Goldman Sachs 2012 Annual Report Download - page 74

Management’s Discussion and Analysis
The level and composition of our equity capital are among
the many factors considered in determining our credit
ratings. Each agency has its own definition of eligible
capital and methodology for evaluating capital adequacy,
and assessments are generally based on a combination of
factors rather than a single calculation. See “Liquidity Risk
Management — Credit Ratings” for further information
about credit ratings of Group Inc., GS&Co., GSI and
GS Bank USA.
Subsidiary Capital Requirements
Many of our subsidiaries, including GS Bank USA and our
broker-dealer subsidiaries, are subject to separate
regulation and capital requirements of the jurisdictions in
which they operate.
GS Bank USA is subject to minimum capital requirements
that are calculated in a manner similar to those applicable to
bank holding companies and computes its capital ratios in
accordance with the regulatory capital requirements
currently applicable to state member banks, which are based
on Basel 1, as implemented by the Federal Reserve Board. As
of December 2012, GS Bank USA’s Tier 1 Capital ratio
under Basel 1 as implemented by the Federal Reserve Board
was 18.9%. See Note 20 to the consolidated financial
statements for further information about GS Bank USA’s
regulatory capital ratios under Basel 1, as implemented by
the Federal Reserve Board. Effective January 1, 2013, GS
Bank USA also implemented the revised market risk
framework outlined above. This revised market risk
framework is a significant part of the regulatory capital
changes that will ultimately be included in GS Bank USA’s
Basel 3 capital ratios.
For purposes of assessing the adequacy of its capital, GS
Bank USA has established an ICAAP which is similar to
that used by Group Inc. In addition, the rules adopted by
the Federal Reserve Board under the Dodd-Frank Act
require GS Bank USA to conduct stress tests on an annual
basis and publish a summary of certain results, beginning in
March 2013. GS Bank USA submitted its annual stress
results to the Federal Reserve on January 7, 2013 and
expects to publish a summary of its results in March 2013.
GS Bank USA’s capital levels and prompt corrective action
classification are subject to qualitative judgments by its
regulators about components, risk weightings and
other factors.
We expect that the capital requirements of several of our
subsidiaries are likely to increase in the future due to the
various developments arising from the Basel Committee,
the Dodd-Frank Act, and other governmental entities and
regulators. See Note 20 to the consolidated financial
statements for information about the capital requirements
of our other regulated subsidiaries and the potential impact
of regulatory reform.
Subsidiaries not subject to separate regulatory capital
requirements may hold capital to satisfy local tax and legal
guidelines, rating agency requirements (for entities with
assigned credit ratings) or internal policies, including
policies concerning the minimum amount of capital a
subsidiary should hold based on its underlying level of risk.
In certain instances, Group Inc. may be limited in its ability
to access capital held at certain subsidiaries as a result of
regulatory, tax or other constraints. As of December 2012
and December 2011, Group Inc.’s equity investment in
subsidiaries was $73.32 billion and $67.70 billion,
respectively, compared with its total shareholders’ equity of
$75.72 billion and $70.38 billion, respectively.
Group Inc. has guaranteed the payment obligations of
GS&Co., GS Bank USA, and Goldman Sachs Execution &
Clearing, L.P. (GSEC) subject to certain exceptions. In
November 2008, Group Inc. contributed subsidiaries into
GS Bank USA, and Group Inc. agreed to guarantee certain
losses, including credit-related losses, relating to assets held
by the contributed entities. In connection with this
guarantee, Group Inc. also agreed to pledge to GS Bank
USA certain collateral, including interests in subsidiaries
and other illiquid assets.
Our capital invested in non-U.S. subsidiaries is generally
exposed to foreign exchange risk, substantially all of which
is managed through a combination of derivatives and
non-U.S. denominated debt.
Contingency Capital Plan
Our contingency capital plan provides a framework for
analyzing and responding to a perceived or actual capital
deficiency, including, but not limited to, identification of
drivers of a capital deficiency, as well as mitigants and
potential actions. It outlines the appropriate
communication procedures to follow during a crisis period,
including internal dissemination of information as well as
ensuring timely communication with external stakeholders.
72 Goldman Sachs 2012 Annual Report