Goldman Sachs 2012 Annual Report Download - page 83

Management’s Discussion and Analysis
Liquidity Risk Management
Liquidity is of critical importance to financial institutions.
Most of the recent failures of financial institutions have
occurred in large part due to insufficient liquidity.
Accordingly, the firm has in place a comprehensive and
conservative set of liquidity and funding policies to address
both firm-specific and broader industry or market liquidity
events. Our principal objective is to be able to fund the firm
and to enable our core businesses to continue to serve clients
and generate revenues, even under adverse circumstances.
We manage liquidity risk according to the
following principles:
Excess Liquidity. We maintain substantial excess liquidity
to meet a broad range of potential cash outflows and
collateral needs in a stressed environment.
Asset-Liability Management. We assess anticipated
holding periods for our assets and their expected liquidity in
a stressed environment. We manage the maturities and
diversity of our funding across markets, products and
counterparties, and seek to maintain liabilities of
appropriate tenor relative to our asset base.
Contingency Funding Plan. We maintain a contingency
funding plan to provide a framework for analyzing and
responding to a liquidity crisis situation or periods of
market stress. This framework sets forth the plan of action
to fund normal business activity in emergency and stress
situations. These principles are discussed in more
detail below.
Excess Liquidity
Our most important liquidity policy is to pre-fund our
estimated potential cash and collateral needs during a
liquidity crisis and hold this excess liquidity in the form of
unencumbered, highly liquid securities and cash. We believe
that the securities held in our global core excess would be
readily convertible to cash in a matter of days, through
liquidation, by entering into repurchase agreements or from
maturities of reverse repurchase agreements, and that this
cash would allow us to meet immediate obligations without
needing to sell other assets or depend on additional funding
from credit-sensitive markets.
As of December 2012 and December 2011, the fair value of
the securities and certain overnight cash deposits included
in our GCE totaled $174.62 billion and $171.58 billion,
respectively. Based on the results of our internal liquidity
risk model, discussed below, as well as our consideration of
other factors including, but not limited to, a qualitative
assessment of the condition of the financial markets and the
firm, we believe our liquidity position as of December 2012
was appropriate.
The table below presents the fair value of the securities and
certain overnight cash deposits that are included in
our GCE.
Average for the
Year Ended December
in millions 2012 2011
U.S. dollar-denominated $125,111 $125,668
Non-U.S. dollar-denominated 46,984 40,291
Total $172,095 $165,959
The U.S. dollar-denominated excess is composed of
(i) unencumbered U.S. government and federal agency
obligations (including highly liquid U.S. federal agency
mortgage-backed obligations), all of which are eligible as
collateral in Federal Reserve open market operations and
(ii) certain overnight U.S. dollar cash deposits. The
non-U.S. dollar-denominated excess is composed of only
unencumbered German, French, Japanese and United
Kingdom government obligations and certain overnight
cash deposits in highly liquid currencies. We strictly limit
our excess liquidity to this narrowly defined list of securities
and cash because they are highly liquid, even in a difficult
funding environment. We do not include other potential
sources of excess liquidity, such as less liquid
unencumbered securities or committed credit facilities, in
our GCE.
Goldman Sachs 2012 Annual Report 81