Goldman Sachs 2015 Annual Report Download - page 21

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Capital, Leverage and Liquidity Requirements. We are
subject to consolidated regulatory capital and leverage
requirements set forth by the Federal Reserve Board, and
GS Bank USA is subject to capital and leverage
requirements that are calculated in substantially the same
manner as those applicable to Group Inc., also set forth by
the Federal Reserve Board.
Under the Federal Reserve Board’s capital adequacy
requirements, Group Inc. must meet specific regulatory
capital requirements that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items. The
sufficiency of our capital levels is also subject to qualitative
judgments by regulators. We are also subject to liquidity
requirements established by the U.S. federal bank
regulatory agencies.
Capital Ratios. We are subject to the Federal Reserve
Board’s revised risk-based capital and leverage ratio
regulations, inclusive of certain transitional provisions
(Revised Capital Framework). These regulations are largely
based on Basel III, and also implement certain provisions of
the Dodd-Frank Act. Under the Revised Capital
Framework, we are an “Advanced approach” banking
organization. The Revised Capital Framework provides for
capital buffers (including surcharges) that phase in over
time, including a capital conservation buffer, and a global
systemically important bank (G-SIB) surcharge described
below, as well as a counter-cyclical capital buffer.
In July 2015, the Federal Reserve Board approved final
rules establishing a capital surcharge for U.S. G-SIBs. For
these institutions, the final rules implement the framework
developed by the Basel Committee for assessing the global
systemic importance of banking institutions and
determining the range of additional Common Equity Tier 1
(CET1) that should be maintained by those deemed to be
G-SIBs.
The Federal Reserve Board’s framework results in
surcharges initially ranging from 1% to 4.5%. The final
rules treat the Basel Committee’s methodology as a floor
(Method One) and introduce an alternative calculation to
determine the applicable surcharge (Method Two), which
includes a significantly higher surcharge for systemic risk
and, as part of the calculation of the applicable surcharge,
replaces the Basel Committee’s indicator for substitutability
with a new indicator based on a U.S. G-SIB’s use of short-
term wholesale funding. Under the Federal Reserve Board’s
final rules, G-SIBs are required to meet the capital
surcharges on a phased-in basis beginning in 2016 through
January 1, 2019.
The Revised Capital Framework also provides a counter-
cyclical capital buffer of up to 2.5% (and also consisting
entirely of CET1), to be imposed in the event that national
supervisors deem it necessary in order to counteract
excessive credit growth. The Federal Reserve Board has
proposed, but not yet finalized, its policy for setting the
counter-cyclical capital buffer, and several other national
supervisors have started to implement this counter-cyclical
buffer. The buffer applicable to us could change in the
future and, as a result, the minimum ratios we are subject to
could increase.
GS Bank USA computes its capital ratios in accordance
with the Revised Capital Framework as an “Advanced
approach” banking organization.
The Basel Committee has published final guidelines for
calculating incremental capital requirements for domestic
systemically important banking institutions (D-SIBs). These
guidelines are complementary to the framework outlined
above for G-SIBs, but are more principles-based in order to
provide an appropriate degree of national discretion. The
impact of these guidelines on the regulatory capital
requirements of GS Bank USA and other subsidiaries will
depend on how they are implemented by the banking and
non-banking regulators in the United States and other
jurisdictions.
In January 2016, the Basel Committee finalized a revised
framework for calculating minimum capital requirements
for market risk, which is expected to increase market risk
capital requirements for most banking organizations. The
revised framework, among other things: modifies the
boundary between the trading book and banking book;
replaces value at risk (VaR) and stressed VaR
measurements in the internal models approach with an
expected shortfall measure that is intended to reflect tail
and liquidity risks not captured by VaR; revises the model
review and approval process; limits the capital-reducing
effects of hedging and portfolio diversification in the
internal models approach; provides that securitization
exposures will be measured using only the Standardized
approach; and makes significant revisions to the
methodology for capital requirements under the
Standardized approach. The effective date for first
reporting under the revised framework is
December 31, 2019. The U.S. federal bank regulatory
agencies have not yet proposed regulations implementing
the revised requirements for U.S. banking organizations.
Goldman Sachs 2015 Form 10-K 9