Goldman Sachs 2012 Annual Report Download - page 187

Notes to Consolidated Financial Statements
Regulatory Reform
Changes to the market risk capital rules of the U.S. federal
bank regulatory agencies (the Agencies) became effective on
January 1, 2013. These changes require the addition of
several new model-based capital requirements, as well as an
increase in capital requirements for securitization positions,
and are designed to implement the new market risk
framework of the Basel Committee, as well as the
prohibition on the use of external credit ratings, as required
by the Dodd-Frank Act. This revised market risk
framework is a significant part of the regulatory capital
changes that will ultimately be included in the firm’s capital
ratios under the guidelines issued by the Basel Committee in
December 2010 (Basel 3). These changes resulted in
increased regulatory capital requirements for market risk,
and will be reflected in all of the firm’s Basel-based capital
ratios for periods beginning on or after January 1, 2013.
The firm is currently working to implement the
requirements set out in the Agencies’ Risk-Based Capital
Standards: Advanced Capital Adequacy Framework —
Basel 2, as applicable to Group Inc. as a bank holding
company and as an advanced approach banking
organization (Basel 2). These requirements are based on the
advanced approaches under the Revised Framework for the
International Convergence of Capital Measurement and
Capital Standards issued by the Basel Committee. Basel 2,
among other things, revises the regulatory capital
framework for credit risk, equity investments, and
introduces a new operational risk capital requirement. The
firm will adopt Basel 2 once approved to do so by
regulators. The firm’s capital adequacy ratio will also be
impacted by the further changes outlined below under
Basel 3 and provisions of the Dodd-Frank Act.
The “Collins Amendment” of the Dodd-Frank Act requires
advanced approach banking organizations to continue,
upon adoption of Basel 2, to calculate risk-based capital
ratios under both Basel 2 and Basel 1. For each of the Tier 1
and Total capital ratios, the lower of the Basel 1 and Basel 2
ratios calculated will be used to determine whether such
advanced approach banking organizations meet their
minimum risk-based capital requirements. Furthermore,
the June 2012 proposals described below include provisions
which, if enacted as proposed, would modify these
minimum risk-based capital requirements.
In June 2012, the Agencies proposed further modifications
to their capital adequacy regulations to address aspects of
both the Dodd-Frank Act and Basel 3. If enacted as
proposed, the most significant changes that would impact
the firm include (i) revisions to the definition of Tier 1
capital, including new deductions from Tier 1 capital,
(ii) higher minimum capital and leverage ratios, (iii) a new
minimum ratio of Tier 1 common equity to RWAs, (iv) new
capital conservation and counter-cyclical capital buffers,
(v) an additional leverage ratio that includes measures of
off-balance sheet exposures, (vi) revisions to the
methodology for calculating RWAs, particularly for credit
risk capital requirements for derivatives and (vii) a new
“standardized approach” to the calculation of RWAs that
would replace the Federal Reserve’s current Basel 1 risk-
based capital framework in 2015, including for purposes of
calculating the requisite capital floor under the Collins
Amendment. In November 2012, the Agencies announced
that the proposed effective date of January 1, 2013 for these
modifications would be deferred, but have not indicated a
revised effective date. These proposals incorporate the
phase-out of Tier 1 capital treatment for the firm’s junior
subordinated debt issued to trusts; such capital would
instead be eligible as Tier 2 capital under the proposals.
Under the Collins Amendment, this phase-out was
scheduled to begin on January 1, 2013. Due to the
aforementioned deferral of the effective date of the
proposed capital rules, however, the application of this
phase-out remains uncertain at this time.
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