Goldman Sachs 2015 Annual Report Download - page 102

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Liquidity Risk Management
Overview
Liquidity risk is the risk that we will be unable to fund the
firm or meet our liquidity needs in the event of firm-specific,
broader industry, or market liquidity stress events.
Liquidity is of critical importance to us, as most of the
failures of financial institutions have occurred in large part
due to insufficient liquidity. Accordingly, we have in place a
comprehensive and conservative set of liquidity and
funding policies. Our principal objective is to be able to
fund the firm and to enable our core businesses to continue
to serve clients and generate revenues, even under adverse
circumstances.
Treasury has the primary responsibility for assessing,
monitoring and managing our liquidity and funding
strategy. Treasury is independent of the revenue-producing
units and reports to our chief financial officer.
Liquidity Risk Management is an independent risk
management function responsible for control and oversight
of the firm’s liquidity risk management framework,
including stress testing and limit governance. Liquidity Risk
Management is independent of the revenue-producing units
and Treasury, and reports to our chief risk officer.
Liquidity Risk Management Principles
We manage liquidity risk according to three principles
(i) hold sufficient excess liquidity in the form of Global
Core Liquid Assets (GCLA) to cover outflows during a
stressed period, (ii) maintain appropriate Asset-Liability
Management and (iii) maintain a viable Contingency
Funding Plan.
Global Core Liquid Assets. GCLA is liquidity that we
maintain to meet a broad range of potential cash outflows
and collateral needs in a stressed environment. Our most
important liquidity policy is to pre-fund our estimated
potential cash and collateral needs during a liquidity crisis
and hold this liquidity in the form of unencumbered, highly
liquid securities and cash. We believe that the securities held
in our GCLA would be readily convertible to cash in a
matter of days, through liquidation, by entering into
repurchase agreements or from maturities of resale
agreements, and that this cash would allow us to meet
immediate obligations without needing to sell other assets
or depend on additional funding from credit-sensitive
markets.
Our GCLA reflects the following principles:
‰The first days or weeks of a liquidity crisis are the most
critical to a company’s survival;
‰Focus must be maintained on all potential cash and
collateral outflows, not just disruptions to financing
flows. Our businesses are diverse, and our liquidity needs
are determined by many factors, including market
movements, collateral requirements and client
commitments, all of which can change dramatically in a
difficult funding environment;
‰During a liquidity crisis, credit-sensitive funding,
including unsecured debt and some types of secured
financing agreements, may be unavailable, and the terms
(e.g., interest rates, collateral provisions and tenor) or
availability of other types of secured financing may
change; and
‰As a result of our policy to pre-fund liquidity that we
estimate may be needed in a crisis, we hold more
unencumbered securities and have larger debt balances
than our businesses would otherwise require. We believe
that our liquidity is stronger with greater balances of
highly liquid unencumbered securities, even though it
increases our total assets and our funding costs.
We maintain our GCLA across major broker-dealer and
bank subsidiaries, asset types, and clearing agents to
provide us with sufficient operating liquidity to ensure
timely settlement in all major markets, even in a difficult
funding environment. In addition to the GCLA, we
maintain cash balances in several of our other entities,
primarily for use in specific currencies, entities, or
jurisdictions where we do not have immediate access to
parent company liquidity.
We believe that our GCLA provides us with a resilient
source of funds that would be available in advance of
potential cash and collateral outflows and gives us
significant flexibility in managing through a difficult
funding environment.
90 Goldman Sachs 2015 Form 10-K