September 4, 2020

Mr. David M. Solomon

Chief Executive Officer

The Goldman Sachs Group, Inc.

200 West Street

New York, NY 10282

Subject: Response to request for reconsideration of the stress capital buffer requirement, 

pursuant to the Board’s capital plan rule

Dear Mr. Solomon:

This letter is in response to the request by The Goldman Sachs Group, Inc.

(“Goldman Sachs”), for reconsideration of the stress capital buffer requirement provided 

to Goldman Sachs by the Board on June 25, 2020.1 For the reasons stated below, the 

Board has affirmed the stress capital buffer requirement previously provided to Goldman 

Sachs.

2 In addition, with respect to the request by Goldman Sachs for an informal 

hearing in connection with the request for reconsideration, the Board has not ordered an 

informal hearing.

I. Background

The Board’s capital plan rule3 establishes the Board’s process for determining the 

stress capital buffer requirement applicable to a firm subject to the capital plan rule. 

Pursuant to that rule, the Board generally will provide a firm with notice of its stress 

 1

 This letter supersedes the letter, dated August 7, 2020, from Margaret McCloskey 

Shanks, Deputy Secretary of the Board, to Mr. David M. Solomon.

2

 As noted below, the final stress capital buffer requirement for Goldman Sachs reflects 

corrected stress test results, as updated on September 4, 2020. 

3

 12 CFR 225.8.
- 2 -

capital buffer requirement by June 30 of each year in which the firm submits an annual 

capital plan.4 On June 25, 2020, the Board provided Goldman Sachs with notice that its 

stress capital buffer requirement associated with its 2020 annual capital plan submission 

is 6.7 percent.5

The capital plan rule permits a firm to request reconsideration of the stress capital 

buffer requirement within 15 calendar days of receiving notice of the requirement.6 

Goldman Sachs was granted a five-day extension to request reconsideration7 and 

submitted a request for reconsideration on July 15, 2020. A request for reconsideration 

may include a request for an informal hearing on the firm’s request for reconsideration.8

 

Goldman Sachs’ request for reconsideration included a request for an informal hearing. 

The capital plan rule generally provides that the Board will notify a firm of the Board’s 

decision to affirm or modify the firm’s stress capital buffer requirement within 

30 calendar days of receipt of the firm’s request for reconsideration, or within 30 days of 

the conclusion of an informal hearing regarding such a request.9

In each year in which a firm submits an annual capital plan, the Board generally 

will provide the firm with a final stress capital buffer requirement, as well as 

confirmation of the firm’s final planned capital distributions for that year, by 

August 31.10 Unless otherwise determined by the Board, the final planned capital 

distributions and final stress capital buffer requirement for a given year become effective 

October 1 of that year.11 A stress capital buffer requirement that becomes effective will 

remain effective until superseded.12

 4

 12 CFR 225.8(h)(1).

5

 See email regarding 2020 CCAR Results (June 25, 2020).

6

 12 CFR 225.8(h)(2)(i) and (j)(2).

7

 Letter from Ann Misback, Secretary of the Board, to Luigi L. De Ghenghi, Esq., Davis 

Polk & Wardwell LLP (July 8, 2020).

8

 12 CFR 225.8(h)(3)(ii).

9

 12 CFR 225.8(j)(5)(ii).

10 12 CFR 225.8(h)(4)(i).

11 12 CFR 225.8(h)(4)(ii)(A).

12 12 CFR 225.8(h)(4)(ii)(B).
- 3 -

II. Stress Testing Framework

The stress capital buffer requirement is established based, in part, on the results of 

a supervisory stress test conducted by the Board. Specifically, a firm’s stress capital 

buffer requirement is the greater of 2.5 percent or the following calculation: (1) the 

difference between the firm’s starting and minimum projected common equity tier 1

(CET1) capital ratios under the severely adverse scenario in the Board’s supervisory 

stress test plus (2) the sum of the dollar amount of the firm’s planned common stock 

dividends for each of the fourth through seventh quarters of the planning horizon13 as a 

percentage of risk-weighted assets.

14 The stress capital buffer requirement provided to 

Goldman Sachs on June 25, 2020, was calculated based on 2020 supervisory stress test 

results released by the Board.15

 13 The planning horizon is the period of at least nine consecutive quarters over which the 

relevant projections extend, beginning with the quarter preceding the quarter in which the 

firm submits its capital plan.

14 12 CFR 225.8(f)(2).

15 See Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 

2020: Supervisory Stress Test Results (June 2020), available at 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf. On 

February 5, 2019, the Board released materials intended to increase the transparency of 

the stress testing program. 

See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm. 

First, the Board updated the Policy Statement on the Scenario Design Framework for 

Stress Testing (“Scenario Policy Statement”) to provide additional information regarding 

the path of home price variables, in particular, reducing uncertainty about the path of 

these variables in the severely adverse scenario. Second, the Board adopted a final Stress 

Testing Policy Statement to provide additional information about the Board’s principles 

and policies with regard to the development and validation of supervisory stress test 

models. See 12 CFR part 252, Appendix A. As described in the Stress Testing Policy 

Statement, material changes to the supervisory stress test models are phased in over two 

years to reduce year-over-year volatility stemming from updates to the supervisory 

models. The Stress Testing Policy Statement defines a model change as highly material 

if its use results in a change in the CET1 ratio of 50 basis points or more for one or more 

firms, relative to the model used in prior years’ supervisory exercises. See 12 CFR 252, 

Appendix B 2.3. This approach contributes to the stability of the results of the 

supervisory stress test by ensuring that changes in model projections primarily reflect 

changes in underlying risk factors and scenarios, year over year. Third, the Board 

provided additional information about the models used in the supervisory stress test. See

84 Fed. Reg. 6784 (February 5, 2019). The Board is committed to continuing to provide 

additional information, including modeled loss rates by loan and borrower characteristics, 
- 4 -

The results of the Board’s supervisory stress tests are projected using a set of 

models developed or selected by the Federal Reserve that take as inputs (1) the 

supervisory scenarios created by the Federal Reserve and (2) firm-provided data on the 

firm’s financial condition and risk characteristics. To provide firms and the public with 

greater transparency regarding the Board’s process for designing supervisory scenarios 

for stress testing, in 2013 the Board finalized the Scenario Policy Statement. 

Consistent with the principles described in the Stress Testing Policy Statement, 

the Federal Reserve designed the system of models so they would result in projections 

that are (1) from an independent supervisory perspective; (2) forward-looking; 

(3) consistent and comparable across covered companies; (4) generated from simple 

approaches, where appropriate; (5) robust and stable; (6) conservative; and (7) able to 

capture the effect of economic stress.16

The Federal Reserve’s models rely on detailed portfolio data provided by firms 

but generally do not rely on models or estimates provided by firms, consistent with the 

modeling principle that emphasizes an independent perspective.

The Federal Reserve generally develops its models under an industry-level 

approach that is calibrated using data from many financial institutions. This approach 

reflects modeling principles that favor models resulting in consistent, comparable, and 

forward-looking projections. The Federal Reserve models the response of specific 

portfolios and instruments to variations in macroeconomic and financial scenario 

variables such that differences across firms are driven by differences in firm-specific 

input data, as opposed to differences in model parameters and specifications. As a result, 

two firms with the same portfolio receive the same results for that portfolio in the 

supervisory stress test, facilitating the comparability of results. In addition, the industrylevel approach promotes a forward-looking stress test, as it results in models that do not 

assume that historical patterns will necessarily continue into the future for individual 

 

about its stress test models, as it has done most recently for its corporate loan and credit 

card models.

16 See 12 CFR part 252, Appendix A.
- 5 -

firms. These policies also help to ensure that consistent and comparable supervisory 

models are forward-looking, robust, and stable.17

III. Discussion

As required by the Board’s capital plan rule, Goldman Sachs’ request for 

reconsideration of its stress capital buffer requirement included a detailed explanation of 

why it contends that reconsideration should be granted.18

To ensure that review of Goldman Sachs’ request would be conducted with an 

independent perspective, a group of experts within the Federal Reserve System, who are 

independent of the staff who developed the models, analyzed the arguments made by 

Goldman Sachs in favor of reconsideration of its stress capital buffer requirement.

19 

With respect to each of the issues raised in the request of Goldman Sachs, the experts

considered whether the request identified any errors in the firm’s stress test results and 

whether each stress test model identified in the firm’s request is operating as intended, 

 17 While the Federal Reserve limits the use of firm-specific fixed effects and the use of 

dummy variables indicating a loan vintage or specific year, it makes exceptions where 

appropriate. For example, the Federal Reserve may use firm-specific indicator variables, 

firm-provided estimates, or third-party models or data in instances in which it is not 

possible or appropriate to create a supervisory model for use in the stress test, including 

when supervisory data are insufficient to support an independently modeled estimate of 

losses or revenues. However, the Federal Reserve does not adjust supervisory projections 

for individual firms or implement firm-specific overlays in the supervisory stress test. 

This policy ensures that the supervisory stress test results are determined solely by 

supervisory models and firm-specific input data. The Federal Reserve has instituted a 

policy of not using additional input data submitted by one or more of the covered 

companies unless comparable data can be collected from all the firms that have material 

exposure in a given area.

18 See 12 CFR 225.8(j)(3)(i).

19 This group is composed of staff members not involved in supervisory modeling and

subject-matter experts from across the Federal Reserve System. This group’s model 

validation process includes reviews of model performance; conceptual soundness; and the 

processes, procedures, and controls used in model development, implementation, and the 

production of results. See Board of Governors of the Federal Reserve System, DoddFrank Act Stress Test 2020: Supervisory Stress Test Methodology at 7 (March 2020), 

available at https://www.federalreserve.gov/publications/files/2020-march-supervisorystress-test-methodology.pdf. 
- 6 -

within the bounds of the Board’s published policies. The information in this letter 

regarding the Board’s stress testing policies and supervisory modeling practices was 

previously publicly disclosed, consistent with the Board’s practice to increase the 

transparency of the stress testing program.20

In its reconsideration request, Goldman Sachs presents five arguments: (1) its 

projected trading revenue was unrealistic due to modeling assumptions; (2) its trading 

and compensation expenses were overstated, as they are not related to revenue; (3) its fair 

value option (“FVO”) residential mortgage losses were overstated relative to risk profile; 

(4) its FVO syndicated loan losses were overstated due to lack of accounting for “flex” 

pricing; and (5) the pre-provision net revenue (“PPNR”) model should be fully phased in. 

With respect to each of these arguments, the Board has assessed Goldman Sachs’ stress 

test results and Federal Reserve models for errors. Through this assessment, the Board

did not identify any errors in Goldman Sachs’ stress test results and has determined that 

the models operated as intended, within the bounds of the Board’s published policies.

As discussed above, Goldman Sachs’ request for reconsideration included a 

request for an informal hearing. The Board has determined not to grant Goldman Sachs’ 

request for an informal hearing regarding its request for reconsideration.21 The informal 

hearing process is intended to ensure that a firm is able to present its arguments to the 

Federal Reserve and to provide an opportunity for both the firm and the Federal Reserve 

to ask any questions regarding the request, including questions regarding disputed issues 

of material fact. Since the submission of Goldman Sachs’ request, Federal Reserve staff 

has met with representatives from Goldman Sachs. The firm described its arguments for 

reconsideration in these meetings, and both the firm and Federal Reserve staff had the 

opportunity to ask questions. Federal Reserve staff also offered to hold additional 

meetings. In light of this process, the Board does not believe it is necessary to order an 

informal hearing regarding Goldman Sachs’ request.

1. Projected Trading Revenue

First, Goldman Sachs argues that the Board’s model appears to project lower 

trading revenue during heightened periods of volatility, which is unrealistic. The firm 

claimed that this may result from the dependence on data sourced from the FR Y-9C 

 20 See supra note 15.

21 See 12 CFR 225.8(j)(4)(i) (providing that the Board has sole discretion regarding 

whether to order an informal hearing).
- 7 -

trading revenue line item, which combines activity-based trading revenue with mark-tomarket position losses, which are already captured as part of the global market shock (the 

trading and counterparty component of the stress tests) (“GMS”). 

For firms subject to the GMS, the Board models trading revenues in the aggregate 

as a function of stock market returns and changes in stock market volatility, and allocates

revenues to each firm based on a measure of the firm’s market share. Firms’ trading 

revenues include both changes in the market value of trading assets and fees from 

market-making activities. Trading revenues for this group of firms are modeled using a 

median regression approach to lessen the influence of extreme movements in trading 

revenues and thereby mitigate the double-counting of trading losses that are captured 

under the GMS. With respect to the projection of trading revenue for Goldman Sachs in 

the 2020 stress tests, the Board has determined that it will follow its published principles 

for stress testing, including the principle of creating industry-level models, and not 

modify the existing results of these models. In particular, models used in the supervisory 

stress test are generally developed according to an industry-level approach, calibrated 

using data from many institutions. In this way, the Board ensures that differences across 

firms are driven by differences in firm-specific input data, as opposed to differences in 

model parameters or specifications. 

2. Trading and Compensation Expenses

Second, the firm argues that trading expenses were inappropriately modeled for 

the industry using macroeconomic variables such as GDP growth. In addition, the firm 

asserted that the projections of compensation expense should more closely reflect the 

observed relationship between the firm’s compensation expense and its revenues, instead 

of the relationship with macroeconomic variables. 

With respect to the modeling of trading expenses for Goldman Sachs in the 2020 

stress tests, the Board has determined that it will follow its published principles for stress 

testing, including the principle of creating industry-level models, and not modify the 

existing results of these models. In particular, models used in the supervisory stress test 

are developed according to an industry-level approach, calibrated using data from many 

institutions. The models are designed to link most components of revenue and expense to 

macroeconomic variables. While for an individual firm the model may seem to improve 

by selecting different predictors, such as the amount of projected revenue, the Federal 

Reserve’s models are optimized to predict expenses across the entire industry. The 

Board’s non-interest expense models are not intended to capture the firm’s specific 

expense structure related to trading activities or the correlation of expenses to revenue.
- 8 -

3. FVO Residential Mortgage Losses

Third, the firm argues that its portfolio of FVO residential mortgage loans has 

experienced minimal losses since its inception, including through both the 2007-2008 

financial crisis and the COVID event. The firm argues that the Board’s approach does 

not provide the necessary detail to appropriately reflect the shorter duration and better 

credit quality of the portfolio. The firm suggested using loan-level data instead to model 

losses on this portfolio. 

The Board’s approach for calculating loss rates for mortgages in the FVO 

portfolio does not include credit characteristics present in the mortgage loss rate model. 

The Board calculates gains and losses on FVO retail loans using a duration-based 

approach. The model includes data on total loan balances, vintage, and loan type. It

estimates losses as a function of duration, and quarterly changes in stressed spreads from

the supervisory scenarios. The model was designed to capture the typical performance of 

these types of loans under stress. The Board has determined not to deviate from its

model development practices with respect to calculating loss rates for mortgages in the 

FVO portfolio. The model is designed to balance the principles of simplicity, creation of 

industry-level models, and projection of impact under stress. Accordingly, the Board has 

determined that it will follow its published principles for stress testing, and not modify 

the existing results of its FVO model with respect to mortgage loss rates.

4. FVO Syndicated Loan Losses

Fourth, the firm argues that its portfolio of FVO syndicated loans includes a 

feature that allows the firm to adjust pricing when credit spreads widen. The firm argues

that this feature is not captured in the current model. The Board’s model projects losses 

based on the loan characteristics known at the time of the forecast. Future pricing options 

for syndicated loans are not provided at the time of the forecast, and the timing of the 

firm exercising the options would need to be forecasted to be included. Although some 

firms use pricing strategies to minimize losses, the Board has instituted a policy of not 

using additional input data submitted by one or more firms unless comparable data can be 

collected from all the firms that have material exposure in a given area. This promotes 

consistency across the stress test results of covered companies and conservative estimates 

of losses, and balances the principles of simplicity and projection of impact under stress. 

Accordingly, the Board has determined that it will follow its published principles for 

stress testing, and not modify the existing results of its FVO model with respect to 

syndicated loan losses. 
- 9 -

5. PPNR Model Phase-In

Finally, the firm argues that a recent change to the PPNR model intended to 

diminish the degree to which quarterly volatility in historical PPNR affects projections

was helpful because of the seasonality of firm behavior in the fourth quarter. While the 

Stress Testing Policy Statement notes that the Federal Reserve will phase in material 

model changes over two years, the firm argues that it is more appropriate to immediately 

phase this change in because it reduces volatility. The Board has determined that it will 

follow its published principles for stress testing, and not modify the existing results of its 

PPNR model. As discussed above, the Federal Reserve’s policy is to phase in material 

model changes over two years, which contributes to the stability of the results of the 

supervisory stress test. 

IV. Conclusion

After consideration of the Board’s stress testing policies and all relevant facts, 

including the information provided in the request, and consistent with the Board’s 

regulations, the Board has determined to affirm the stress capital buffer requirement 

provided to Goldman Sachs on June 25, 2020. The Board notes that it is focused on

continuously improving the stress testing framework, including the Board’s supervisory 

models. With regard to the arguments raised by Goldman Sachs in the request for 

reconsideration, the Board has directed Federal Reserve staff to investigate and address, 

as appropriate, the incorporation of portfolio credit quality in modeling losses on loans 

that use FVO accounting to see if any future improvements can be made. In addition, the 

Board has directed Federal Reserve staff to explore potential improvements with regard 

to the granularity of the approach to estimating trading revenues for firms subject to the 

GMS, estimating expenses based on revenues instead of macroeconomic variables, and 

using flexible pricing options in projecting losses. In evaluating any of its supervisory 

models, the Board follows the processes for development, implementation, and validation 

of its supervisory models, as outlined in the Board’s Stress Testing Policy Statement.

The final stress capital buffer requirement for Goldman Sachs is 6.6 percent.22 

The Board hereby confirms that the planned capital distributions Goldman Sachs

submitted as part of its 2020 capital plan submitted on April 5, 2020, incorporating any 

adjustments made pursuant to 12 CFR 225.8(h)(2), are final. Goldman Sachs’ final stress 

capital buffer requirement and final planned capital distributions are effective October 1, 

 22 This final stress capital buffer requirement reflects corrected stress test results for 

Goldman Sachs, as updated on September 4, 2020. 
- 10 -

2020. The Federal Reserve supports banking organizations that choose to use their 

capital buffers to lend and undertake other supportive actions in a safe and sound 

manner.23 When using their buffers, banking organizations may make capital 

distributions up to prescribed limits, which include automatic limitations in the capital 

framework, as well as any additional limitations determined by the Board.24

Please contact Hillel Kipnis at (202) 452-2924 with any questions. 

Sincerely yours,

Margaret McCloskey Shanks

Deputy Secretary of the Board

cc: Joanna de Plas, Officer

John Heinze, Officer

Lauren Hargraves, Senior Vice President

Federal Reserve Bank of New York

 23 See Interagency Statement on the Use of Capital and Liquidity Buffers (March 17, 

2020), available at

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200317a.htm. 

24 A “capital buffer” refers to capital held above regulatory minimum 

requirements. Banking organizations with regulatory capital ratios that are below their 

capital buffer requirement face gradual restrictions on capital distributions and 

discretionary bonus payments. See 12 CFR 217.11(c). These restrictions encourage 

banking organizations to conserve capital within the organization as they lend to 

households and businesses and as their capital levels approach minimum regulatory 

capital requirements. Capital buffers were designed to provide banking organizations 

with the means to support the economy in adverse situations and allow banking 

organization to continue to serve households and businesses.