Goldman Sachs 2012 Annual Report Download - page 87

Management’s Discussion and Analysis
Subsidiary Funding Policies. The majority of our
unsecured funding is raised by Group Inc. which lends the
necessary funds to its subsidiaries, some of which are
regulated, to meet their asset financing, liquidity and capital
requirements. In addition, Group Inc. provides its regulated
subsidiaries with the necessary capital to meet their
regulatory requirements. The benefits of this approach to
subsidiary funding are enhanced control and greater
flexibility to meet the funding requirements of our
subsidiaries. Funding is also raised at the subsidiary level
through a variety of products, including secured funding,
unsecured borrowings and deposits.
Our intercompany funding policies assume that, unless
legally provided for, a subsidiary’s funds or securities are
not freely available to its parent company or other
subsidiaries. In particular, many of our subsidiaries are
subject to laws that authorize regulatory bodies to block or
reduce the flow of funds from those subsidiaries to Group
Inc. Regulatory action of that kind could impede access to
funds that Group Inc. needs to make payments on its
obligations. Accordingly, we assume that the capital
provided to our regulated subsidiaries is not available to
Group Inc. or other subsidiaries and any other financing
provided to our regulated subsidiaries is not available until
the maturity of such financing.
Group Inc. has provided substantial amounts of equity and
subordinated indebtedness, directly or indirectly, to its
regulated subsidiaries. For example, as of December 2012,
Group Inc. had $29.52 billion of equity and subordinated
indebtedness invested in GS&Co., its principal U.S.
registered broker-dealer; $29.45 billion invested in GSI, a
regulated U.K. broker-dealer; $2.62 billion invested in
GSEC, a U.S. registered broker-dealer; $3.78 billion
invested in Goldman Sachs Japan Co., Ltd., a regulated
Japanese broker-dealer; and $20.67 billion invested in GS
Bank USA, a regulated New York State-chartered bank.
Group Inc. also provided, directly or indirectly,
$68.44 billion of unsubordinated loans and $11.37 billion
of collateral to these entities, substantially all of which was
to GS&Co., GSI and GS Bank USA, as of December 2012.
In addition, as of December 2012, Group Inc. had
significant amounts of capital invested in and loans to its
other regulated subsidiaries.
Contingency Funding Plan
The Goldman Sachs contingency funding plan sets out the
plan of action we would use to fund business activity in
crisis situations and periods of market stress. The
contingency funding plan outlines a list of potential risk
factors, key reports and metrics that are reviewed on an
ongoing basis to assist in assessing the severity of, and
managing through, a liquidity crisis and/or market
dislocation. The contingency funding plan also describes in
detail the firm’s potential responses if our assessments
indicate that the firm has entered a liquidity crisis, which
include pre-funding for what we estimate will be our
potential cash and collateral needs as well as utilizing
secondary sources of liquidity. Mitigants and action items
to address specific risks which may arise are also described
and assigned to individuals responsible for execution.
The contingency funding plan identifies key groups of
individuals to foster effective coordination, control and
distribution of information, all of which are critical in the
management of a crisis or period of market stress. The
contingency funding plan also details the responsibilities of
these groups and individuals, which include making and
disseminating key decisions, coordinating all contingency
activities throughout the duration of the crisis or period of
market stress, implementing liquidity maintenance activities
and managing internal and external communication.
Proposed Liquidity Framework
The Basel Committee on Banking Supervision’s
international framework for liquidity risk measurement,
standards and monitoring calls for imposition of a liquidity
coverage ratio, designed to ensure that the banking entity
maintains an adequate level of unencumbered high-quality
liquid assets based on expected cash outflows under an
acute liquidity stress scenario, and a net stable funding
ratio, designed to promote more medium- and long-term
funding of the assets and activities of banking entities over a
one-year time horizon. While the principles behind the new
framework are broadly consistent with our current liquidity
management framework, it is possible that the
implementation of these standards could impact our
liquidity and funding requirements and practices. Under the
Basel Committee framework, the liquidity coverage ratio
would be introduced on January 1, 2015; however there
would be a phase-in period whereby firms would have a
60% minimum in 2015 which would be raised 10% per
year until it reaches 100% in 2019. The net stable funding
ratio is not expected to be introduced as a requirement until
January 1, 2018.
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