Goldman Sachs 2013 Annual Report Download - page 73

Management’s Discussion and Analysis
Other Developments
The Basel Committee and the Financial Stability Board
(established at the direction of the leaders of the Group of
20) have also recently issued several consultative papers
which propose further changes to capital regulations. In
particular, the Basel Committee has issued consultation
papers on a “Fundamental Review of the Trading Book”
and “Revisions to the Securitization Framework” that
could have an impact on the level of the firm’s RWAs and
regulatory capital ratios.
The European Union (EU) finalized legislation to
implement Basel III, which became effective on
January 1, 2014. The Dodd-Frank Act, other reform
initiatives proposed and announced by the Agencies, the
Basel Committee, and other governmental entities and
regulators (including the EU and the U.K.’s Financial
Services Authority (FSA) which was replaced by the
Prudential Regulation Authority and the Financial Conduct
Authority (FCA) on April 1, 2013) are not in all cases
consistent with one another, which adds further uncertainty
to the firm’s future capital, leverage and liquidity
requirements, and those of the firm’s subsidiaries.
The Dodd-Frank Act contains provisions that require the
registration of all swap dealers, major swap participants,
security-based swap dealers and major security-based swap
participants. The firm has registered certain subsidiaries as
“swap dealers” under the CFTC rules, including GS&Co.,
GS Bank USA, Goldman Sachs International (GSI), and
J. Aron & Company. These entities and other entities that
would require registration under the CFTC or SEC rules
will be subject to regulatory capital requirements, which
have not been finalized by the CFTC and SEC.
Capital Planning and Stress Testing Process
Our capital planning and stress testing process incorporates
our internally designed stress tests and those required under
CCAR and DFAST. The process is designed to identify and
measure material risks associated with our business
activities. We also attribute capital usage to each of our
businesses and maintain a contingency capital plan.
Stress Testing. Our stress testing process incorporates an
internal capital adequacy assessment with the objective of
ensuring that the firm is appropriately capitalized relative to
the risks in our business. As part of our assessment, we
project sources and uses of capital given a range of business
environments, including stressed conditions. Our stress
scenarios incorporate our internally designed stress tests
and those required under CCAR and DFAST and are
designed to capture our specific vulnerabilities and risks
and to analyze whether the firm holds an appropriate
amount of capital. Our goal is to hold sufficient capital to
ensure we remain adequately capitalized after experiencing
a severe stress event. Our assessment of capital adequacy is
viewed in tandem with our assessment of liquidity
adequacy and is integrated into the overall risk
management structure, governance and policy framework
of the firm.
Internal Risk-Based Capital Assessment. As part of our
capital planning and stress testing process, we perform an
internal risk-based capital assessment. This assessment
incorporates market risk, credit risk and operational risk.
Market risk is calculated by using VaR calculations
supplemented by risk-based add-ons which include risks
related to rare events (tail risks). Credit risk utilizes
assumptions about our counterparties’ probability of
default and the size of our losses in the event of a default.
Operational risk is calculated based on scenarios
incorporating multiple types of operational failures as well
as incorporating internal and external actual loss
experience. Backtesting is used to gauge the effectiveness of
models at capturing and measuring relevant risks.
Capital Attribution. We attribute capital usage to each of
our businesses based upon regulatory capital requirements
as well as our internal risk-based capital assessment. We
manage the levels of our capital usage based upon the
established balance sheet and risk limits.
Contingency Capital Plan. As part of our comprehensive
capital management policy, we maintain a contingency
capital plan. Our contingency capital plan provides a
framework for analyzing and responding to a perceived or
actual capital deficiency, including, but not limited to,
identification of drivers of a capital deficiency, as well as
mitigants and potential actions. It outlines the appropriate
communication procedures to follow during a crisis period,
including internal dissemination of information as well as
ensuring timely communication with external stakeholders.
Goldman Sachs 2013 Annual Report 71