A computational error by the Federal Reserve in this year’s bank stress tests resulted in slightly inflated capital requirements for two US banks, Goldman Sachs and Morgan Stanley.

The central bank admitted the mistake on Friday. It said Goldman Sachs’ common equity tier one (CET1) requirement has now been adjusted to 13.6 per cent, from 13.7 per cent previously. At Morgan Stanley, the threshold was moved to 13.2 per cent from 13.4 per cent. 

The Fed said the loss rates on certain public welfare investments — made in funds or companies that invest in low- and moderate-income communities, in areas such as housing or community development — had been “initially miscalculated”, which led to “an overestimation of hypothetical losses for those investments”.

The same error affected Citigroup, Wells Fargo, and HSBC North America, but did not result in a change those banks’ capital requirements. 

Goldman Sachs said it was “notified by the Federal Reserve of an error in their calculation of our stress capital buffer (SCB). Accordingly, our SCB has now been revised downward to 6.6 per cent, with corresponding adjustment downward in our required CET1 ratio to 13.6 per cent.”

The SCB is a capital standard tailored to each bank’s exposure, designed to ensure that they will have adequate cushion in the case of a sharp economic downturn or market turbulence. It was applied for the first time this year. 

Goldman was the only bank to have a capital shortfall after this year’s stress tests were released in June. It had a CET1 ratio of 12.5 per cent at the end of the first quarter, meaning it had $12.50 in high-quality capital for every $100 of risk-weighted assets.

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The bank said it could increase capital levels without changing its strategy. By June, the bank had raised its CET1 capital level to 13.6 per cent, making it compliant with the corrected standard. 

Goldman appealed the results of the stress tests, one of five banks to do so. A person familiar with the appeal said the lender believed its strong second-quarter trading results showed its trading operations were “countercyclical”. Its appeal was denied.

Morgan Stanley did not immediately comment.

Via Financial Times