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July 6, 2010 Tuesday 8:17 AM EST
NEWS & COMMENTARY; Markets; The Ratings Game
Goldman upped for ‘best in class’ risk management
Simon Kennedy, MarketWatch mailto:email@example.com.
Simon Kennedy is the City correspondent for MarketWatch in London.
LONDON (MarketWatch) — The way Goldman Sachs measures risk and allocates capital should be seen as a model for other investment banks, according to analysts at J.P. Morgan.
Upgrading Goldman (GS) to overweight from neutral, J.P. Morgan analysts Kian Abouhossein and Delphine Lee said the firm is the most conservative in the way that it calculates risk in its trading activities and that it wouldn’t need to raise more capital after an upcoming change to capital rules.
On all the measures they looked at, Goldman Sachs’ risk management was “best in class” and could act “as a benchmark for investment banking peers,” the pair said in a note to clients.
The positive comments from J.P. Morgan come amid the backdrop of an investigation into Goldman Sachs by the U.S. Securities and Exchange Commission for the way it sold collateralized debt obligations it underwrote, and in particular not revealing that a short-selling investor helped structure those notes.
Deutsche Bank (DB) (DBK) , on the other hand, will have the weakest capital level of the major investment banks following the introduction of the new Basel III rules, the broker calculated as it downgraded the German group to underweight from neutral.
Adjusting for the different ways the banks measure their market risks would leave Deutsche Bank with a capital deficit of around 14 billion euros ($17.6 billion), said J.P. Morgan. It added it therefore believes the firm will have to raise more equity if it wants its shares to re-rate continuously above its tangible book value.
In general U.S. investment banks are more conservative in their measurement of risk than European firms, the broker said. But the industry as a whole cannot expect shares to re-rate significantly without giving full risk disclosures and improving the consistency between banks globally, it added.
For example, trading revenue at U.S. banks is a much lower percentage of risk-weighted assets than at European banks.
That either suggests unusually high profitability for the likes of Deutsche Bank and Credit Suisse (CS) or, more likely, a “relative understatement of market risk” by European firms, J.P. Morgan said.
Authorities may even have to create an international body to approve the internal models that banks use to measure risk, the report said.
Shares in Deutsche Bank posted gains of 2.2% Tuesday, but still underperformed compared to European rivals Barclays (BARC) (BCS) and BNP Paribas (BNP) , which rose 5.3% and 4.3% respectively.
Goldman shares rose over 2% in pre-market Wall Street trading.
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July 7, 2010