Goldman Sachs

Goldman Sachs Group, Inc. (NYSE:GS) is rumoured this morning to be planning the sale of its hedge fund administration unit to State Street Corporation (NYSE:STT). The move has been cited by many as an attempt to get out of the hedge fund business and at the same time out from under the regulator’s gaze.

Though that may be part of the investment bank’s reasoning behind the move, there is at least one other glaring possibility. Goldman may simply to be trying to increase its level of capital holdings. The Basel III rules will begin to come into effect at the start of next year. Many banks are going to have to start making changes.

At the beginning of 2013 a process will begin by which minimum capital requirements begin to increase. Currently, under the Basel II set of rules, banks need to set aside 2.5% of their Risk Weighted Assets value as a capital requirement. Under the new regime that figure increases to 7%, or possibly more depending on the nature of the bank’s business.

By 2015, when that process closes, the banks will be standing at much higher capital requirements. In order to gt there they will have to raise that money. Goldman may be just the first of the big banks we see scrambling for cash in the run up to  the introduction of the new system.

Goldman’s sale of it’s hedge fund administration unit complements its sale of its stake in Kinder Morgan Energy Partners LP (NYSE:KMP) earlier in the week. That stake was sold for $1.2 billion. It is unknown how much the hedge fund unit might sell for, if the rumours prove veracious, but it will certainly add to Goldman’s capital stockpile.

In the next year, and on toward 2015, a great deal of sales are to be expected from the banks as the capital requirements increase. Goldman Sachs looks like its getting the ball rolling on the asset sales front and it will need to continue if it hopes to stay ahead of the curve on meeting the new capital requirements.

In an already rocky economy for financial institutions, Basel II is about to add to the turbulence. The complexity of some of the rules leaves many institutions unsure of exactly how much they will have to raise. One thing is sure. Banks will need a lot more capital than they have now in order to stay on the right side of the regulations.