Goldman Sachs 2012 Annual Report Download - page 186

Notes to Consolidated Financial Statements
Note 20.
Regulation and Capital Adequacy
The Federal Reserve Board is the primary regulator of
Group Inc., a bank holding company under the Bank
Holding Company Act of 1956 (BHC Act) and a financial
holding company under amendments to the BHC Act
effected by the U.S. Gramm-Leach-Bliley Act of 1999. As a
bank holding company, the firm is subject to consolidated
regulatory capital requirements that are computed in
accordance with the Federal Reserve Board’s risk-based
capital requirements (which are based on the ‘Basel 1’
Capital Accord of the Basel Committee). These capital
requirements are expressed as capital ratios that compare
measures of capital to risk-weighted assets (RWAs). The
firm’s U.S. bank depository institution subsidiaries,
including GS Bank USA, are subject to similar capital
requirements.
Under the Federal Reserve Board’s capital adequacy
requirements and the regulatory framework for prompt
corrective action that is applicable to GS Bank USA, the
firm and its U.S. bank depository institution subsidiaries
must meet specific capital requirements that involve
quantitative measures of assets, liabilities and certain off-
balance-sheet items as calculated under regulatory
reporting practices. The firm and its U.S. bank depository
institution subsidiaries’ capital amounts, as well as GS Bank
USA’s prompt corrective action classification, are also
subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Many of the firm’s subsidiaries, including GS&Co. and the
firm’s other broker-dealer subsidiaries, are subject to
separate regulation and capital requirements as described
below.
Group Inc.
Federal Reserve Board regulations require bank holding
companies to maintain a minimum Tier 1 capital ratio of 4%
and a minimum total capital ratio of 8%. The required
minimum Tier 1 capital ratio and total capital ratio in order
to be considered a “well-capitalized” bank holding company
under the Federal Reserve Board guidelines are 6% and
10%, respectively. Bank holding companies may be expected
to maintain ratios well above the minimum levels, depending
on their particular condition, risk profile and growth plans.
The minimum Tier 1 leverage ratio is 3% for bank holding
companies that have received the highest supervisory rating
under Federal Reserve Board guidelines or that have
implemented the Federal Reserve Board’s risk-based capital
measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%.
The table below presents information regarding Group
Inc.’s regulatory capital ratios.
As of December
$ in millions 2012 2011
Tier 1 capital $ 66,977 $ 63,262
Tier 2 capital $ 13,429 $ 13,881
Total capital $ 80,406 $ 77,143
Risk-weighted assets $399,928 $457,027
Tier 1 capital ratio 16.7% 13.8%
Total capital ratio 20.1% 16.9%
Tier 1 leverage ratio 7.3% 7.0%
RWAs under the Federal Reserve Board’s risk-based capital
requirements are calculated based on the amount of market
risk and credit risk. RWAs for market risk are determined
by reference to the firm’s Value-at-Risk (VaR) model,
supplemented by other measures to capture risks not
reflected in the firm’s VaR model. Credit risk for on-
balance sheet assets is based on the balance sheet value. For
off-balance sheet exposures, including OTC derivatives and
commitments, a credit equivalent amount is calculated
based on the notional amount of each trade. All such assets
and exposures are then assigned a risk weight depending
on, among other things, whether the counterparty is a
sovereign, bank or a qualifying securities firm or other
entity (or if collateral is held, depending on the nature of the
collateral).
Tier 1 leverage ratio is defined as Tier 1 capital under
Basel 1 divided by average adjusted total assets (which
includes adjustments for disallowed goodwill and
intangible assets, and the carrying value of equity
investments in non-financial companies that are subject to
deductions from Tier 1 capital).
184 Goldman Sachs 2012 Annual Report