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Alex Cho

Morgan Stanley and Goldman Sachs Haven't Met TLAC Requirements

If you’re wondering, which G-SIFI bank is having the most difficulty with reaching the TLAC (total loss absorbing capacity) requirements by the Financial Stability Board (FSB), it would be Goldman Sachs and Morgan Stanley. But, then again this probably isn’t too surprising given the riskier assets that GS and MS trade. Furthermore, full implementation of TLAC (total loss absorbing capacity) isn’t required until January 2022, which gives the two firms 8-years to set aside enough capital to meet the stated requirements.

Source: UBS Research

As it currently stands, Morgan Stanley has a $30 billion shortfall whereas Goldman Sachs has a $47 billion shortfall. It’s likely that the two firms will set aside more capital in the coming years to meet those requirements, but it’s unlikely that this materially alters the relative earnings/growth for both firms assuming they shift the portfolio to lower risk assets and underwrite fewer derivatives for brokerage clients.

Considering the potential risks of another bank crisis the trade-off of less revenue/earnings over the short-term, but long-term stability in bank lending should translate to less risk and higher sales/earnings multiples. Added regulation was met with some skepticism by investors, but given enough time the added liquidity requirements in conjunction with higher capital reserves translates into more stable sales/earnings upon full implementation. I believe that the two banks will recover in valuation, as on-going concerns over portfolio quality in response to weakening energy fundamentals will eventually abate.

In other words, beyond the two bank’s exposure to energy and petrol production, I believe the exposure to investment banking, trading, asset management and brokerage will mitigate concerns over portfolio quality as these two areas will return to growth over the next couple years.

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