Goldman Sachs 2013 Annual Report Download - page 192

Notes to Consolidated Financial Statements
Note 20.
Regulation and Capital Adequacy
The Federal Reserve Board is the primary regulator of
Group Inc., a bank holding company under the Bank
Holding Company Act of 1956 (BHC Act) and a financial
holding company under amendments to the BHC Act
effected by the U.S. Gramm-Leach-Bliley Act of 1999. As a
bank holding company, the firm is subject to consolidated
risk-based regulatory capital requirements. These
requirements are computed in accordance with the Federal
Reserve Board’s risk-based capital regulations which, as of
December 2013, were based on the Basel I Capital Accord
of the Basel Committee and also reflected the Federal
Reserve Board’s revised market risk regulatory capital
requirements which became effective on January 1, 2013.
These capital requirements are expressed as capital ratios
that compare measures of capital to risk-weighted assets
(RWAs). The capital regulations also include requirements
with respect to leverage. The firm’s capital levels are also
subject to qualitative judgments by its regulators about
components of capital, risk weightings and other factors.
Beginning January 1, 2014, the Federal Reserve Board
implemented revised consolidated regulatory capital and
leverage requirements discussed below.
The firm’s U.S. bank depository institution subsidiary, GS
Bank USA, is subject to similar capital and leverage
regulations. Under the Federal Reserve Board’s capital
adequacy requirements and the regulatory framework for
prompt corrective action, the firm and GS Bank USA must
meet specific capital requirements. The firm’s and GS Bank
USA’s capital levels, as well as GS Bank USA’s prompt
corrective action classification, are also subject to
qualitative judgments by the regulators about components
of capital, risk weightings and other factors.
Many of the firm’s subsidiaries, including GS&Co. and the
firm’s other broker-dealer subsidiaries, are subject to
separate regulation and capital requirements as
described below.
Group Inc.
As of December 2013, Federal Reserve Board regulations
required bank holding companies to maintain a minimum
Tier 1 capital ratio of 4% and a minimum Total capital
ratio of 8%. The required minimum Tier 1 capital ratio and
Total capital ratio in order to meet the quantitative
requirements for being a “well-capitalized” bank holding
company under the Federal Reserve Board guidelines are
6% and 10%, respectively. Bank holding companies may
be expected to maintain ratios well above the minimum
levels, depending on their particular condition, risk profile
and growth plans. As of December 2013, the minimum
Tier 1 leverage ratio was 3% for bank holding companies
that had received the highest supervisory rating under
Federal Reserve Board guidelines or that had implemented
the Federal Reserve Board’s risk-based capital measure for
market risk. Beginning January 1, 2014, all bank holding
companies became subject to a minimum Tier 1 leverage
ratio of 4%.
Tier 1 leverage ratio is defined as Tier 1 capital divided by
average adjusted total assets (which includes adjustments
for goodwill and identifiable intangible assets, and the
carrying value of certain equity investments in
nonconsolidated entities that are subject to deduction from
Tier 1 capital).
RWAs under the Federal Reserve Board’s risk-based capital
requirements are calculated based on measures of credit
risk and market risk. Credit risk requirements for on-
balance-sheet assets are generally based on the balance
sheet value. For off-balance-sheet exposures, including
OTC derivatives, commitments and guarantees, a credit
equivalent amount is calculated based on the notional
amount of each trade and, to the extent applicable, positive
net exposure. All such assets and exposures are then
assigned a risk weight depending on, among other things,
whether the counterparty is a sovereign, bank or a
qualifying securities firm or other entity (or if collateral is
held, depending on the nature of the collateral).
As of December 2012, RWAs for market risk were
determined by reference to the firm’s Value-at-Risk (VaR)
model, supplemented by the standardized measurement
method used to determine RWAs for specific risk for
certain positions. Under the Federal Reserve Board’s revised
market risk regulatory capital requirements, which became
effective on January 1, 2013, RWAs for market risk are
determined using VaR, stressed VaR, incremental risk,
comprehensive risk and a standardized measurement
method for specific risk.
190 Goldman Sachs 2013 Annual Report