Understanding Goldman Sachs’s capital ratios
Since the financial crisis of 2009, there has been intense pressure on US Banks (XLF) to raise capital levels to meet minimum requirements. Since then, they have worked hard to reduce leverage and fortify their balance sheets.
Leverage ratios are measures of the quality of a bank’s assets. Leverage ratios are defined as the proportion of a bank’s Tier 1 capital ratio to its total assets. Basel III provides the internationally agreed-upon standard, although a number of national authorities have opted for even stricter rules.
The Basel III Capital Adequacy framework has introduced a new ratio for controlling excess leverage. This measure expects banks to maintain a leverage ratio of at least 3% at all times.
In 2Q15, Goldman Sachs’s (GS) total capital was $257.9 billion. Its Tier 1 capital ratio was was 11.8% and its Basel III Common Equity Tier 1 ratio was 12.5%. In comparison, peers like JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) reported Tier 1 capital ratios of 12.6%, 10.5%, and 10.1%, respectively.
As of 1Q15, these ratios were 11.4% and 12.6%, respectively, for Goldman Sachs. The bank’s supplementary leverage ratio on a fully phased-in basis was 5.7%, up from 5.3% in the first quarter. This makes the bank’s assets less vulnerable to global downturns.
2015 capital plan
Goldman Sachs remains focused on managing its capital levels efficiently, as is evident in its 2015 Capital Plan. The plan includes a repurchase of stock and a likely issuance and redemption of other securities. Theses activities are primarily aimed at boosting investor confidence.
During the second quarter, the company repurchased 1.2 million shares of its common stock at an average cost per share of $208.20, for a total cost of $245 million. The remaining share authorization under the company’s existing repurchase program is 17.4 million shares.