Goldman Sachs 2013 Annual Report Download - page 108

Management’s Discussion and Analysis
Risk Identification and Reporting
The core of our operational risk management framework is
risk identification and reporting. We have a comprehensive
data collection process, including firmwide policies and
procedures, for operational risk events.
We have established policies that require managers in our
revenue-producing units and our independent control and
support functions to escalate operational risk events. When
operational risk events are identified, our policies require
that the events be documented and analyzed to determine
whether changes are required in our systems and/or
processes to further mitigate the risk of future events.
In addition, our firmwide systems capture internal
operational risk event data, key metrics such as transaction
volumes, and statistical information such as performance
trends. We use an internally-developed operational risk
management application to aggregate and organize this
information. Managers from both revenue-producing units
and independent control and support functions analyze the
information to evaluate operational risk exposures and
identify businesses, activities or products with heightened
levels of operational risk. We also provide periodic
operational risk reports to senior management, risk
committees and the Board.
Risk Measurement
We measure our operational risk exposure over a twelve-
month time horizon using both statistical modeling and
scenario analyses, which involve qualitative assessments of
the potential frequency and extent of potential operational
risk losses, for each of our businesses. Operational risk
measurement incorporates qualitative and quantitative
assessments of factors including:
‰internal and external operational risk event data;
‰assessments of our internal controls;
‰evaluations of the complexity of our business activities;
‰the degree of and potential for automation in
our processes;
‰new product information;
‰the legal and regulatory environment;
‰changes in the markets for our products and services,
including the diversity and sophistication of our
customers and counterparties; and
‰the liquidity of the capital markets and the reliability of
the infrastructure that supports the capital markets.
The results from these scenario analyses are used to
monitor changes in operational risk and to determine
business lines that may have heightened exposure to
operational risk. These analyses ultimately are used in the
determination of the appropriate level of operational risk
capital to hold.
Risk Monitoring
We evaluate changes in the operational risk profile of our
businesses, including changes in business mix or
jurisdictions in which we operate, by monitoring the factors
noted above at a firmwide level. We have both detective
and preventive internal controls, which are designed to
reduce the frequency and severity of operational risk losses
and the probability of operational risk events. We monitor
the results of assessments and independent internal audits
of these internal controls.
Certain Risk Factors That May Affect Our
Businesses
We face a variety of risks that are substantial and inherent
in our businesses, including market, liquidity, credit,
operational, legal, regulatory and reputational risks. For a
discussion of how management seeks to manage some of
these risks, see “Overview and Structure of Risk
Management.” A summary of the more important factors
that could affect our businesses follows. For a further
discussion of these and other important factors that could
affect our businesses, financial condition, results of
operations, cash flows and liquidity, see “Risk Factors” in
Part I, Item 1A of the 2013 Form 10-K.
‰Our businesses have been and may continue to be
adversely affected by conditions in the global financial
markets and economic conditions generally.
‰Our businesses have been and may be adversely affected
by declining asset values. This is particularly true for
those businesses in which we have net “long” positions,
receive fees based on the value of assets managed, or
receive or post collateral.
‰Our businesses have been and may be adversely affected
by disruptions in the credit markets, including reduced
access to credit and higher costs of obtaining credit.
‰Our market-making activities have been and may be
affected by changes in the levels of market volatility.
‰Our investment banking, client execution and investment
management businesses have been adversely affected and
may continue to be adversely affected by market
uncertainty or lack of confidence among investors and
CEOs due to general declines in economic activity and
other unfavorable economic, geopolitical or
market conditions.
106 Goldman Sachs 2013 Annual Report