Goldman Sachs 2015 Annual Report Download - page 50

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Concentration of risk increases the potential for
significant losses in our market-making,
underwriting, investing and lending activities.
Concentration of risk increases the potential for significant
losses in our market-making, underwriting, investing and
lending activities. The number and size of such transactions
may affect our results of operations in a given period.
Moreover, because of concentration of risk, we may suffer
losses even when economic and market conditions are
generally favorable for our competitors. Disruptions in the
credit markets can make it difficult to hedge these credit
exposures effectively or economically. In addition, we
extend large commitments as part of our credit origination
activities.
Rules adopted under the Dodd-Frank Act require issuers of
asset-backed securities and any person who organizes and
initiates an asset-backed securities transaction to retain
economic exposure to the asset, which is likely to
significantly increase the cost to us of engaging in
securitization activities. Our inability to reduce our credit
risk by selling, syndicating or securitizing these positions,
including during periods of market stress, could negatively
affect our results of operations due to a decrease in the fair
value of the positions, including due to the insolvency or
bankruptcy of the borrower, as well as the loss of revenues
associated with selling such securities or loans.
In the ordinary course of business, we may be subject to a
concentration of credit risk to a particular counterparty,
borrower, issuer, including sovereign issuers, or geographic
area or group of related countries, such as the EU, and a
failure or downgrade of, or default by, such entity could
negatively impact our businesses, perhaps materially, and
the systems by which we set limits and monitor the level of
our credit exposure to individual entities, industries and
countries may not function as we have anticipated. While
our activities expose us to many different industries,
counterparties and countries, we routinely execute a high
volume of transactions with counterparties engaged in
financial services activities, including brokers and dealers,
commercial banks, clearing houses, exchanges and
investment funds. This has resulted in significant credit
concentration with respect to these counterparties.
Provisions of the Dodd-Frank Act have led to increased
centralization of trading activity through particular clearing
houses, central agents or exchanges, which has significantly
increased our concentration of risk with respect to these
entities.
The financial services industry is both highly
competitive and interrelated.
The financial services industry and all of our businesses are
intensely competitive, and we expect them to remain so. We
compete on the basis of a number of factors, including
transaction execution, our products and services,
innovation, reputation, creditworthiness and price. There
has been substantial consolidation and convergence among
companies in the financial services industry. This
consolidation and convergence has hastened the
globalization of the securities and other financial services
markets.
As a result, we have had to commit capital to support our
international operations and to execute large global
transactions. To the extent we expand into new business
areas and new geographic regions, we will face competitors
with more experience and more established relationships
with clients, regulators and industry participants in the
relevant market, which could adversely affect our ability to
expand. Governments and regulators have recently adopted
regulations, imposed taxes, adopted compensation
restrictions or otherwise put forward various proposals that
have or may impact our ability to conduct certain of our
businesses in a cost-effective manner or at all in certain or
all jurisdictions, including proposals relating to restrictions
on the type of activities in which financial institutions are
permitted to engage. These or other similar rules, many of
which do not apply to all our U.S. or non-U.S. competitors,
could impact our ability to compete effectively.
Pricing and other competitive pressures in our businesses
have continued to increase, particularly in situations where
some of our competitors may seek to increase market share
by reducing prices. For example, in connection with
investment banking and other assignments, we have
experienced pressure to extend and price credit at levels that
may not always fully compensate us for the risks we take.
38 Goldman Sachs 2015 Form 10-K