Goldman Sachs 2015 Annual Report Download - page 40

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
We receive asset-based management fees based on the value
of our clients’ portfolios or investment in funds managed by
us and, in some cases, we also receive incentive fees based
on increases in the value of such investments. Declines in
asset values reduce the value of our clients’ portfolios or
fund assets, which in turn reduce the fees we earn for
managing such assets.
We post collateral to support our obligations and receive
collateral to support the obligations of our clients and
counterparties in connection with our client execution
businesses. When the value of the assets posted as collateral
or the credit ratings of the party posting collateral decline,
the party posting the collateral may need to provide
additional collateral or, if possible, reduce its trading
position. A classic example of such a situation is a “margin
call” in connection with a brokerage account. Therefore,
declines in the value of asset classes used as collateral mean
that either the cost of funding positions is increased or the
size of positions is decreased. If we are the party providing
collateral, this can increase our costs and reduce our
profitability and if we are the party receiving collateral, this
can also reduce our profitability by reducing the level of
business done with our clients and counterparties. In
addition, volatile or less liquid markets increase the
difficulty of valuing assets which can lead to costly and
time-consuming disputes over asset values and the level of
required collateral, as well as increased credit risk to the
recipient of the collateral due to delays in receiving
adequate collateral.
Our businesses have been and may be adversely
affected by disruptions in the credit markets,
including reduced access to credit and higher costs of
obtaining credit.
Widening credit spreads, as well as significant declines in
the availability of credit, have in the past adversely affected
our ability to borrow on a secured and unsecured basis and
may do so in the future. We fund ourselves on an unsecured
basis by issuing long-term debt, by accepting deposits at our
bank subsidiaries, by issuing hybrid financial instruments,
or by obtaining bank loans or lines of credit. We seek to
finance many of our assets on a secured basis. Any
disruptions in the credit markets may make it harder and
more expensive to obtain funding for our businesses. If our
available funding is limited or we are forced to fund our
operations at a higher cost, these conditions may require us
to curtail our business activities and increase our cost of
funding, both of which could reduce our profitability,
particularly in our businesses that involve investing, lending
and market making.
Our clients engaging in mergers and acquisitions often rely
on access to the secured and unsecured credit markets to
finance their transactions. A lack of available credit or an
increased cost of credit can adversely affect the size, volume
and timing of our clients’ merger and acquisition
transactions — particularly large transactions — and
adversely affect our financial advisory and underwriting
businesses.
Our credit businesses have been and may in the future be
negatively affected by a lack of liquidity in credit markets. A
lack of liquidity reduces price transparency, increases price
volatility and decreases transaction volumes and size, all of
which can increase transaction risk or decrease the
profitability of such businesses.
To the extent that the final rules related to TLAC require us
to issue material amounts of additional qualified loss-
absorbing debt or to refinance material amounts of our
existing debt, such requirements, at least in the near term,
could increase our borrowing costs, perhaps materially, and
negatively impact the debt capital markets. See “Business —
Regulation — Banking Supervision and Regulation —
Total Loss-Absorbing Capacity” in Part I, Item 1 of the
2015 Form 10-K for more information about the Federal
Reserve Board’s proposed rules on loss-absorbency
requirements.
Our market-making activities have been and may be
affected by changes in the levels of market volatility.
Certain of our market-making activities depend on market
volatility to provide trading and arbitrage opportunities to
our clients, and decreases in volatility may reduce these
opportunities and adversely affect the results of these
activities. On the other hand, increased volatility, while it
can increase trading volumes and spreads, also increases
risk as measured by Value-at-Risk (VaR) and may expose
us to increased risks in connection with our market-making
activities or cause us to reduce our market-making
positions in order to avoid increasing our VaR. Limiting the
size of our market-making positions can adversely affect
our profitability. In periods when volatility is increasing,
but asset values are declining significantly, it may not be
possible to sell assets at all or it may only be possible to do
so at steep discounts. In such circumstances we may be
forced to either take on additional risk or to realize losses in
order to decrease our VaR. In addition, increases in
volatility increase the level of our RWAs, which increases
our capital requirements.
28 Goldman Sachs 2015 Form 10-K