Fed finds error in stress tests, lowers capital requirements for Goldman, Morgan Stanley

September 4, 2020.

The U.S. has corrected stress test results for five of the country’s largest banks after discovering an error in projected trading losses, decreasing the capital requirements for and as a result.

The Fed said Friday that the loss rates for certain public welfare investments made by large banks were initially miscalculated, resulting in an overestimation of hypothetical losses for , Goldman Sachs, , Morgan Stanley and

Because of the revised stress test results, Goldman Sachs saw a 0.1 percentage point decrease in its Common Equity Tier 1 ratio to 13.6%, and Morgan Stanley saw a 0.2 percentage point decrease to 13.2%. The three other banks did not see a change in their CET1 capital requirements as a result of the revision.

The Fed said that in conducting its review of the loss models used for certain public welfare investments, it found other model components that were similarly implemented but no other errors were discovered.

Last month, the Fed issued new capital requirements for 34 of the largest banks in the U.S. based on stress tests conducted earlier this year, the first time the central bank gave out custom capital requirements. Goldman Sachs and Morgan Stanley were slapped with the highest CET1 capital requirements.

The revised stress tests still leave the two banks with the highest capital requirements, followed by DB USA Corp., a subsidiary of Deutsche Bank, at 12.3% and Credit Suisse at 11.4%.

At the end of the second quarter, Goldman Sachs and Morgan Stanley had CET1 ratios of 13.3% and 16.1%, respectively. The Fed’s new capital requirements go into effect Oct. 1. 

Goldman Sachs had previously asked the Fed to reconsider its stress test results, but the central bank dismissed the appeal after a reconsideration process, which involved an independent group analyzing and evaluating the stress test results to make sure the models worked as intended. Other banks that had appeals rejected included BMO Financial, Capital One Financial, Citizens Financial and Regions Financial.