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Goldman Sachs and Morgan Stanley Near Bottom of Stress Tests

Thursday, 7 Mar 2013 | 4:31 PM ET
Peter Gridley | Getty Images

Goldman Sachs and Morgan Stanley may face resistance from regulators if they attempt to significantly increase their dividends or share buybacks this year.

The Federal Reserve estimates that in a stress scenario, the Tier One common ratio, the ratio of common equity to overall assets, for both Goldman Sachs and Morgan Stanley could come very close to the five-percent minimum required for banks to pay dividends or engage in buybacks.

Goldman's Tier One common ratio, which stood at 13.1 percent in the third quarter of 2012, could drop as low as 5.8 percent in stress scenario in 2014. Morgan Stanley's Tier One common ratio stood at 13.9 percent in the third quarter of 2012. The Fed estimates that it could fall as low as 5.7 percent in a stressed scenario.

The estimates of capital are based on the banks continuing the dividend and buyback plans approved for last year. Since both Goldman and Morgan Stanley's results show capital in excess of 5 percent, it's unlikely that they'll be required to cut back on capital distributions.

Firms that submit aggressive capital-distribution plans may be forced to submit new plans if they have proposed an increased distribution which would bring down their capital ratios below 5 percent. The capital plans submitted to the Fed have not yet been disclosed.

The Fed will announce which capital plans have been approved next week.

Since the stress tests used last year's capital-distribution plans to benchmark future financial health, both Goldman and Morgan Stanley could argue that they placed so low in this year's test because they were already authorized to return so much capital to shareholders. Bank of America, for example, was blocked from increasing its dividend last year, which helps its numbers look better this year. In short, Goldman and Morgan Stanley can claim that the numbers revealed Thursday afternoon simply show they have been efficiently returning capital to shareholders already.

Other than Morgan Stanley and Goldman Sachs, only Ally Financial's capital would fall below 6 percent under a stress situation in 2014, according to the Fed's analysis. Ally's capital could fall as low as 1.5 percent, according to the stress-test results. That's far below the minimum required for an approved capital distribution.

Under a stress situation, JPMorgan Chase capital could fall to 6.3 percent, Bank of America to 6.8 percent, Citigroup to 8.3 percent, Bank of New York Mellon to 13.2 percent, BB&T to 9.4 percent, Fifth Third Bancorp to 8.6 percent, Keycorp to 8.0 percent, PNC Financial to 8.7 percent, Regions Financial to 7.5 percent, State Street to 12.8 percent, SunTrust Banks to 7.3 percent, U.S. Bancorp to 8.3 percent, and Wells Fargo to 7 percent.

The total ratio for the 18 participants in the study could fall to 7.4 percent.

The stress tests results today reflect a scenario in which the unemployment rate reaches 12.1 percent, equity prices drop more than 50 percent, and home prices fall 20 percent.

Follow me on Twitter @Carney

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