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Goldman Sachs has become the first US bank to successfully challenge the Federal Reserve over its stress tests and win a cut to its capital requirements as a result.
Goldman will be required to hold common equity equal to 13.7 per cent of its risk-weighted assets (RWA), instead of the 13.9 per cent the Fed initially proposed.
Since the 2008 financial crisis, the Fed has run big bank balance sheets through an annual series of economic doomsday scenarios. It then uses the results to determine how much capital each lender needs to absorb potential losses.
After this spring’s stress tests, Goldman challenged the Fed’s conclusion that the bank would lose more than $40bn on its loans in the worst-case scenarios. It argued that the Fed’s estimates did not reflect the work the bank had done to make its business more stable. It asked the Fed to rethink its plan to require the bank to have capital equal to 6.4 per cent of RWA as a “stress buffer” as part of the overall requirement.
The Fed agreed to cut the buffer to 6.2 per cent after the challenge. Under bank safety rules, if a lender’s capital dips below the requirement, it faces restrictions on paying bonuses and dividends as well as share buybacks.
This marks the ninth time that a US lender has appealed against its stress test results since the Fed started allowing such challenges in 2020. None of the others, including a prior Goldman appeal, were successful. Banks regularly complain that the process is opaque and hard to predict.
Goldman chief financial officer Denis Coleman said in a statement: “We appreciate the Federal Reserve’s willingness to reconsider this matter. We will continue to engage with our regulator to better understand their determinations and to advocate for a more transparent process.”
Goldman successfully argued that losses related to its divestiture of the GreenSky lending platform should not be used in stress test projections of future expenses, according to a letter from the Fed to Goldman chief executive David Solomon that was made public.
Goldman’s overall capital requirement remains the highest of any US-based bank, although the American arms of UBS and Deutsche Bank must hit even higher levels.
