Goldman Sachs’s Stress-Test Stumble Leads to Repo CutMichael J. Moore
Goldman Sachs Group Inc., which had to resubmit its capital plan this year after falling below a minimum leverage ratio, used that experience as motivation to cut lending through repurchase agreements.
The bank reduced total assets by $56 billion to $860 billion as of June 30, the lowest level since 2009. Goldman Sachs is cutting back on businesses that have low return on assets and $25 billion of the reduction came in the firm’s “matched book” repo lending, Chief Financial Officer Harvey Schwartz said today in a conference call with analysts after the New York-based firm reported second-quarter results.
Goldman Sachs is facing pressure to reduce assets as the bank is below the 5 percent minimum ratio in the proposed supplementary leverage ratio, which measures equity capital compared to assets unweighted by risk. In March, it also had to reduce the amount of capital it planned to return in the Federal Reserve’s stress test, known as CCAR, after dropping below the 4 percent minimum of a separate requirement.
“We identified opportunities to reduce balance sheet with a de minimis impact to our client franchise and earnings potential,” Schwartz said. “One of the significant inputs into the process obviously was CCAR.”
In a matched book, banks rely on repurchase agreements and securities lending to fund clients while using the same collateral and terms to borrow themselves, often overnight.
Goldman Sachs’s asset reductions also affect other secured financing for clients, Schwartz said. While the firm didn’t release a full balance sheet with its quarterly results today, it had $355.9 billion in secured client financing and secured financing agreements at the end of March, which represented about 40 percent of its assets.
The bank hadn’t seen a pressing need to cut back on the low-margin secured loans before the leverage ratio and stress test because they were viewed as a low risk way to help clients, according to a person with direct knowledge of the firm’s discussions. Clients have been understanding of Goldman Sachs’s decision to pull back, said the person, who asked to remain anonymous because the talks were private.
Recent changes in borrowing rates and so-called failures in the $1.6 trillion-a-day repo market suggest other participants have trimmed their matched books, the person said. Failures to deliver Treasuries in repo trades have increased this year and repo rates on some debt have fallen as low as negative 3 percent.
“A lot’s been written about the repo markets,” Schwartz said on the call. “Certainly our $25 billion reduction in the matchbook had no marginal impact in terms of the repo markets, but I think this will be interesting to watch how it evolves, because as mentioned earlier, large banks have multiple constraints.”
Goldman Sachs’s ratio under the proposed supplementary leverage ratio is 4.5 percent and will reach 5 percent as the firm reduces certain fund stakes to comply with the Volcker Rule, Schwartz said.