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From Banking and Finance Law Daily, March 22, 2016

Sale of GE Capital’s deposits to Goldman Sachs benefits both institutions

By Lisa M. Goolik, J.D.

The Federal Reserve Board has approved the application submitted by Goldman Sachs Bank USA (GS Bank), the state member bank subsidiary of The Goldman Sachs Group, Inc., to assume substantially all the deposit liabilities and acquire certain limited assets from GE Capital Bank, the industrial bank subsidiary of General Electric Capital Corporation (GECC). GS Bank will assume approximately $17 billion of GE Capital Bank’s $18.2 billion in deposits, along with supporting technology and resources.

The transaction furthers GECC’s efforts to sell off its holdings that are not related to General Electric’s core business in order to shed its designation as a systemically important financial institution by the Financial Stability Oversight Council.

Commenters’ objections. While 31 commenters were in favor of the acquisition, the Fed received 53 comments in opposition. According to the Fed, the objections ranged from the performance of the involved institutions under the Community Reinvestment Act to the size of the Goldman Sachs organization, arguing that it is already “too big to fail” and should not increase in size or complexity. Some commenters questioned the relationship between the Federal Reserve and Goldman Sachs.

After considering the comments, the Fed concluded that acquisition satisfied all of the requirements of the Bank Merger Act, including: the competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources and future prospects of the involved institutions; the effectiveness of the involved institutions in combatting money-laundering activities; the convenience and needs of the communities to be served, including the records of performance under the CRA of the insured depository institutions involved in the transaction; and the risk to the stability of the U.S. financial system.

CRA performance. In approving the application, the Fed considered the fair lending and compliance records of both banks, the supervisory views of the Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau, confidential supervisory information, information provided by GS Bank, and the public comments received on the proposal. Commenters objecting to the proposal argued that GS Bank’s CRA investments were inadequate with regard to small business loans in LMI communities, that GS Bank had unsuitably low levels of corporate philanthropy, and that the level of community development grants by GS Bank was inadequate for a bank of its size and importance.

In response, the Fed noted that, as a wholesale bank, GS Bank is not in the business of extending home mortgage loans to retail customers, and that the small number of home mortgage loans the bank does make are extended as an accommodation to existing high-net-worth customers. In addition, GS Bank received an overall “Outstanding” rating at its most recent CRA public evaluation by the New York Fed in November 2012. Examiners found that GS Bank provided a high level of community development loans, community development services, or qualified investments, particularly investments that are not routinely provided by private investors. The bank also made extensive use of innovative or complex qualified investments, community development loans, and community development services and exhibited “excellent responsiveness” to credit and community economic development needs in its assessment areas.

The Fed also noted that it received supporting comments asserting that GS Bank has a long history of expanding credit in distressed areas, providing access to financial services to low- and moderate-income (LMI) households, and working with other financial institutions, local governments, and community groups on innovative and sophisticated projects to benefit low-income and minority communities.

Financial stability. The Fed also considered information relevant to the risks to the stability of the U.S. banking or financial system, as well as the effect of the proposal on Goldman Sachs’s and GS Bank’s systemic footprints. According to the Fed, the proposal would benefit both Goldman Sachs and GECC.

The approximately $17 billion of deposits to be assumed would have a negligible effect on the systemic footprint of Goldman Sachs or GS Bank, increasing its shares of U.S. financial-system assets and liabilities by less than 0.1 percentage points, and deposits by less than 0.2 percentage points. In addition, the acquisition would immediately improve the stability of GS Bank’s funding profile by diversifying sources of funding and increasing stable funding and would allow the bank to maintain and further improve its funding profile in the future, which would enhance its financial stability.

As to GECC, the proposal would facilitate its efforts to reduce its overall systemic footprint by exiting from its financial activities.

Conflicts of interest. According to the Fed, some opposing commenters suggested that its consideration of the proposal would create conflicts of interest due to what commenters deemed “close relationships” between the institutions involved and employees of the Fed, citing press reports concerning the illegal disclosure of confidential supervisory information by an employee of the Federal Reserve Bank of New York and an employee of the Goldman Sachs organization.

The Fed responded that the Bank Merger Act requires that the Fed consider the application and that the Federal Reserve Board made the determination, without any involvement by any individuals identified by commenters. The Fed also noted that the individuals identified in the press were terminated by the New York Fed and Goldman Sachs. Those individuals have been charged for their illegal activities, have entered a plea concerning their activities, and are awaiting sentencing.

No reduction in services. To address commenters’ objections that the proposal would not provide a clear or significant public benefit, GS Bank indicated that no reduction in deposit-related products or services is expected as a result of the proposal. In addition, the sale would provide continuity for GE Capital Bank’s deposit customers as it winds down its operations and reduces its deposit-taking activities.

Companies: General Electric; General Electric Capital Corporation; GE Capital Bank; Goldman Sachs Banks USA; The Goldman Sachs Group, Inc.

MainStory: TopStory BankHolding BankingOperations DoddFrankAct FederalReserveSystem FinancialStability MergersAcquisitions PrudentialRegulation

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