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Wall Street biggie – The Goldman Sachs Group Inc. (GS - Analyst Report) is expected to shed its majority stake over a span of one year in London-based Rothesay Life Ltd., the European Insurance Unit of the bank. The decision came on the heels of stringent new capital rules issued by regulators.
Holding $9.66 billion in assets as of Jun 30, 2013, Rothesay was instituted in 2007 by Goldman to capitalize on the sprouting opportunities in the UK pension market. Vending of this underwriting unit by Goldman comes as part of its strategy to increase capital before the implementation of new capital regulations.
In order to strengthen the banking sector and mitigate the threats posed by big banks to the financial system as a whole, the Federal Reserve approved of stricter capital rules. These capital rules put into practice the Basel III accords as well as changes necessitated by the Dodd Frank Wall Street Reform and Consumer Protection Act in the U.S.
The capital rules suggest that U.S. banks would need to set aside more capital as buffer to tide over unexpected losses. Banks will be required to maintain a new minimum common equity tier 1 ratio of 4.5% of risk-weighted assets (RWAs) and a common equity tier 1 capital conservation buffer of 2.5% of RWAs applicable to all supervised financial institutions.
Additionally, the minimum ratio of tier 1 capital has been raised to 6% of RWAs from the present 4%. Moreover, minimum leverage ratio for all banking institutions has been pegged at 4%.
Overall, Goldman is striving hard to optimize its balance sheet. Previously, in Apr 2013, Goldman sold around 80% stake in Global Atlantic Financial Group, the reinsurance business in Bermuda to institutions and high-net worth clients. This step boosted Goldman’s Basel III Tier 1 common ratio by 0.5%. As of Jun 30, 2013, Goldman’s Tier 1 common equity stood at 9.3% of risk-weighted assets under new Basel III rules.
Further, in May, Goldman reduced its exposure to the Chinese economy by selling off its final stake in Beijing-based Industrial & Commercial Bank of China Ltd. (ICBC).
Moreover, in July, Goldman vended majority equity stake in REDI, a financial technology company, to a consortium of investors, which included BofA Merrill Lynch, the corporate and investment banking division of Bank of America Corporation (BAC - Analyst Report), Barclays PLC (BCS - Snapshot Report), BNP Paribas SA (BNPQY), Citadel and Lightyear Capital.
It appears that Goldman has been taking such actions to reduce its non-core business exposure. Moreover, regulatory pressure to strengthen its capital ratios is compelling the company to undertake such measures.
A weak capital level is always a threat to the global economy. Needless to say, meeting new capital rules would act as building blocks for the still unstable economy. The capital rules will benefit the financial system in the long run. They will prevent bank failures and involve less of taxpayers’ money for the bailout of troubled financial institutions.
Goldman currently holds a Zacks Rank #2 (Buy).