Close call for Goldman, Morgan Stanley on total leverage measure in Fed stress test


Goldman Sachs and Morgan Stanley barely passed the Federal Reserve’s annual stress tests, raising doubts about their ability to grow dividends and buybacks over the next year.

All 35 banks subject to the tests passed, despite an unusually harsh exam that featured a severe global recession, the Federal Reserve said Thursday.

Read: Fed says all banks met minimum capital requirements after stress tests

But it was a close call for the Wall Street duo of Goldman Sachs

GS, -0.37%

  and Morgan

MS, -0.20%

 in one particular metric, the so-called supplementary leverage ratio. This is a bank’s total leverage, a measure of total capital as a percent of total assets, including some off-balance-sheet exposures. The two banks’ leverage ratios fell to 3.1% and 3.3% respectively because of losses on loans and trading positions in the most severe scenario, bringing them perilously close the regulatory minimum of 3%.

In the next phase of the process, banks will ask the Fed to approve their capital-return plans for the next four quarters and announce the results on Thursday next week. The entire process is opaque, and it is unclear exactly what these two banks’ skin-of-the-teeth passage will mean for their dividends and buybacks. But on the face of it, the results don’t leave much room to lavish cash on shareholders, particularly for Goldman Sachs.

Earlier this month, Credit Suisse analyst Susan Katzke forecast that Goldman Sachs would buy back $5 billion of stock over the next four quarters, up from roughly $4.6 billion a year earlier. But this assumed that the bank would get through the tests with a 3.8% leverage ratio, not 3.1%.

In a statement, Morgan Stanley said the results “may not be indicative of the capital distributions that we will be permitted to make” when the fuller results are out next week.

An expanded version of this report appears on

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