Goldman Sachs 2015 Annual Report Download - page 108

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Liquidity Regulatory Framework
The Basel Committee’s international framework for
liquidity risk measurement, standards and monitoring calls
for a liquidity coverage ratio (LCR) designed to ensure that
banking organizations maintain an adequate level of
unencumbered high-quality liquid assets (HQLA) based on
expected net cash outflows under an acute short-term
liquidity stress scenario.
The final rules on minimum liquidity standards approved
by the U.S. federal bank regulatory agencies are generally
consistent with the Basel Committee’s framework as
described above, but include accelerated transition
provisions and more stringent requirements related to both
the range of assets that qualify as HQLA and cash outflow
assumptions for certain types of funding and other liquidity
risks. Our GCLA is substantially the same in composition
as the assets that qualify as HQLA under these rules. Under
the accelerated transition timeline, the LCR became
effective in the United States on January 1, 2015, with a
phase-in period whereby firms have an 80% minimum in
2015, which will increase by 10% per year until 2017. In
November 2015, the Federal Reserve Board proposed a rule
that would require bank holding companies to disclose
their LCR on a quarterly basis beginning in the quarter
ended September 2016. These requirements include LCR
averages over the prior quarter, detailed information on
certain components of the LCR calculation and projected
net cash outflows. For the three months ended
December 2015, our average LCR exceeded the fully
phased-in minimum requirement, based on our
interpretation and understanding of the finalized
framework, which may evolve as we review our
interpretation and application with our regulators.
The Basel Committee’s international framework for
liquidity risk measurement, standards and monitoring also
calls for a net stable funding ratio (NSFR) designed to
promote more medium- and long-term stable funding of the
assets and off-balance-sheet activities of banking
organizations over a one-year time horizon. The Basel
Committee’s NSFR framework requires banking
organizations to maintain a stable funding profile in
relation to the composition of their assets and off-balance-
sheet activities and will be effective on January 1, 2018. The
U.S. federal bank regulatory agencies have not yet proposed
rules implementing the NSFR for U.S. banks and bank
holding companies. We are currently evaluating the impact
of the Basel Committee’s NSFR framework.
The following is information on our subsidiary liquidity
regulatory requirements:
‰GS Bank USA. GS Bank USA is subject to minimum
liquidity standards under the LCR rule approved by the
U.S. federal bank regulatory agencies that became
effective on January 1, 2015, with the same phase-in
through 2017 described above.
‰GSI. The LCR rule issued by the U.K. regulatory
authorities became effective in the United Kingdom on
October 1, 2015, with a phase-in period whereby certain
financial institutions, including GSI, must have an 80%
minimum ratio initially, increasing to 90% on
January 1, 2017 and 100% on January 1, 2018.
‰Other Subsidiaries. We monitor the local regulatory
liquidity requirements of our subsidiaries to ensure
compliance. For many of our subsidiaries, these
requirements either have changed or are likely to change
in the future due to the implementation of the Basel
Committee’s framework for liquidity risk measurement,
standards and monitoring, as well as other regulatory
developments.
The implementation of these rules, and any amendments
adopted by the applicable regulatory authorities, could
impact our liquidity and funding requirements and
practices in the future.
Credit Ratings
We rely on the short-term and long-term debt capital
markets to fund a significant portion of our day-to-day
operations and the cost and availability of debt financing is
influenced by our credit ratings. Credit ratings are also
important when we are competing in certain markets, such
as OTC derivatives, and when we seek to engage in longer-
term transactions. See “Risk Factors” in Part I, Item 1A of
the 2015 Form 10-K for information about the risks
associated with a reduction in our credit ratings.
During the fourth quarter of 2015, Standard & Poor’s
Ratings Services (S&P) downgraded the long-term debt
ratings of Group Inc. from A- to BBB+ and the
subordinated debt ratings of Group Inc. from BBB+ to
BBB-, and changed the outlook of Group Inc. from negative
to stable and the outlook for GS Bank USA, GSIB, GS&Co.
and GSI from positive to watch positive. Additionally,
Rating and Investment Information, Inc. (R&I)
downgraded the long-term debt ratings of Group Inc. from
A+ to A and the subordinated debt ratings for Group Inc.
from A to A-, and changed the outlook for Group Inc. from
negative to stable.
96 Goldman Sachs 2015 Form 10-K