Goldman Sachs 2015 Annual Report Download - page 196

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Market Risk
Market RWAs are calculated based on measures of
exposure which include Value-at-Risk (VaR), stressed VaR,
incremental risk and comprehensive risk based on internal
models, and a standardized measurement method for
specific risk. The market risk regulatory capital rules
require that a bank holding company obtain prior written
agreement from its regulators before using any internal
model to calculate its risk-based capital requirement. The
following is further information regarding the measures of
exposure for market RWAs calculated in accordance with
the Standardized Capital Rules, Basel III Advanced Rules
and Hybrid Capital Rules:
‰VaR is the potential loss in value of inventory positions,
as well as certain other financial assets and financial
liabilities, due to adverse market movements over a
defined time horizon with a specified confidence level. For
both risk management purposes and regulatory capital
calculations the firm uses a single VaR model which
captures risks including those related to interest rates,
equity prices, currency rates and commodity prices.
However, VaR used for regulatory capital requirements
(regulatory VaR) differs from risk management VaR due
to different time horizons and confidence levels (10-day
and 99% for regulatory VaR vs. one-day and 95% for
risk management VaR), as well as differences in the scope
of positions on which VaR is calculated. In addition, the
daily trading net revenues used to determine risk
management VaR exceptions (i.e., comparing the daily
trading net revenues to the VaR measure calculated as of
the end of the prior business day) include intraday
activity, whereas the Federal Reserve Board’s regulatory
capital rules require that intraday activity be excluded
from daily trading net revenues when calculating
regulatory VaR exceptions. Intraday activity includes bid/
offer net revenues, which are more likely than not to be
positive by their nature. As a result, there may be
differences in the number of VaR exceptions and the
amount of daily trading net revenues calculated for
regulatory VaR compared to the amounts calculated for
risk management VaR. The firm’s positional losses
observed on a single day did not exceed its 99% one-day
regulatory VaR during 2015, but did exceed its 99% one-
day regulatory VaR on three occasions during 2014.
There was no change in the VaR multiplier used to
calculate Market RWAs;
‰Stressed VaR is the potential loss in value of inventory
positions, as well as certain other financial assets and
financial liabilities, during a period of significant market
stress;
‰Incremental risk is the potential loss in value of non-
securitized inventory positions due to the default or credit
migration of issuers of financial instruments over a one-
year time horizon;
‰Comprehensive risk is the potential loss in value, due to
price risk and defaults, within the firm’s credit correlation
positions; and
‰Specific risk is the risk of loss on a position that could
result from factors other than broad market movements,
including event risk, default risk and idiosyncratic risk.
The standardized measurement method is used to
determine specific risk RWAs, by applying supervisory
defined risk-weighting factors after applicable netting is
performed.
Operational Risk
Operational RWAs are only required to be included under
the Basel III Advanced Rules. The firm has been given
permission by its regulators to calculate operational RWAs
in accordance with the “Advanced Measurement
Approach,” and therefore utilizes an internal risk-based
model to quantify operational RWAs.
Consolidated Regulatory Capital Ratios
Capital Ratios and RWAs. Each of the ratios calculated in
accordance with the Basel III Advanced Rules was lower
than that calculated in accordance with the Standardized
Rules as of December 2015 and therefore such lower ratios
applied to the firm as of that date. Each of the ratios
calculated in accordance with the Basel III Advanced Rules
was lower than that calculated in accordance with the
Hybrid Capital Rules as of December 2014 and therefore
such lower ratios applied to the firm as of that date.
184 Goldman Sachs 2015 Form 10-K