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Jun 26, 2020

Goldman has choices to make to avoid dividend cut after Fed test

Bank shares sink as Fed clamps down on dividends

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Goldman Sachs Group Inc. might have to shrink its balance sheet to avoid a dividend cut in the wake of the Federal Reserve’s annual stress test.

The central bank on Thursday assigned each firm it reviewed a “stress capital buffer” that’s used to determine how much capital the company needs to meet safety requirements. Goldman’s buffer was much higher than analysts had predicted.

The SCB is also higher than the level that would breach minimum capital requirements, meaning the bank couldn’t keep paying its current dividend without taking action such as reducing its balance sheet to get below the restriction.

That could be as simple as selling some of its bond holdings.

Goldman’s common equity tier 1 capital would be eroded by 6.4 percentage points under the Fed’s stress scenario, according to Thursday’s results.

Adding the impact of current dividends, the firm’s stress capital buffer is likely to be set at 6.7 per cent. That would bring its minimum capital requirement to 13.7 per cent, above the bank’s 12.3 per cent capital ratio at the end of March.

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The bank will probably shrink its balance sheet to meet the stricter requirement, analysts at Keefe, Bruyette & Woods and Morgan Stanley said in reports. The SCB rules go into effect in the fourth quarter.

Goldman will probably meet the new requirement by the end of the third quarter through retained earnings and balance-sheet management, keeping its dividend at current levels, analysts at Barclays Plc said.

A representative for the New York-based company declined to comment on the stress test results.

Goldman shares fell 8.1 per cent to US$190.43 at 2:10 pm in New York, bringing this year’s decline to 17 per cent.