Goldman Sachs 2015 Annual Report Download - page 85

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Equity Capital Management and Regulatory
Capital
Capital adequacy is of critical importance to us. We have in
place a comprehensive capital management policy that
provides a framework, defines objectives and establishes
guidelines to assist us in maintaining the appropriate level
and composition of capital in both business-as-usual and
stressed conditions.
Equity Capital Management
We determine the appropriate level and composition of our
equity capital by considering multiple factors including our
current and future consolidated regulatory capital
requirements, the results of our capital planning and stress
testing process and other factors such as rating agency
guidelines, subsidiary capital requirements, the business
environment and conditions in the financial markets. We
manage our capital requirements and the levels of our
capital usage principally by setting limits on balance sheet
assets and/or limits on risk, in each case at both the
consolidated and business levels.
We principally manage the level and composition of our
equity capital through issuances and repurchases of our
common stock. We may also, from time to time, issue or
repurchase our preferred stock, junior subordinated debt
issued to trusts, and other subordinated debt or other forms
of capital as business conditions warrant. Prior to any
repurchases, we must receive confirmation that the Board
of Governors of the Federal Reserve System (Federal
Reserve Board) does not object to such capital actions. See
Notes 16 and 19 to the consolidated financial statements
for further information about our preferred stock, junior
subordinated debt issued to trusts and other subordinated
debt.
Capital Planning and Stress Testing Process. As part of
capital planning, we project sources and uses of capital
given a range of business environments, including stressed
conditions. Our stress testing process is designed to identify
and measure material risks associated with our business
activities including market risk, credit risk and operational
risk, as well as our ability to generate revenues.
The following is a description of our capital planning and
stress testing process:
‰Capital Planning. Our capital planning process
incorporates an internal capital adequacy assessment
with the objective of ensuring that we are appropriately
capitalized relative to the risks in our business. We
incorporate stress scenarios into our capital planning
process with a goal of holding sufficient capital to ensure
we remain adequately capitalized after experiencing a
severe stress event. Our assessment of capital adequacy is
viewed in tandem with our assessment of liquidity
adequacy and is integrated into our overall risk
management structure, governance and policy
framework.
Our capital planning process also includes an internal
risk-based capital assessment. This assessment
incorporates market risk, credit risk and operational risk.
Market risk is calculated by using Value-at-Risk (VaR)
calculations supplemented by risk-based add-ons which
include risks related to rare events (tail risks). Credit risk
utilizes assumptions about our counterparties’
probability of default and the size of our losses in the
event of a default. Operational risk is calculated based on
scenarios incorporating multiple types of operational
failures as well as incorporating internal and external
actual loss experience. Backtesting is used to gauge the
effectiveness of models at capturing and measuring
relevant risks.
‰Stress Testing. Our stress tests incorporate our
internally designed stress scenarios, including our
internally developed severely adverse scenario, and those
required under CCAR and DFAST, and are designed to
capture our specific vulnerabilities and risks. We provide
additional information about our stress test processes and
a summary of the results on our web site as described
under “Business — Available Information” in Part I,
Item 1 of the 2015 Form 10-K.
Goldman Sachs 2015 Form 10-K 73