Why Goldman Sachs Is Building Its Deposit Base

When Goldman Sachs became a bank holding company in September 2008, it looked like big internal changes might be lurking just around the corner.

Finally gone were the days of Goldman taking big risks without a government safety net.

Regulators seemed likely to rein in the fabled investment bank's high-flying business model.

Since the crisis, Goldman has evolved substantially, though the process has been more gradual than might have been anticipated at the time. Today the company is subject to the Volcker Rule, as well as capital and liquidity rules that limit its ability to make big bets.

And now Goldman is taking steps to look a bit more like the commercial bank it has been, at least on paper, for nearly seven years.

No, Goldman is unlikely to open a branch down the street anytime soon. But the firm recently unveiled plans to build an online platform for consumer and small-business loans that will compete against traditional banks and Web-based upstarts like Lending Club. And on Thursday, Goldman announced an agreement to buy approximately $16 billion in online deposits from General Electric's financial arm.

Goldman made those two moves independently of each other, according to a source familiar with the matter. Still, both steps reflect a new emphasis on consumer banking, rather than Wall Street dealmaking.

So what's behind the course change? Goldman said the new funds — roughly $8 billion in online deposit accounts and $8 billion more in brokered certificates of deposit — will strengthen the firm's liquidity profile. In the aftermath of the crisis, liquidity has of course been a priority for bank regulators, who have put particular emphasis on deposit funding.

As of March 31, Goldman Sachs Bank, which is buying the funds, held $77.5 billion in deposits. Fifty-seven percent of them were brokered, and therefore classified as a less stable source of funding than core deposits.

Goldman also noted in a press release that the new deposits will allow the firm to diversify its sources of funding. As of the first quarter, the firm was getting only about 17% of its core funding from deposits, according to a recent company presentation.

The influx of online deposits will be used to fund parts of Goldman's business that otherwise would have relied on wholesale funding, according to the source familiar with the company's plans.

Outside observers foresee Goldman benefiting in other ways from its acquisition of deposits from GE Capital Bank.

As a bank holding company, Goldman spends a lot of money on regulatory compliance, said Todd Baker, managing principal at Broadmoor Consulting. For banks, deposits are cheaper than other funding sources in the long run. And so by adding more deposits to its balance sheet, Goldman will be able to exploit one tangible advantage of being a bank.

"Deposits are a good, stable source of funding," Baker said. "Since you have the whole regulatory burden, why don't you take advantage of that burden?"

In the wake of the Dodd-Frank Act, deposits have become something of a hot potato for firms looking to avoid more onerous regulation.

In January 2013, insurer MetLife Inc. sold $6.4 billion in banking deposits to GE Capital as part of an effort to avoid regulation by the Federal Reserve. Then in April of this year, GE announced plans to wind down GE Capital in order to wriggle free from its status as a systemically important financial institution.

That decision led to the planned sale of deposits to Goldman Sachs, nearly seven years after it became a bank holding company.

So why did it take so long for Goldman to pursue a retail funding strategy?

Baker noted that even more than Morgan Stanley, another investment bank that became a bank holding company in 2008, but which already had a large wealth management business, Goldman Sachs was purely an investment bank prior to the crisis. So the company needed time to figure out how it should reposition itself.

"I think they've just taken time to do it because it wasn't obvious what the clear path would be for an investment bank," Baker said.

Christopher Marinac, an analyst at FIG Partners, offered another explanation for Goldman's interest in deposits, which can be used to make more loans.

He noted that the ratio of equity to assets at Goldman Sachs Bank, as of March 31, was 17.1%.

That means the bank had a leverage ratio of six to one. Industrywide, the same ratio was 11.2%, or more like nine to one.

Consequently, Goldman Sachs Bank has been leaving money on the table, according to Marinac. "They're not fully leveraging themselves yet," he said.