Goldman Sachs 2012 Annual Report Download - page 96

Management’s Discussion and Analysis
Credit Risk Management
Overview
Credit risk represents the potential for loss due to the
default or deterioration in credit quality of a counterparty
(e.g., an OTC derivatives counterparty or a borrower) or an
issuer of securities or other instruments we hold. Our
exposure to credit risk comes mostly from client
transactions in OTC derivatives and loans and lending
commitments. Credit risk also comes from cash placed with
banks, securities financing transactions (i.e., resale and
repurchase agreements and securities borrowing and
lending activities) and receivables from brokers, dealers,
clearing organizations, customers and counterparties.
Credit Risk Management, which is independent of the
revenue-producing units and reports to the firm’s chief risk
officer, has primary responsibility for assessing, monitoring
and managing credit risk at the firm. The Credit Policy
Committee and the Firmwide Risk Committee establish and
review credit policies and parameters. In addition, we hold
other positions that give rise to credit risk (e.g., bonds held
in our inventory and secondary bank loans). These credit
risks are captured as a component of market risk measures,
which are monitored and managed by Market Risk
Management, consistent with other inventory positions.
Policies authorized by the Firmwide Risk Committee and
the Credit Policy Committee prescribe the level of formal
approval required for the firm to assume credit exposure to
a counterparty across all product areas, taking into account
any applicable netting provisions, collateral or other credit
risk mitigants.
Credit Risk Management Process
Effective management of credit risk requires accurate and
timely information, a high level of communication and
knowledge of customers, countries, industries and
products. Our process for managing credit risk includes:
‰approving transactions and setting and communicating
credit exposure limits;
‰monitoring compliance with established credit
exposure limits;
‰assessing the likelihood that a counterparty will default
on its payment obligations;
‰measuring the firm’s current and potential credit
exposure and losses resulting from counterparty default;
‰reporting of credit exposures to senior management, the
Board and regulators;
‰use of credit risk mitigants, including collateral and
hedging; and
‰communication and collaboration with other
independent control and support functions such as
operations, legal and compliance.
As part of the risk assessment process, Credit Risk
Management performs credit reviews which include initial
and ongoing analyses of our counterparties. A credit review
is an independent judgment about the capacity and
willingness of a counterparty to meet its financial
obligations. For substantially all of our credit exposures,
the core of our process is an annual counterparty review. A
counterparty review is a written analysis of a counterparty’s
business profile and financial strength resulting in an
internal credit rating which represents the probability of
default on financial obligations to the firm. The
determination of internal credit ratings incorporates
assumptions with respect to the counterparty’s future
business performance, the nature and outlook for the
counterparty’s industry, and the economic environment.
Senior personnel within Credit Risk Management, with
expertise in specific industries, inspect and approve credit
reviews and internal credit ratings.
Our global credit risk management systems capture credit
exposure to individual counterparties and on an aggregate
basis to counterparties and their subsidiaries (economic
groups). These systems also provide management with
comprehensive information on our aggregate credit risk by
product, internal credit rating, industry, country
and region.
94 Goldman Sachs 2012 Annual Report