­posits and loans, they be­gin to re­sem­ble more com­plex mega­banks like Bank of Amer­ica, Cit­i­group and JPMor­gan. Sec­ond, they can use fed­er­ally in­sured de­posits to fund some of their trad­ing, es­pe­cially in for­eign ex­change and cer­tain swaps and gov­ern­ment bonds, in­creas­ing the ex­po­sure of re­tail cus­tomers to cap­i­tal mar­kets. None of this will hap­pen overnight, of course. Gold­man had just $32 bil­lion of loans out­stand­ing at the end of June, com­pared with JPMor­gan's $791 bil­lion. But it's sim­plis­tic to think that shift­ing an in­vest­ment bank's fund­ing to de­posits will end up re­duc­ing sys­temic risk.

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