Fed admits stress test error

By James Langton | September 4, 2020 | Last updated on September 4, 2020
1 min read
Federal Reserve Building is the headquarter of the Federal Reserve System and 12 Federal Reserve Banks, Washington DC, USA
© Wangkun Jia / 123Rf Stock Photo

Correction of an error in U.S. stress tests has produced modest reductions in capital requirements for two big banks — Goldman Sachs Group, Inc. and Morgan Stanley.

The U.S. Federal Reserve Board released corrected stress test results due to an error in projected trading losses that impacted five major banks.

“The loss rates for certain public welfare investments made by large banks were initially miscalculated, resulting in an overestimation of hypothetical losses for those investments,” the Fed said.

Correcting the error resulted in tiny revisions to the common equity tier 1 capital requirements for Goldman Sachs and Morgan Stanley, to 13.6% from 13.7%, and to 13.2% from 13.4%, respectively.

The mistake had no impact on the capital requirements for the other three banks that were impacted — Citigroup Inc., HSBC North America Holdings Inc., and Wells Fargo & Co.

The Fed said that after finding the error, it reviewed its stress models and didn’t find any other implementation issues. It also adopted changes to prevent similar errors in the future.

James Langton headshot

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.