Goldman Sachs 2013 Annual Report Download - page 106

Management’s Discussion and Analysis
To supplement our regular stress tests, we conduct tailored
stress tests on an ad hoc basis in response to specific market
events that we deem significant. For example, in response to
the Euro area debt crisis, we conducted stress tests intended
to estimate the direct and indirect impact that might result
from a variety of possible events involving certain European
member states, including sovereign defaults and the exit of
one or more countries from the Euro area. In the stress tests,
described in “Market Risk Management — Stress Testing”
and “Credit Risk Management — Stress Tests/Scenario
Analysis,” we estimated the direct impact of the event on
our credit and market exposures resulting from shocks to
risk factors including, but not limited to, currency rates,
interest rates, and equity prices. The parameters of these
shocks varied based on the scenario reflected in each stress
test. We also estimated the indirect impact on our
exposures arising from potential market moves in response
to the event, such as the impact of credit market
deterioration on corporate borrowers and counterparties
along with the shocks to the risk factors described above.
We reviewed estimated losses produced by the stress tests in
order to understand their magnitude, highlight potential
loss concentrations, and assess and mitigate our exposures
where necessary.
Euro area exit scenarios included analysis of the impacts on
exposure that might result from the redenomination of
assets in the exiting country or countries. We also tested our
operational and risk management readiness and capability
to respond to a redenomination event. Constructing stress
tests for these scenarios requires many assumptions about
how exposures might be directly impacted and how
resulting secondary market moves would indirectly impact
such exposures. Given the multiple parameters involved in
such scenarios, losses from such events are inherently
difficult to quantify and may materially differ from
our estimates.
See “Liquidity Risk Management — Modeled Liquidity
Outflow,” “Market Risk Management — Stress Testing”
and “Credit Risk Management — Stress Tests/Scenario
Analysis” for further discussion.
104 Goldman Sachs 2013 Annual Report