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Why Goldman Is Launching an Online Bank

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Goldman Sachs Group Inc.’s new online bank, acquired from General Electric Co. last week, caps a decade-long shift by the firm and Morgan Stanley to lean more on deposits for funding — efforts that will help them comply with a U.S. rule unveiled Tuesday.

Goldman Sachs took over $16 billion of deposits from the online business it bought from GE Capital. It merged the platform with its GS Bank USA unit and is offering 1.05% interest on savings accounts opened online. That’s adding to a deposit base that’s already grown almost seven-fold since 2007.

Goldman and smaller rival Morgan Stanley scraped through the 2008 financial crisis, converting into bank holding companies under the oversight of the Federal Reserve, while three of their biggest rivals succumbed or sold themselves to stronger firms. Since then, the pair have been amassing deposits, a form of funding favored by regulators over the short-term financing markets that froze during the crisis. On Tuesday, two U.S. agencies announced their version of a long-term liquidity rule outlined by global regulators in 2014.

The so-called net stable funding ratio requires banks to hold enough easy-to-sell assets to meet any liabilities coming due in the next 12 months. Because deposits are viewed as a more stable form of financing than market-based sources such as repos, regulations — including a short-term liquidity standard approved almost two years ago — let banks hold fewer liquid assets against them.

Goldman Sachs said in its latest annual report that it’s already in full compliance with the pending short-term rule, called the liquidity coverage ratio. The firm was still evaluating the potential impact of the long-term rule as suggested by the Basel Committee on Banking Supervision. On Tuesday, regulators estimated almost all covered banks in the U.S. already meet the proposed rule set to take effect in 2018. And the few that don’t are almost at the mark.

One reason regulators favor deposits is that they’re “sticky.” The Federal Deposit Insurance Commission backs deposits to a certain amount, bolstering customer confidence in times of crisis, even when other creditors might worry about losing their money.

Deposits also are a cheaper form of funding than many other types. Goldman paid 2.625 percent for five-year bonds it sold last week. Its online bank’s website offers clients 2 percent interest on five-year certificates of deposit. The portal is Goldman’s first big push for retail bank deposits. Previously, the firm focused on deposits from other customers. At the end of 2015, private bank deposits and CDs provided most of its stockpile.

Morgan Stanley also has become more aggressive in cross-selling savings products to its wealth management clients to boost deposits. The firm targets clients of its retail brokerage division, which jumped in size when the company completed the purchase of Citigroup Inc.’s Smith Barney business in 2013.

— Check out 5 Big Banks’ Living Wills Are Rejected by U.S. Regulators on ThinkAdvisor.


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