Fed cuts Goldman Sachs stress capital levels; FDIC proposal may hamper bank M&A

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital.

At the federal regulators

The Federal Reserve Board reduced Goldman Sachs Group Inc.'s stress capital buffer (SCB) requirement to 6.2% from the 6.4% floated by the Fed in the June annual stress-test results, the regulator said as it finalized individual capital requirements for large banks, effective Oct. 1.

Goldman Sachs argued that certain nonrecurring expenses related to the impairment of goodwill and other intangibles from business divestitures should not influence the bank's preprovision net revenue projections of noninterest expense. The company also stressed that recent expenses related to losses associated with the write-down of consolidated investment entities should not influence preprovision net revenue projections, according to an Aug. 23 letter from the Fed to Goldman Sachs CEO David Solomon.

Solomon previously expressed dissatisfaction with the Fed's stress-test results this year, calling the process "opaque" and lacking transparency, which "makes prudent capital management difficult."

The adjustment for Goldman Sachs will result in a standardized common equity Tier 1 ratio of 13.7% for the company, down from the 13.9% proposed by the Fed initially.

"We appreciate the Federal Reserve's willingness to reconsider this matter," CFO Denis Coleman said in an Aug. 28 statement. "We will continue to engage with our regulator to better understand their determinations and to advocate for a more transparent process."

The new capital requirements still require large banks to maintain a common equity Tier 1 capital ratio of at least 4.5%, and if applicable a capital surcharge for global systemically important banks — also called a GSIB surcharge — of at least 1.0%. Additionally, banks' common equity Tier 1 capital requirements would include the SCB requirement, based on the stress-test results, which is at least 2.5%.

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The Federal Deposit Insurance Corp.'s proposed rule to amend its regulations under the Change in Bank Control Act could hinder investors' share purchases in banks and lead to ripple effects on bank M&A.

Industry experts are concerned that the proposal would give the agency up to six months to approve the investments, delaying executions and deterring fund managers from owning bank shares.

The proposal could create "friction in the willingness or ability of the large fund complexes to have substantial investments in the public shares of these banks," Cliff Stanford, partner at Alston & Bird LLP, said in an interview.

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The US Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued two rules that extend anti-money laundering regulations to residential real estate and investment adviser sectors.

The residential real estate rule will require certain real estate professionals to submit reports of non-financed transfers of residential real estate involving high illicit finance risk to a legal entity or trust. Through the rule, the agency aims to increase transparency, limit the laundering of illicit proceeds through the US housing market and bolster law enforcement investigative efforts, according to an Aug. 28 release.

The final real estate rule will be effective Dec. 1, 2025.

FinCEN also issued a final rule that will require both US SEC-registered investment advisers and exempt reporting advisers to establish minimum standards for anti-money laundering and countering the financing of terrorism programs and report suspicious activities to the regulator under provisions of the Bank Secrecy Act. The rule takes effect Jan. 1, 2026.

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US District Chief Judge Randy Craner ruled that the Consumer Financial Protection Bureau did not violate the Administrative Procedure Act when it adopted the small business loan reporting rule in March 2023, denying claims brought by the Texas Bankers Association; the American Bankers Association; and McAllen, Texas-based Rio Bank in their lawsuit against the consumer agency, American Banker reported.

In 2023, Judge Crane granted a preliminary injunction to the plaintiffs against the proposed rule, citing the Supreme Court's pending decision on the constitutionality of the CFPB's funding structure. In May, the CFPB extended the compliance deadlines for the lending rule.

The plaintiffs plan to appeal the ruling, according to the report.

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The FDIC's decision to waive civil fines in a case involving alleged violations of Small Business Administration loan regulations could lead to banks and individual bankers contesting enforcements against them in the future, in cases where agencies are seeking restitution or disgorgement of ill-gotten gains, American Banker reported.

The FDIC's move was in response to the Supreme Court ruling that deemed agencies' use of in-house administrative judges as illegal, the report said.

The banking regulators could ask Congress to make certain changes to their legal authorities in response to the Supreme Court ruling, the report said, citing David Weber, a former enforcement official.

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Oakland, Calif.-based community development financial institution Beneficial State Bank is taking a stance against large industry trade groups by calling for the implementation of changes to the Community Reinvestment Act.

Beneficial CEO Randell Leach said the bank does not anticipate any direct support for its business and instead sees the benefit it could bring to underserved communities.

At the CFTC

The Commodity Futures Trading Commission (CFTC) ordered Nasdaq Futures Inc. to pay a $22 million civil monetary penalty to settle charges of alleged failures to properly establish, monitor, or enforce rules related to a 3-year incentive program for certain traders on its contract market, including its "Designated Market Maker" program.

Further, the CFTC alleged that the company violated federal laws by not fully disclosing the details of the incentive program to the agency or the public, and by making false and misleading statements to the CFTC regarding the incentive program.

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The CFTC fined Bank of New York Mellon Corp. $5 million for repeated disclosure failures related to millions of swap transactions, in violation of a prior order against the company.

The regulator found that from roughly 2018 through 2023, BNY Mellon repeatedly failed to correctly report at least 5 million swap transactions and failed to properly supervise its swap dealer business concerning data reporting and monitoring. Many of those failures violated a CFTC order against the bank from Sept. 30, 2019, the CFTC said.