The Goldman Sachs Group Inc.
) 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.
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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
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
BNP Paribas SA
), 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).