Goldman Sachs 2015 Annual Report Download - page 195

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Regulatory Capital and Capital Ratios. The table below
presents the minimum ratios required for the firm as of
December 2015.
Minimum Ratio
CET1 ratio 4.5%
Tier 1 capital ratio 6.0%
Total capital ratio 18.0%
Tier 1 leverage ratio 24.0%
1. In order to meet the quantitative requirements for being “well-capitalized”
under the Federal Reserve Board’s regulations, the firm must meet a higher
required minimum Total capital ratio of 10.0%.
2. Tier 1 leverage ratio is defined as Tier 1 capital divided by quarterly average
adjusted total assets (which includes adjustments for goodwill and
identifiable intangible assets, and certain investments in nonconsolidated
financial institutions).
Certain aspects of the Revised Capital Framework’s
requirements phase in over time (transitional provisions).
These include the introduction of capital buffers (including
surcharges) and certain deductions from regulatory capital
(such as investments in nonconsolidated financial
institutions). These deductions from regulatory capital are
required to be phased in ratably per year from 2014 to
2018, with residual amounts not deducted during the
transitional period subject to risk weighting. In addition,
junior subordinated debt issued to trusts is being phased
out of regulatory capital. The minimum CET1, Tier 1 and
Total capital ratios that apply to the firm will increase as
the transitional provisions phase in and capital buffers
(including surcharges) are introduced.
Definition of Risk-Weighted Assets. As of
December 2015, RWAs were calculated in accordance with
both the Standardized Capital Rules and the Basel III
Advanced Rules. The following is a comparison of RWA
calculations under these rules:
‰RWAs for credit risk in accordance with the Standardized
Capital Rules are calculated in a different manner than
the Basel III Advanced Rules. The primary difference is
that the Standardized Capital Rules do not contemplate
the use of internal models to compute exposure for credit
risk on derivatives and securities financing transactions,
whereas the Basel III Advanced Rules permit the use of
such models, subject to supervisory approval. In addition,
credit RWAs calculated in accordance with the
Standardized Capital Rules utilize prescribed risk-weights
which depend largely on the type of counterparty, rather
than on internal assessments of the creditworthiness of
such counterparties;
‰RWAs for market risk in accordance with the
Standardized Capital Rules and the Basel III Advanced
Rules are generally consistent; and
‰RWAs for operational risk are not required by the
Standardized Capital Rules, whereas the Basel III
Advanced Rules do include such a requirement.
As of December 2014, the firm calculated RWAs in
accordance with both the Basel III Advanced Rules and the
Hybrid Capital Rules described below.
Credit Risk
Credit RWAs are calculated based upon measures of
exposure, which are then risk weighted. The following is a
description of the calculation of credit RWAs in accordance
with the Standardized Capital Rules, the Basel III Advanced
Rules and the Hybrid Capital Rules:
‰For credit RWAs calculated in accordance with the
Standardized Capital Rules, the firm utilizes prescribed
risk-weights which depend largely on the type of
counterparty (e.g., whether the counterparty is a
sovereign, bank, broker-dealer or other entity). The
exposure measure for derivatives is based on a
combination of positive net current exposure and a
percentage of the notional amount of each derivative. The
exposure measure for securities financing transactions is
calculated to reflect adjustments for potential price
volatility, the size of which depends on factors such as the
type and maturity of the security, and whether it is
denominated in the same currency as the other side of the
financing transaction. The firm utilizes specific required
formulaic approaches to measure exposure for
securitizations and equities;
‰For credit RWAs calculated in accordance with the
Basel III Advanced Rules, the firm has been given
permission by its regulators to compute risk-weights for
wholesale and retail credit exposures in accordance with
the Advanced Internal Ratings-Based approach. This
approach is based on internal assessments of the
creditworthiness of counterparties, with key inputs being
the probability of default, loss given default and the
effective maturity. The firm utilizes internal models to
measure exposure for derivatives, securities financing
transactions and eligible margin loans. The Revised
Capital Framework requires that a bank holding
company obtain prior written agreement from its
regulators before using internal models for such purposes.
The firm utilizes specific required formulaic approaches
to measure exposure for securitizations and equities; and
‰For credit RWAs calculated in accordance with the
Hybrid Capital Rules, the firm utilized prescribed risk-
weights depending on, among other things, the type of
counterparty. The exposure measure for derivatives was
based on a combination of positive net current exposure
and a percentage of the notional amount of each
derivative. The exposure measure for securities financing
transactions was based on the carrying value without the
application of potential price volatility adjustments
required under the Standardized Capital Rules.
Goldman Sachs 2015 Form 10-K 183