Writing my Hotel California column earlier this week, I came across the following interesting tidbit in Goldman’s 10-K (page 206):
The amount deposited by the firm’s depository institution subsidiaries held at the Federal Reserve Bank was approximately $27.43 billion and $94 million as of December 2009 and November 2008, respectively, which exceeded required reserve amounts by $25.86 billion and $6 million as of December 2009 and November 2008, respectively.
This seems a good indicator of the lack of lending opportunities in the economy. But I’m curious: Goldman is probably losing a lot of money parking customer deposits on reserve at the Fed. Why do it?
But first let me try to explain what’s happening here…
Goldman has a bank subsidiary — GS Bank USA — which collects deposits via brokerage accounts. It doesn’t have any bank branches anywhere. And Goldman has grown these deposits a fair bit, from an average of $13 billion in 2007 to $35 billion in 2009.
This is odd for two reasons.
First, Goldman doesn’t have much use for deposits that I can see. They can’t be used to fund investment banking activities.
And clearly they don’t see many good lending opportunities for these deposits. If they did, they wouldn’t park such a big proportion at the Fed, where they lose money.
[Aside: a common misconception is that holding reserves at the Fed is profitable for banks since the Fed now pays interest on reserves. But this ignores the other side of the balance sheet. Banks, after all, have to pay for the deposits that they then put on reserve at the Fed. Math in next paragraph]
Excess reserves held on deposit at the Fed pay 0.25%. But the average interest rate Goldman paid on U.S. deposits in 2009 was 1.06%, implying a negative net interest margin of 0.81%.
Multiply -0.81% by total excess reserves of $25.9 billion held at December 2009, and you get an implied annualized loss of $210 million. That’s a decent chunk of change.*
Another reason these deposits might not make good loans is old-fashioned asset-liability maturity mismatch. Brokerage deposits aren’t sticky like retail deposits. They chase the highest return in the market. Short duration (“hot money”) deposits tied up in longer-duration illiquid loans is a recipe for bank failure.
Now, certain folks might use this as an excuse to bash Goldman (“why aren’t they lending to the real economy!”), but that’s wrongheaded. Don’t get me wrong: I’m no fan of Goldman Sachs. But the problem isn’t that banks are lending too little today, it’s that they lent way too much yesterday. The chief lesson of the financial crisis is that irresponsible lending has dire consequences for the economy. Better that banks err on the side of safety and soundness….better that they lose money parking reserves at the Fed than chase risk making dodgy loans.
But the original question still stands. If Goldman can’t find anything profitable to do with deposits, why keep collecting them?
*A couple caveats here. The rate Goldman is paying on deposits could be lower today than the average in 2009. Also, to lose $210 million, Goldman would have to hold this balance at the Fed — at a NIM of -.81% — for a full year.