Goldman’s Risk-Weighted Assets Seen Jumping Under New Rules

Goldman Sachs Group Inc. (GS), the fifth- biggest U.S. bank by assets, would have $728 billion in risk- weighted assets under new capital rules, a 67 percent jump from the amount it had under earlier regulations.

The investment bank plans to cut the figure to $700 billion by the end of next year, Chief Executive Officer Lloyd C. Blankfein, 58, said today at an investor conference in New York sponsored by Bank of America Corp.’s Merrill Lynch unit. About $18 billion of the reduction will come from cutting credit risk, and $11 billion from market risk, Blankfein said in his seventh straight appearance at the annual event.

The comments mark Goldman Sachs’s first public estimate of how new Basel III rules have increased the risks the firm must assign to its assets, a factor in determining the size of the company’s capital buffer. While larger banks such as Citigroup Inc. and JPMorgan (JPM) Chase & Co. face a smaller jump in RWAs, they will have to hold more capital against those assets based on their size and business mix.

“For more than a decade, larger size and complexity were viewed entirely as synergistic and virtuous,” Blankfein said. “For the first time it’s clear that size and complexity come with a higher cost.”

Capital Buffer

Earlier this month, the Financial Stability Board disclosed capital surcharges for the largest global banks. New York-based Goldman Sachs is required to hold a 1.5 percent capital surcharge above the 7 percent minimum. That equals the 8.5 percent ratio the firm estimated it had under the new rules at the end of the third quarter. The bank probably will maintain a 1-percentage-point buffer above the requirement, Blankfein said.

JPMorgan and Citigroup, along with Deutsche Bank AG and HSBC Holdings Plc (HSBA), face surcharges of 2.5 percent as they are deemed more systemically important.

“Many of our investment-banking competitors also have sizable commercial and consumer businesses,” Blankfein said. “Any synergy from housing multiple businesses together must be weighed against the requirements for more capital and liquidity.”

The need to boost the proportion of equity capital has pressured return on equity, a measure of profitability. Goldman Sachs generated an 8.8 percent return on common shareholder equity in the first nine months of this year, down from 19.2 percent in the same period of 2009.

‘Nature Rules’

Banks have sought to cut holdings of assets with high risk weightings to reduce capital needs for trading businesses and improve returns. Goldman Sachs traders have been adjusting their positions to the new rules since about June, according to Blankfein’s presentation.

“We’ve found that risk-weighted assets have started to drop already,” he said. “Nature rules in our firm. If we give people information and put a charge on something or a cost on something, that incentive structure will get people going places much faster than we otherwise would have gotten by fiat or instruction.”

Changes in Basel III rules have a greater impact on Goldman Sachs’s holdings than those of competitors. The firm’s risk- weighted assets were 67 percent higher than under Basel I rules, a greater difference than Citigroup (C)’s 27 percent or JPMorgan’s 28 percent.

Of Goldman’s $728 billion of risk-weighted assets as of Sept. 30, $250 billion are related to market risk, according to Blankfein’s presentation. Credit risk from derivatives account for $125 billion. Credit risks from principal investments make up $121 billion and other credit risks constitute $186 billion. The firm’s operational risk contributed $47 billion.

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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