Goldman Sachs 2015 Annual Report Download - page 116

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Credit Risk Management
Overview
Credit risk represents the potential for loss due to the
default or deterioration in credit quality of a counterparty
(e.g., an OTC derivatives counterparty or a borrower) or an
issuer of securities or other instruments we hold. Our
exposure to credit risk comes mostly from client
transactions in OTC derivatives and loans and lending
commitments. Credit risk also comes from cash placed with
banks, securities financing transactions (i.e., resale and
repurchase agreements and securities borrowing and
lending activities) and receivables from brokers, dealers,
clearing organizations, customers and counterparties.
Credit Risk Management, which is independent of the
revenue-producing units and reports to our chief risk
officer, has primary responsibility for assessing, monitoring
and managing credit risk at the firm. The Credit Policy
Committee and the Firmwide Risk Committee establish and
review credit policies and parameters. In addition, we hold
other positions that give rise to credit risk (e.g., bonds held
in our inventory and secondary bank loans). These credit
risks are captured as a component of market risk measures,
which are monitored and managed by Market Risk
Management, consistent with other inventory positions.
We also enter into derivatives to manage market risk
exposures. Such derivatives also give rise to credit risk,
which is monitored and managed by Credit Risk
Management.
Credit Risk Management Process
Effective management of credit risk requires accurate and
timely information, a high level of communication and
knowledge of customers, countries, industries and
products. Our process for managing credit risk includes:
‰Approving transactions and setting and communicating
credit exposure limits;
‰Monitoring compliance with established credit exposure
limits;
‰Assessing the likelihood that a counterparty will default
on its payment obligations;
‰Measuring our current and potential credit exposure and
losses resulting from counterparty default;
‰Reporting of credit exposures to senior management, the
Board and regulators;
‰Use of credit risk mitigants, including collateral and
hedging; and
‰Communication and collaboration with other
independent control and support functions such as
operations, legal and compliance.
As part of the risk assessment process, Credit Risk
Management performs credit reviews which include initial
and ongoing analyses of our counterparties. For
substantially all of our credit exposures, the core of our
process is an annual counterparty credit review. A credit
review is an independent analysis of the capacity and
willingness of a counterparty to meet its financial
obligations, resulting in an internal credit rating. The
determination of internal credit ratings also incorporates
assumptions with respect to the nature of and outlook for
the counterparty’s industry, and the economic
environment. Senior personnel within Credit Risk
Management, with expertise in specific industries, inspect
and approve credit reviews and internal credit ratings.
Our global credit risk management systems capture credit
exposure to individual counterparties and on an aggregate
basis to counterparties and their subsidiaries (economic
groups). These systems also provide management with
comprehensive information on our aggregate credit risk by
product, internal credit rating, industry, country and region.
Risk Measures and Limits
We measure our credit risk based on the potential loss in the
event of non-payment by a counterparty using current and
potential exposure. For derivatives and securities financing
transactions, current exposure represents the amount
presently owed to us after taking into account applicable
netting and collateral arrangements while potential
exposure represents our estimate of the future exposure
that could arise over the life of a transaction based on
market movements within a specified confidence level.
Potential exposure also takes into account netting and
collateral arrangements. For loans and lending
commitments, the primary measure is a function of the
notional amount of the position.
We use credit limits at various levels (counterparty,
economic group, industry, country) to control the size of
our credit exposures. Limits for counterparties and
economic groups are reviewed regularly and revised to
reflect changing risk appetites for a given counterparty or
group of counterparties. Limits for industries and countries
are based on our risk tolerance and are designed to allow
for regular monitoring, review, escalation and management
of credit risk concentrations. The Risk Committee of the
Board and the Firmwide Risk Committee approve credit
risk limits at the firmwide and business levels. Credit Risk
Management sets credit limits for individual counterparties,
economic groups, industries and countries. Policies
authorized by the Firmwide Risk Committee and the Credit
Policy Committee prescribe the level of formal approval
required for us to assume credit exposure to a counterparty
across all product areas, taking into account any applicable
netting provisions, collateral or other credit risk mitigants.
104 Goldman Sachs 2015 Form 10-K