Goldman Sachs 2012 Annual Report Download - page 72

Management’s Discussion and Analysis
Consolidated Regulatory Capital Ratios
The table below presents information about our regulatory
capital ratios, which are based on Basel 1, as implemented
by the Federal Reserve Board.
As of December
$ in millions 2012 2011
Common shareholders’ equity $ 69,516 $ 67,279
Less: Goodwill (3,702) (3,802)
Less: Intangible assets (1,397) (1,666)
Less: Equity investments in
certain entities 1(4,805) (4,556)
Less: Disallowed deferred tax assets (1,261) (1,073)
Less: Debt valuation adjustment 2(180) (664)
Less: Other adjustments 3(124) (356)
Tier 1 Common Capital 58,047 55,162
Non-cumulative preferred stock 6,200 3,100
Junior subordinated debt issued
to trusts 42,730 5,000
Tier 1 Capital 66,977 63,262
Qualifying subordinated debt 513,342 13,828
Other adjustments 87 53
Tier 2 Capital 13,429 13,881
Total Capital $ 80,406 $ 77,143
Risk-Weighted Assets $399,928 $457,027
Tier 1 Capital Ratio 16.7% 13.8%
Total Capital Ratio 20.1% 16.9%
Tier 1 Leverage Ratio 67.3% 7.0%
Tier 1 Common Ratio 714.5% 12.1%
1. Primarily represents a portion of our equity investments in non-
financial companies.
2. Represents the cumulative change in the fair value of our unsecured
borrowings attributable to the impact of changes in our own credit spreads
(net of tax at the applicable tax rate).
3. Includes net unrealized gains/(losses) on available-for-sale securities (net of
tax at the applicable tax rate), the cumulative change in our pension and
postretirement liabilities (net of tax at the applicable tax rate) and
investments in certain nonconsolidated entities.
4. See Note 16 to the consolidated financial statements for additional
information about the junior subordinated debt issued to trusts.
5. Substantially all of our subordinated debt qualifies as Tier 2 capital for
Basel 1 purposes.
6. See Note 20 to the consolidated financial statements for additional
information about the firm’s Tier 1 leverage ratio.
7. The Tier 1 common ratio equals Tier 1 common capital divided by RWAs. We
believe that the Tier 1 common ratio is meaningful because it is one of the
measures that we and investors use to assess capital adequacy and, while
not currently a formal regulatory capital ratio, this measure is of increasing
importance to regulators. The Tier 1 common ratio is a non-GAAP measure
and may not be comparable to similar non-GAAP measures used by
other companies.
Our Tier 1 capital ratio increased to 16.7% as of
December 2012 from 13.8% as of December 2011
primarily reflecting an increase in common shareholders’
equity and a reduction in market RWAs. The reduction in
market RWAs was primarily driven by lower volatilities, a
decrease in derivative exposure and capital efficiency
initiatives that, while driven by future Basel 3 rules, also
reduced market RWAs as measured under the current rules.
Changes to the market risk capital rules of the U.S. federal
bank regulatory agencies became effective on
January 1, 2013. These changes require the addition of
several new model-based capital requirements, as well as an
increase in capital requirements for securitization positions,
and are designed to implement the new market risk
framework of the Basel Committee, as well as the
prohibition on the use of external credit ratings, as required
by the Dodd-Frank Act. This revised market risk
framework is a significant part of the regulatory capital
changes that will ultimately be included in our Basel 3
capital ratios. The firm’s estimated Tier 1 common ratio
under Basel 1 reflecting these revised market risk regulatory
capital requirements would have been approximately
350 basis points lower than the firm’s reported Basel 1
Tier 1 common ratio as of December 2012.
See “Business — Regulation” in Part I, Item 1 of our
Annual Report on Form 10-K and Note 20 to the
consolidated financial statements for additional
information about our regulatory capital ratios and the
related regulatory requirements, including pending and
proposed regulatory changes.
Risk-Weighted Assets
RWAs under the Federal Reserve Board’s risk-based capital
requirements are calculated based on the amount of credit
risk and market risk.
RWAs for credit risk reflect amounts for on-balance sheet
and off–balance sheet exposures. Credit risk requirements
for on-balance sheet assets, such as receivables and cash, are
generally based on the balance sheet value. Credit risk
requirements for securities financing transactions are
determined based upon the positive net exposure for each
trade, and include the effect of counterparty netting and
collateral, as applicable. For off-balance sheet exposures,
including commitments and guarantees, a credit equivalent
amount is calculated based on the notional amount of each
trade. Requirements for OTC derivatives are based on a
combination of positive net exposure and a percentage of
the notional amount of each trade, and include the effect of
counterparty netting and collateral, as applicable. All such
assets and exposures are then assigned a risk weight
depending on, among other things, whether the
counterparty is a sovereign, bank or a qualifying securities
firm or other entity (or if collateral is held, depending on the
nature of the collateral).
70 Goldman Sachs 2012 Annual Report