The Federal Reserve might not yet be certain if Goldman Sachs is “too big to fail,” but it believes the notorious behemoth isn’t too big to acquire other banks.
Goldman’s purchase of $17 billion in deposits from GE Capital Bank was approved on Monday by the Fed. The deal had been in the works since last August.
Fed officials noted that public comments filed in response to the proposed merger charged that Goldman “should not be allowed to increase in size and complexity, arguing that it is ‘too big to fail.’” They decided to brush off the concerns in approving the transaction, citing the relative size of the merger.
“The approximately $17 billion of deposits to be assumed would have a negligible effect on the systemic footprint of these organizations,” the Fed stated in its ruling. The central bank said the merger will up Goldman’s “shares of US financial-system assets and liabilities by less than 0.1 percentage points, and deposits by less than 0.2 percentage points.”
Fed officials also said Goldman’s purchase of GE Capital will “have a negligible effect on [its] …interconnectedness.” Regulators consider a bank’s links to other financial institution when determining the likelihood it will be bailed out in the event of its collapse.
Monday’s ruling is noteworthy because the Fed has recently taken heat for not yet deciding whether eleven banks, including Goldman, are “too big to fail.”
As part of the Dodd-Frank Act of 2010, banks with over $50 billion in assets were declared systemically important by regulators and ordered to draw up living wills—plans to disassemble in an orderly fashion, in case of failure, at minimal cost to taxpayers.
But while the Federal Deposit Insurance Corporation in 2014 declared those banks’ living wills to be “not sufficient,” the Fed declined to do the same. The central bank’s decision gave another chance at drafting the plans to the Wall Street giants—Goldman, Bank of America, Citigroup, and JP Morgan, among others.
“This is one of the ways we determine if ‘too big to fail’ still actually exists,” Sen. Sherrod Brown (D-Ohio) told Fed Chair Janet Yellen, in February. At the same congressional hearing, Sen. Elizabeth Warren reminded Yellen that a failure to produce a living will could result in federal officials “breaking up the banks, by forcing them to sell off assets.”
“The Fed’s refusal to call the plans ‘not credible’ meant the agencies couldn’t use statutory rules to push these risky banks in the right direction,” Warren said.
Yellen told Brown that the ruling would come “in the not too distant future,” but declined to specify when. She said the process was complicated, but that the Fed was, in fact, “prepared to make findings that a living will is deficient.”
GE Capital is in the process of selling off a range of assets because in 2013 it was declared systemically important, and, therefore, subjected to additional rules.
