What the Fed stress test showed about Goldman Sachs' capital

The Federal Reserve Board's annual bank stress test revealed that all of the large US banks under evaluation are "positioned to weather a severe recession and stay above minimum capital requirements," according to a press release from the Federal Reserve.

JMP Securities Director of Financial Technology Research Devin Ryan gives insight into the Fed's stress test and what it ultimately means for Goldman Sachs' capital strength:

"The pressure from kind of stressing the credit card portfolio was a little bit of a drag for them [Goldman Sachs]. And so I would point to that is kind of one component of it. Again, these are really small dynamics and we're much more focused on what this all implies for capital return. I think from a capital position, they're still in a very strong position, as we saw in the test last night, even these very severe scenarios...

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This post was written by Nicholas Jacobino

Video transcript

Following the latest round of stress test results.

The fed saying all 31 banks would be able to withstand a severe recession scenario.

Goldman Sachs shares taking a hit.

Analysts are saying that the bank are, is going to have to have to set aside more capital based on the stress test we wanna bring in Devin Ryan, he's J MP Securities Director of Financial Technology Research, Devin real quick before we dive in specifically into Goldman, I just wanna take a step back when you take a look at the results that we did get out last night.

Did anything surprise you uh at a high level?

It wasn't overly surprising.

We figured, you know, all banks would pass and, and really you go into the stress test and you hope that all banks are gonna pass and really then the question is the nuance around that and then what that implies for capital return, which is really what investors are focused on.

I think we all know that banks have built a lot of capital and recent years.

And so I would say uh you look at, you know, the banks at pa banks have passed, you know, 10 were uh slightly better, um, than um, where they were last year and 11 were slightly below where they were last year.

So they're really small nuance around the edges versus, you know, some major surprise to your question.

So let's talk about the Goldman of it all then that banks capital strength that is for our viewers that their solvency, their ability to withstand financial distress that declined.

What do you think was the single biggest driver behind that?

Yeah, so it declined a little bit.

Um And, and not overly surprising, uh if you look at this year's test, it wasn't dramatically different than last year.

But um the pressure from kind of stressing the credit card portfolio was a little bit of a drag for them.

And so, you know, I would point to that is, is kind of one component of it.

Um Again, these are really small uh dynamics and um you know, we're, we're much more focused on, you know, what, what this all implies for capital return, I think from a capital position, they're still in a very strong position.

Um A as we saw in the test last night, even these like very severe scenarios.

Um But the question then is what does this imply for how much capital they can return?

And we'll get an update on Friday.

So tomorrow from all the banks and then um you know, happy to talk about this.

But I think the bigger question is around where capital rules go and that's really related to basel three end game, which is a whole another conversation, but that's gonna be kind of over the next couple of months.

That's where we get to the final rules there.

Yeah, Devin, let's talk a little bit more about that because in the recent note and your reaction note, you're saying that we should be placing maybe a bigger emphasis or maybe that is more important ultimately uh to the banks healthier in the future.

Talk to us just about what you think we could potentially see from that given that there are certain, I guess, uncertain factors or uncertainty because we don't exactly know what exactly puzzle the end game is going to look like.

Right, exactly.

So the initial proposal came out and I think um you made a lot of us and, and some of the bank executives a bit nervous in terms of where the starting point was for that conversation.

And what we've seen in recent months is that, um, you know, it does appear that it's going to get softened and there's even some press reports earlier this week that the fed has been floating, you know, much after um proposal for the final rule, which would really, you know, be a positive for the industry.

So I think, you know, everybody is just waiting to see what exactly that looks like.

And then on the other side of that then I think uh companies will have more confidence to really, um you know, more broadly accelerate capital returns.

So of course, you need to get through the stress test and have um you know, reasonably good results.

I think we got that last night again, there's some nuance on the plus side and some nuance on the negative side.

Uh And I think you'll see you probably modest acceleration and capital return in the announcements tomorrow, but then you'll see a bigger catalyst on the other side, a basel three end game in the expectation that it does get watered down, which is, you know, everything that we're reading about right now in the press, at least.