The Federal Reserve System (Fed) has identified Goldman Sachs as one of the weaker financial groups on Wall Street as part of its annual stress tests.
Out of the 18 institutions tested, 17 cleared the stress tests, while Detroit-based Ally Financial failed to meet Fed’s metrics.
Fed’s stress tests measure how financial institutions meet minimum capital levels in the event of a deep global recession and uncertain markets.
In addition, the US central banking system gave green light for Citigroup’s distribution plan, including a $1.2bn buyback in the next 12 months.
Fed said that Goldman Sachs would suffer a $20bn loss in the depths of the hypothetical crisis and its ratio of core tier one common equity capital against risk-weighted assets would fall to 5.8 per cent, compared with a minimum requirement of 5 per cent.
Goldman Sachs, however, said its tier one ratio would be 8.6 per cent. Ally Financial’s ratio declined to 1.5 per cent in the test.
Tier one capital ratios of other institutions were Morgan Stanley 5.7 per cent, Bank of America 6.8 per cent, JPMorgan 6.3 per cent, and Wells Fargo 7 per cent. Although, bank-run tests and the tests conducted by the Fed show large differences.
Daniel Tarullo, the Fed governor in charge of regulation, said: “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”
Gerard Cassidy, analyst at RBC Capital Markets, told the Financial Times (FT): “Goldman Sachs is clearly capable of equalling or exceeding last year’s capital return.”