Goldman Sachs 2012 Annual Report Download - page 73

Management’s Discussion and Analysis
RWAs for market risk are comprised of modeled and
non-modeled risk requirements. Modeled risk requirements
are determined by reference to the firm’s Value-at-Risk
(VaR) model. VaR is the potential loss in value of inventory
positions due to adverse market movements over a defined
time horizon with a specified confidence level. We use a
single VaR model which captures risks including interest
rates, equity prices, currency rates and commodity prices.
For certain portfolios of debt and equity positions, the
modeled RWAs also reflect requirements for specific risk,
which is the risk of loss on a position that could result from
changes in risk factors unique to that position. Regulatory
VaR used for capital requirements will differ from risk
management VaR, due to different time horizons (10-day
vs. 1-day), confidence levels (99% vs. 95%), as well as
other factors. Non-modeled risk requirements reflect
specific risk for other debt and equity positions. The
standardized measurement method is used to determine
non-modeled risk by applying supervisory defined
risk-weighting factors to positions after applicable netting
is performed.
The table below presents information on the components of
RWAs within our consolidated regulatory capital ratios.
As of December
in millions 2012 2011
Credit RWAs
OTC derivatives $107,269 $119,848
Commitments and guarantees 146,007 37,648
Securities financing transactions 247,069 53,236
Other 387,181 84,039
Total Credit RWAs $287,526 $294,771
Market RWAs
Modeled requirements $ 23,302 $ 57,784
Non-modeled requirements 89,100 104,472
Total Market RWAs 112,402 162,256
Total RWAs 4$399,928 $457,027
1. Principally includes certain commitments to extend credit and letters
of credit.
2. Represents resale and repurchase agreements and securities borrowed and
loaned transactions.
3. Principally includes receivables from customers, other assets, cash and cash
equivalents and available-for-sale securities.
4. Under the current regulatory capital framework, there is no explicit
requirement for Operational Risk.
As outlined above, changes to the market risk capital rules
that became effective on January 1, 2013, require the
addition of several new model-based capital requirements,
as well as an increase in capital requirements for
securitization positions.
Internal Capital Adequacy Assessment Process
We perform an ICAAP with the objective of ensuring that
the firm is appropriately capitalized relative to the risks in
our business.
As part of our ICAAP, we perform an internal risk-based
capital assessment. This assessment incorporates market
risk, credit risk and operational risk. Market risk is
calculated by using VaR calculations supplemented by
risk-based add-ons which include risks related to rare
events (tail risks). Credit risk utilizes assumptions about our
counterparties’ probability of default, the size of our losses
in the event of a default and the maturity of our
counterparties’ contractual obligations to us. Operational
risk is calculated based on scenarios incorporating multiple
types of operational failures. Backtesting is used to gauge
the effectiveness of models at capturing and measuring
relevant risks.
We evaluate capital adequacy based on the result of our
internal risk-based capital assessment, supplemented with
the results of stress tests which measure the firm’s estimated
performance under various market conditions. Our goal is
to hold sufficient capital, under our internal risk-based
capital framework, to ensure we remain adequately
capitalized after experiencing a severe stress event. Our
assessment of capital adequacy is viewed in tandem with
our assessment of liquidity adequacy and is integrated into
the overall risk management structure, governance and
policy framework of the firm.
We attribute capital usage to each of our businesses based
upon our internal risk-based capital and regulatory
frameworks and manage the levels of usage based upon the
balance sheet and risk limits established.
Rating Agency Guidelines
The credit rating agencies assign credit ratings to the
obligations of Group Inc., which directly issues or
guarantees substantially all of the firm’s senior unsecured
obligations. GS&Co. and GSI have been assigned long- and
short-term issuer ratings by certain credit rating agencies.
GS Bank USA has also been assigned long-term issuer
ratings as well as ratings on its long-term and short-term
bank deposits. In addition, credit rating agencies have
assigned ratings to debt obligations of certain other
subsidiaries of Group Inc.
Goldman Sachs 2012 Annual Report 71