Goldman Sachs : 2019 Annual Dodd-Frank Act Stress Test Disclosure

2019 Annual Dodd-Frank Act

Stress Test Disclosure

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THE GOLDMAN SACHS GROUP, INC.

2019 Annual Dodd-Frank Act Company-Run Stress Test Disclosure

Overview and Requirements

For the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Stress Tests (DFAST) conducted annually (Annual DFAST) and completed in April of each year, The Goldman Sachs Group, Inc. ("we," "us" or "our") is currently required to conduct stress tests using a set of macroeconomic scenarios (supervisory baseline, supervisory adverse and supervisory severely adverse) developed by the Board of Governors of the Federal Reserve System (FRB).

In addition, as part of our capital plan submitted to the FRB in connection with its annual Comprehensive Capital Analysis and Review (CCAR), we are also required to assess our capital adequacy under internally developed baseline and severely adverse scenarios. Stress testing is an integral component of our internal processes to assess our capital adequacy and to ensure that we hold an appropriate amount of capital relative to the risks of our businesses.

We are required to calculate our 2019 Annual DFAST in accordance with the regulations of the FRB (Capital Framework). These regulations are largely based on the Basel Committee on Banking Supervision's capital framework for strengthening international capital standards (Basel III) and also implement certain provisions of the Dodd-Frank Act. The capital requirements are expressed as risk-based capital and leverage ratios that compare measures of regulatory capital to risk-weighted assets (RWAs), average assets and off-balance-sheet exposures.

We are required to calculate risk-based Common Equity Tier 1 (CET1) capital, Tier 1 capital and Total capital ratios for all quarters of the planning horizon in accordance with the Standardized approach and market risk rules set out in the Capital Framework (together, the Standardized Capital Rules). We are also required to calculate a Tier 1 leverage ratio for all quarters, using the Capital Framework definition of Tier 1 capital in the numerator and adjusted total assets (which includes adjustments for certain capital deductions) in the denominator. We are also required to calculate a supplementary leverage ratio (SLR) for all quarters of the planning horizon. The SLR compares Tier 1 capital to a measure of leverage exposure, which consists of total assets for the quarter and certain off-balance-sheet exposures (which include a measure of derivatives, securities financing transactions, commitments, and guarantees) less certain balance sheet deductions.

The planning horizon for the 2019 Annual DFAST is the first quarter of 2019 through and including the first quarter of 2021.

Minimum Regulatory Ratio Requirements

The table below presents the FRB's minimum risk-based capital and leverage ratios applicable to us over the planning horizon in the Annual DFAST stress test.

Minimum Ratio

CET1 capital ratio	4.5%
Tier 1 capital ratio	6.0%
Total capital ratio	8.0%
Tier 1 leverage ratio	4.0%
SLR	3.0%

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THE GOLDMAN SACHS GROUP, INC.

2019 Annual Dodd-Frank Act Company-Run Stress Test Disclosure

Summary of Results

The table below presents the results of our calculations under the FRB's severely adverse scenario over the planning horizon, including the instantaneous global market shock and counterparty default scenario applied to our trading and counterparty exposures.

These results incorporate the following capital action assumptions, as prescribed by the FRB's DFAST rules:

• Actual capital actions for the first quarter of 2019; and
• For each of the remaining quarters in the planning horizon:
• • common stock dividends equal to the quarterly average dollar amount of common stock dividends that were paid in the second quarter of 2018 through and including the first quarter of 2019; and
  • payments on any other instrument that is eligible for inclusion in the numerator of a regulatory capital ratio equal to the stated dividend, interest or principal due on such instrument during the quarter.

Other than described above, these results do not include any requested capital actions that may be incorporated into our CCAR 2019 submission.

Based on the FRB's severely adverse scenario, the most significant drivers impacting our capital ratios over the planning horizon are:

• Trading and counterparty losses, which include the global market shock, the counterparty default scenario and trading incremental default risk losses;
• Stress Pre-Provision Net Revenues (PPNR) and operational risk losses; and
• Stress provisions and other losses in our loans and lending commitments

These results are not indicative of the FRB's calculations of our regulatory capital ratios under its CCAR 2019 supervisory stress tests. The FRB has separately published its results for the supervisory stress test results incorporating the Annual DFAST capital actions. On June 27th, 2019, the FRB is expected to publish its calculations for the supervisory stress test results incorporating our CCAR requested capital actions.

Additionally, this year's results are based on the current Annual DFAST requirements and do not incorporate the proposed Stress Capital Buffer requirements.

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2019 Annual DFAST Results

Projected Capital Ratios, RWAs, PPNR, Losses, Net Loss Before Taxes and Loan Losses

The Goldman Sachs Group, Inc. Estimates in the FRB's Severely Adverse Scenario

These results are calculated using capital action assumptions required by the DFAST rules. All projections represent hypothetical estimates that involve an economic outcome that is more adverse than expected. These estimates are not forecasts.

Table 1

Actual Q4 2018 and Projected Capital Ratios through Q1 2021 under the FRB's Severely Adverse Scenario

		Projected Stressed Capital
	Actual		Ratios
Regulatory Ratio	Q4 2018	Ending	Minimum
CET1 capital ratio (%)	13.3	8.9	8.8
Tier 1 capital ratio (%)	15.3	10.8	10.7
Total capital ratio (%)	18.0	13.7	13.6
Tier 1 leverage ratio (%)	8.9	6.7	6.6
SLR (%)	6.2	4.7	4.6

Table 2

Actual Q4 2018 and Projected Q1 2021 RWAs under the FRB's Severely Adverse Scenario

	Actual	Projected
Item	Q4 2018	Q1 2021
RWAs ($ in billions)	$547.9	$547.7

In the table above, the lowest calculated capital ratios (minimum) from the first quarter of 2019 through the first quarter of 2021 are presented.

Table 3

Projected Loan Losses by Type of Loan from

Q1 2019 through Q1 2021 under the FRB's Severely Adverse Scenario

		Portfolio
Loan Type		Loss Rates
$ in billions	(%)
Loan Losses:	$7.4	7.3%
First Lien Mortgages, Domestic	0.5	24.3
Junior Liens and HELOCs, Domestic	0.0	3.8
Commercial and Industrial	2.3	7.6
Commercial Real Estate, Domestic	0.6	7.9
Credit Cards	0.4	16.1
Other Consumer	1.3	18.4
Other Loans	2.3	4.5

In the table above:

• Loan losses and average loan balances used to calculate portfolio loss rates excludes loans and lending commitments held for sale or accounted for under the fair value option.
• For reporting purposes, provisions on our purchased credit impaired portfolio included in Table 4 are also included in loan losses in Table 3.

Table 4

Projected PPNR, Losses and Net Loss Before Taxes

from Q1 2019 through Q1 2021 under the FRB's Severely Adverse Scenario

		Percentage of
Item		Average Assets
$ in billions	(%)
PPNR	$2.8	0.3%
Other Revenue	-
Less:
Provision for Loan Losses	8.7
Realized Losses/(Gains) on Securities	-
Trading and Counterparty Losses	16.2
Other Losses/(Gains)	2.8
Equals:
Net Loss Before Taxes	(24.9)	(2.9)

In the table above:

• PPNR includes net revenues and operating expenses (including operational risk events and other real estate owned costs).
• Trading and counterparty losses include mark-to-market losses, trading incremental default risk losses on positions held at fair value and changes in credit valuation adjustment (CVA) and other counterparty credit losses, as a result of the global market shock and the impact of the counterparty default scenario. Subsequent trading incremental default risk losses over the planning horizon are also included.
• Other losses/(gains) primarily include projected changes in the fair value of loans and lending commitments, which are held for sale or accounted for under the fair value option, and their associated hedges, which are not subject to the global market shock, pursuant to the FRB's instructions.

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THE GOLDMAN SACHS GROUP, INC.

2019 Annual Dodd-Frank Act Company-Run Stress Test Disclosure

Material Risks Captured in the Stress Test Market Risk

Market risk is the risk of loss in the value of our inventory, as well as certain other financial assets and financial liabilities, due to changes in market conditions. We employ a variety of risk measures to monitor market risk. We hold inventory primarily for market making for our clients and for our investing and lending activities. Our inventory, therefore, changes based on client demands and our investment opportunities. Categories of market risk include the following:

• Interest rate risk: results from exposures to changes in the level, slope and curvature of yield curves, the volatilities of interest rates, prepayment speeds and credit spreads;
• Equity price risk: results from exposures to changes in prices and volatilities of individual equities, baskets of equities and equity indices;
• Currency rate risk: results from exposures to changes in spot prices, forward prices and volatilities of currency rates; and
• Commodity price risk: results from exposures to changes in spot prices, forward prices and volatilities of commodities, such as crude oil, petroleum products, natural gas, electricity, and precious and base metals.

Market risk is incorporated into our 2019 Annual DFAST results under the FRB's severely adverse scenario via the global market shock and the macroeconomic scenario. The global market shock is applied to certain fair value positions with changes in the fair value being reflected in our revenue projections in the first quarter of the planning horizon. Pursuant to the FRB's instructions, certain loans and lending commitments and associated hedges, which are held for sale or accounted for under the fair value option, are not subject to the global market shock.

In addition to the global market shock, trading incremental default risk losses are estimated over the planning horizon.

We further stress our positions based on the prescribed changes in macroeconomic variables and asset values over the planning horizon.

Credit Risk

Credit risk represents the potential for loss due to the default or deterioration in credit quality of a counterparty (e.g., an over-the-counter (OTC) derivatives counterparty or a borrower) or an issuer of securities or other instruments we hold. Our exposure to credit risk comes mostly from client transactions in OTC derivatives and loans and lending commitments. Credit risk also comes from cash placed with banks, securities financing transactions (i.e., resale and repurchase agreements and securities borrowing and lending activities) and customer and other receivables.

Credit risk is incorporated into our 2019 Annual DFAST results under the FRB's severely adverse scenario via the global market shock, the counterparty default scenario and the macroeconomic scenario. The global market shock includes counterparty credit losses (i.e., from credit valuation adjustments (CVA) and other counterparty credit losses). The counterparty default scenario may include counterparty credit losses due to defaults on OTC derivatives and securities financing transactions. Along with the global market shock, the counterparty default scenario is assumed to occur in the first quarter of the planning horizon. Projections for CVA and other counterparty credit losses over the planning horizon are also included in our revenue projections.

Credit risk is also incorporated into our projections for changes in provisions and loan losses in our loans held for investment that are accounted for at amortized cost, net of allowance (loans receivable) and related lending commitments. We utilize a model that estimates losses based on projections of the probability of default, loss given default, exposure at default and rating migration, which is segmented by industry classification and region for our loans receivable. We also include projections of estimated defaults and associated losses on our loans and lending commitments, which are held for sale or accounted for under the fair value option.

Per FRB instructions, our 2019 Annual DFAST results do not incorporate the impact of adopting the Current Expected Credit Loss model.

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