Goldman Sachs 2015 Annual Report Download - page 96

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Overview and Structure of Risk
Management
Overview
We believe that effective risk management is of primary
importance to the success of the firm. Accordingly, we have
comprehensive risk management processes through which
we monitor, evaluate and manage the risks we assume in
conducting our activities. These include market, credit,
liquidity, operational, model, legal, regulatory and
reputational risk exposures. Our risk management
framework is built around three core components:
governance, processes and people.
Governance. Risk management governance starts with
our Board, which plays an important role in reviewing and
approving risk management policies and practices, both
directly and through its committees, including its Risk
Committee. The Board also receives regular briefings on
firmwide risks, including market risk, liquidity risk, credit
risk, operational risk and model risk from our independent
control and support functions, including the chief risk
officer, and on matters impacting our reputation from the
chair of our Firmwide Client and Business Standards
Committee. The chief risk officer, as part of the review of
the firmwide risk portfolio, regularly advises the Risk
Committee of the Board of relevant risk metrics and
material exposures. Next, at the most senior levels of the
firm, our leaders are experienced risk managers, with a
sophisticated and detailed understanding of the risks we
take. Our senior management, and senior managers in our
revenue-producing units and independent control and
support functions, lead and participate in risk-oriented
committees. Independent control and support functions
include Business Selection and Conflicts Resolution
(Conflicts), Compliance, Controllers, Credit Risk
Management and Advisory (Credit Risk Management),
Human Capital Management, Legal, Liquidity Risk
Management and Analysis (Liquidity Risk Management),
Market Risk Management and Analysis (Market Risk
Management), Model Risk Management, Operations,
Operational Risk Management and Analysis (Operational
Risk Management), Tax, Technology and Treasury.
Our governance structure provides the protocol and
responsibility for decision-making on risk management
issues and ensures implementation of those decisions. We
make extensive use of risk-related committees that meet
regularly and serve as an important means to facilitate and
foster ongoing discussions to identify, manage and mitigate
risks.
We maintain strong communication about risk and we have
a culture of collaboration in decision-making among the
revenue-producing units, independent control and support
functions, committees and senior management. While we
believe that the first line of defense in managing risk rests
with the managers in our revenue-producing units, we
dedicate extensive resources to independent control and
support functions in order to ensure a strong oversight
structure and an appropriate segregation of duties. We
regularly reinforce our strong culture of escalation and
accountability across all divisions and functions.
Processes. We maintain various processes and procedures
that are critical components of our risk management. First
and foremost is our daily discipline of marking
substantially all of our inventory to current market levels.
Goldman Sachs carries its inventory at fair value, with
changes in valuation reflected immediately in our risk
management systems and in net revenues. We do so because
we believe this discipline is one of the most effective tools
for assessing and managing risk and that it provides
transparent and realistic insight into our financial
exposures.
We also apply a rigorous framework of limits to control
risk across multiple transactions, products, businesses and
markets. This includes approval of limits at both firmwide
and business levels by the Risk Committee of the Board. In
addition, the Firmwide Risk Committee is responsible for
approving limits, subject to the overall limits approved by
the Risk Committee of the Board, at a variety of levels and
monitoring these limits on a daily basis. Divisional risk
committees are responsible for setting sub-limits below the
overall business-level limits approved by the Firmwide Risk
Committee. Limits are typically set at levels that will be
periodically exceeded, rather than at levels which reflect
our maximum risk appetite. This fosters an ongoing
dialogue on risk among revenue-producing units,
independent control and support functions, committees and
senior management, as well as rapid escalation of risk-
related matters. See “Liquidity Risk Management,”
“Market Risk Management” and “Credit Risk
Management” for further information about our risk
limits.
84 Goldman Sachs 2015 Form 10-K