Goldman Sachs has lodged an appeal with the US Federal Reserve challenging its result in the regulator’s most recent “stress test”, which is set to force the Wall Street bank to hold a greater amount of capital, according to people familiar with the matter.
The appeal advances the issues that Goldman chief executive David Solomon expressed publicly two weeks ago, when he argued the Fed’s results did not reflect the work the bank had done to make its business more stable.
Goldman and the Fed declined to comment.
The Fed’s stress result, which included that Goldman would lose more than $40bn from loans in a series of economic doomsday scenarios, would require the bank to hold a higher amount of capital relative to its assets. Capital is kept in store by banks to absorb potential losses but is also used for dividends and stock buybacks.
The result will mean Goldman’s capital holdings rise more than some analysts had anticipated, given that the bank has pared back its business of investing its own capital in less liquid and riskier private assets. Goldman is also typically subject to some of the highest capital requirements due to its large trading business.
The appeal process starts with banks submitting a letter to the Fed that lays out the areas in which it disagrees with the outcome. The Fed would then recheck the test for any errors.
Goldman faces long odds in its appeal effort. Since the Fed started to allow banks to appeal against their results in 2020, eight lenders have done so but all have been rebuffed. Goldman challenged its results once four years ago.
The Fed’s stress test was mandated by Congress as part of the Dodd-Frank post-financial crisis reforms, and is used to decide how much capital banks must hold against their assets.
The Fed typically discloses in August the names of any banks that appealed against their stress test result and whether they were successful.
Bank capital has emerged as a hot topic in the past 12 months after the Fed proposed an implementation of new banking regulations, the so-called Basel III Endgame reforms, that would require large US banks to hold considerably more capital.
The proposal set off an aggressive lobbying campaign from the banking industry. Fed chair Jay Powell has since said the central bank, which is also one of the main US banking regulators, would make material changes to its proposal.
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