Wall Street major Goldman Sachs Group, Inc. (GS) has declared the sale of its majority stake in London-based insurer, Rothesay Life Ltd. to private equity giant The Blackstone Group L.P. (BX) and Singapore-based wealth fund, GIC Pte.
Under Basel rules, banks are required to maintain a capital cushion to absorb probable losses on assets. The Basel III regulations have made pension businesses less attractive for banks. The tough regulations have forced banks such as Goldman to vend their businesses to comparatively less regulated private equity firms like Blackstone.
While Blackstone and GIC will each take over 28.5% of Goldman’s stake, Massachusetts Mutual Life Insurance Co. will acquire 7%. This will leave Goldman with only 36% stake in Rothesay.
Overall, Goldman is striving to enhance its balance sheet. In April, the bank sold around 80% stake in Global Atlantic Financial Group – the reinsurance business in Bermuda – to institutions and high net worth clients. This move boosted Goldman’s Basel III Tier 1 common ratio by 0.5%.
Further, in May, Goldman reduced its exposure to the Chinese economy by selling off its final stake in Beijing-based Industrial & Commercial Bank of China Ltd. (:ICBC).
Moreover, in July, Goldman vended its majority equity stake in REDI – a financial technology company – to a consortium of investors including BofA Merrill Lynch, the corporate and investment banking division of Bank of America Corporation (BAC), Barclays PLC (BCS), BNP Paribas SA (BNPQY), Citadel and Lightyear Capital.
It appears that Goldman has been undertaking these measures to reduce its non-core business exposure. Regulatory pressure to strengthen its capital ratios is likely to have driven the company to take such steps.
Weak capital levels are always risky for the global economy. Additionally, conforming to new capital rules will likely act as deterrents to the present unstable economy. However, these rules will expectedly benefit the financial system in the long run by preventing bank failures and involving less of taxpayers’ money for the bailout of troubled financial institutions.
Goldman currently carries a Zacks Rank #3 (Hold).