Note 20.

Regulation and Capital Adequacy

The Federal Reserve Board is the primary regulator of Group Inc., a bank holding company under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under amendments to the BHC Act. As a bank holding company, the firm is subject to consolidated regulatory capital requirements which are calculated in accordance with the revised risk-based capital and leverage regulations of the Federal Reserve Board, subject to certain transitional provisions (Revised Capital Framework).

The risk-based capital requirements are expressed as capital ratios that compare measures of regulatory capital to risk-weighted assets (RWAs). Failure to comply with these capital requirements could result in restrictions being imposed by the firm’s regulators. The firm’s capital levels are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. Furthermore, certain of the firm’s subsidiaries are subject to separate regulations and capital requirements as described below.

Capital Framework

The regulations under the Revised Capital Framework are largely based on the Basel Committee’s capital framework for strengthening international capital standards (Basel III) and also implement certain provisions of the Dodd-Frank Act. Under the Revised Capital Framework, the firm is an “Advanced approach” banking organization.

The firm calculates its Common Equity Tier 1 (CET1), Tier 1 capital and Total capital ratios in accordance with (i) the Standardized approach and market risk rules set out in the Revised Capital Framework (together, the Standardized Capital Rules) and (ii) the Advanced approach and market risk rules set out in the Revised Capital Framework (together, the Basel III Advanced Rules). The lower of each ratio calculated in (i) and (ii) is the ratio against which the firm’s compliance with its minimum ratio requirements is assessed. Each of the ratios calculated in accordance with the Basel III Advanced Rules was lower than that calculated in accordance with the Standardized Capital Rules and therefore the Basel III Advanced ratios were the ratios that applied to the firm as of September 2016 and December 2015. The capital ratios that apply to the firm can change in future reporting periods as a result of these regulatory requirements.

Regulatory Capital and Capital Ratios. The table below presents the minimum ratios required for the firm.


	As of
		September 2016	December 2015
CET1 ratio		5.875%	4.5%

Tier 1 capital ratio		7.375%	6.0%

Total capital ratio		9.375%	8.0%

Tier 1 leverage ratio		4.000%	4.0%

In the table above:

•

The minimum ratios as of September 2016 reflect (i) the 25% phase-in of the capital conservation buffer (0.625%), (ii) the 25% phase-in of the Global Systemically Important Bank (G-SIB) buffer (0.75%), and (iii) the counter-cyclical capital buffer of zero percent, each described below.

•

In order to meet the quantitative requirements for being “well-capitalized” under the Federal Reserve Board’s regulations, the firm must meet a higher required minimum Total capital ratio of 10.0%.

•

Tier 1 leverage ratio is defined as Tier 1 capital divided by quarterly average adjusted total assets (which includes adjustments for goodwill and identifiable intangible assets, and certain investments in nonconsolidated financial institutions).

Certain aspects of the Revised Capital Framework’s requirements phase in over time (transitional provisions). These include capital buffers and certain deductions from regulatory capital (such as investments in nonconsolidated financial institutions). These deductions from regulatory capital are required to be phased in ratably per year from 2014 to 2018, with residual amounts not deducted during the transitional period subject to risk weighting. In addition, junior subordinated debt issued to trusts is being phased out of regulatory capital. The minimum CET1, Tier 1 and Total capital ratios that apply to the firm will increase as the capital buffers are phased in.

The capital conservation buffer, which consists entirely of capital that qualifies as CET1, began to phase in on January 1, 2016 and will continue to do so in increments of 0.625% per year until it reaches 2.5% of RWAs on January 1, 2019.

The G-SIB buffer, which is an extension of the capital conservation buffer, phases in ratably, beginning on January 1, 2016, becoming fully effective on January 1, 2019, and must consist entirely of capital that qualifies as CET1. The buffer must be calculated using two methodologies, the higher of which is reflected in the firm’s minimum risk-based capital ratios. The first calculation is based upon the Basel Committee’s methodology which, among other factors, relies upon measures of the size, activity and complexity of each G-SIB (Method One). The second calculation uses similar inputs, but it includes a measure of reliance on short-term wholesale funding (Method Two). The firm’s G-SIB buffer is 3.0%, using financial data primarily as of December 2014. The buffer will be updated annually based on financial data as of the end of the prior year, and will be applicable for the following year.

The Revised Capital Framework also provides for a counter-cyclical capital buffer, which is an extension of the capital conservation buffer, of up to 2.5% (consisting entirely of CET1) intended to counteract systemic vulnerabilities. As of September 2016 the Federal Reserve Board has set the counter-cyclical capital buffer at 0%.

Failure to meet the capital levels inclusive of the buffers could result in limitations on the firm’s ability to distribute capital, including share repurchases and dividend payments, and to make certain discretionary compensation payments.

Definition of Risk-Weighted Assets. RWAs are calculated in accordance with both the Standardized Capital Rules and the Basel III Advanced Rules. The following is a comparison of RWA calculations under these rules:

•

RWAs for credit risk in accordance with the Standardized Capital Rules are calculated in a different manner than the Basel III Advanced Rules. The primary difference is that the Standardized Capital Rules do not contemplate the use of internal models to compute exposure for credit risk on derivatives and securities financing transactions, whereas the Basel III Advanced Rules permit the use of such models, subject to supervisory approval. In addition, credit RWAs calculated in accordance with the Standardized Capital Rules utilize prescribed risk-weights which depend largely on the type of counterparty, rather than on internal assessments of the creditworthiness of such counterparties;

•

RWAs for market risk in accordance with the Standardized Capital Rules and the Basel III Advanced Rules are generally consistent; and

•

RWAs for operational risk are not required by the Standardized Capital Rules, whereas the Basel III Advanced Rules do include such a requirement.

Credit Risk

Credit RWAs are calculated based upon measures of exposure, which are then risk weighted. The following is a description of the calculation of credit RWAs in accordance with the Standardized Capital Rules and the Basel III Advanced Rules:

•

For credit RWAs calculated in accordance with the Standardized Capital Rules, the firm utilizes prescribed risk-weights which depend largely on the type of counterparty (e.g., whether the counterparty is a sovereign, bank, broker-dealer or other entity). The exposure measure for derivatives is based on a combination of positive net current exposure and a percentage of the notional amount of each derivative. The exposure measure for securities financing transactions is calculated to reflect adjustments for potential price volatility, the size of which depends on factors such as the type and maturity of the security, and whether it is denominated in the same currency as the other side of the financing transaction. The firm utilizes specific required formulaic approaches to measure exposure for securitizations and equities; and

•

For credit RWAs calculated in accordance with the Basel III Advanced Rules, the firm has been given permission by its regulators to compute risk-weights for wholesale and retail credit exposures in accordance with the Advanced Internal Ratings-Based approach. This approach is based on internal assessments of the creditworthiness of counterparties, with key inputs being the probability of default, loss given default and the effective maturity. The firm utilizes internal models to measure exposure for derivatives, securities financing transactions and eligible margin loans. The Revised Capital Framework requires that a bank holding company obtain prior written agreement from its regulators before using internal models for such purposes. The firm utilizes specific required formulaic approaches to measure exposure for securitizations and equities.

Market Risk

Market RWAs are calculated based on measures of exposure which include Value-at-Risk (VaR), stressed VaR, incremental risk and comprehensive risk based on internal models, and a standardized measurement method for specific risk. The market risk regulatory capital rules require that a bank holding company obtain prior written agreement from its regulators before using any internal model to calculate its risk-based capital requirement. The following is further information regarding the measures of exposure for market RWAs calculated in accordance with the Standardized Capital Rules and Basel III Advanced Rules:

•

VaR is the potential loss in value of inventory positions, as well as certain other financial assets and financial liabilities, due to adverse market movements over a defined time horizon with a specified confidence level. For both risk management purposes and regulatory capital calculations the firm uses a single VaR model which captures risks including those related to interest rates, equity prices, currency rates and commodity prices. However, VaR used for regulatory capital requirements (regulatory VaR) differs from risk management VaR due to different time horizons and confidence levels (10-day and 99% for regulatory VaR vs. one-day and 95% for risk management VaR), as well as differences in the scope of positions on which VaR is calculated. In addition, the daily trading net revenues used to determine risk management VaR exceptions (i.e., comparing the daily trading net revenues to the VaR measure calculated as of the end of the prior business day) include intraday activity, whereas the Federal Reserve Board’s regulatory capital rules require that intraday activity be excluded from daily trading net revenues when calculating regulatory VaR exceptions. Intraday activity includes bid/offer net revenues, which are more likely than not to be positive by their nature. As a result, there may be differences in the number of VaR exceptions and the amount of daily trading net revenues calculated for regulatory VaR compared to the amounts calculated for risk management VaR. The firm’s positional losses observed on a single day exceeded its 99% one-day regulatory VaR on two occasions during the nine months ended September 2016, but did not exceed its 99% one-day regulatory VaR during the year ended December 2015. There was no change in the VaR multiplier used to calculate Market RWAs;

•

Stressed VaR is the potential loss in value of inventory positions, as well as certain other financial assets and financial liabilities, during a period of significant market stress;

•

Incremental risk is the potential loss in value of non-securitized inventory positions due to the default or credit migration of issuers of financial instruments over a one-year time horizon;

•

Comprehensive risk is the potential loss in value, due to price risk and defaults, within the firm’s credit correlation positions; and

•

Specific risk is the risk of loss on a position that could result from factors other than broad market movements, including event risk, default risk and idiosyncratic risk. The standardized measurement method is used to determine specific risk RWAs, by applying supervisory defined risk-weighting factors after applicable netting is performed.

Operational Risk

Operational RWAs are only required to be included under the Basel III Advanced Rules. The firm has been given permission by its regulators to calculate operational RWAs in accordance with the “Advanced Measurement Approach,” and therefore utilizes an internal risk-based model to quantify Operational RWAs.

Consolidated Regulatory Capital Ratios

Capital Ratios and RWAs. Each of the ratios calculated in accordance with the Basel III Advanced Rules was lower than that calculated in accordance with the Standardized Rules as of September 2016 and December 2015, and therefore such lower ratios applied to the firm as of these dates.

The table below presents the ratios calculated in accordance with both the Standardized and Basel III Advanced Rules.


	As of
$ in millions		September 2016		December 2015
Common shareholders’ equity		$ 75,907		$ 75,528

Deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities		(2,879	)	(2,814	)

Deductions for investments in nonconsolidated financial institutions		(650	)	(864	)

Other adjustments		(681	)	(487	)
Common Equity Tier 1		71,697		71,363
Preferred stock		11,203		11,200

Junior subordinated debt issued to trusts		—		330

Deduction for investments in covered funds		(587	)	(413	)

Other adjustments		(569	)	(969	)
Tier 1 capital		$ 81,744		$ 81,511
Standardized Tier 2 and Total capital
Tier 1 capital		$ 81,744		$ 81,511

Qualifying subordinated debt		14,808		15,132

Junior subordinated debt issued to trusts		792		990

Allowance for losses on loans and lending commitments		699		602

Other adjustments		(4	)	(19	)
Standardized Tier 2 capital		16,295		16,705
Standardized Total capital		$ 98,039		$ 98,216
Basel III Advanced Tier 2 and Total capital
Tier 1 capital		$ 81,744		$ 81,511

Standardized Tier 2 capital		16,295		16,705

Allowance for losses on loans and lending commitments		(699	)	(602	)
Basel III Advanced Tier 2 capital		15,596		16,103
Basel III Advanced Total capital		$ 97,340		$ 97,614
RWAs
Standardized		$513,020		$524,107

Basel III Advanced		579,996		577,651
CET1 ratio
Standardized		14.0%		13.6%

Basel III Advanced		12.4%		12.4%
Tier 1 capital ratio
Standardized		15.9%		15.6%

Basel III Advanced		14.1%		14.1%
Total capital ratio
Standardized		19.1%		18.7%

Basel III Advanced		16.8%		16.9%
Tier 1 leverage ratio		9.3%		9.3%

In the table above:

•

The deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities, include goodwill of $3.67 billion and $3.66 billion as of September 2016 and December 2015, respectively, and identifiable intangible assets of $261 million (60% of $435 million) and $196 million (40% of $491 million) as of September 2016 and December 2015, respectively, net of associated deferred tax liabilities of $1.05 billion and $1.04 billion as of September 2016 and December 2015, respectively. Goodwill is fully deducted from CET1, while the deduction for identifiable intangible assets is required to be phased into CET1 ratably over five years from 2014 to 2018. The balance that is not deducted during the transitional period is risk weighted.

•

The deductions for investments in nonconsolidated financial institutions represent the amount by which the firm’s investments in the capital of nonconsolidated financial institutions exceed certain prescribed thresholds. The deduction for such investments is required to be phased into CET1 ratably over five years from 2014 to 2018. As of September 2016 and December 2015, CET1 reflects 60% and 40% of the deduction, respectively. The balance that is not deducted during the transitional period is risk weighted.

•

The deduction for investments in covered funds represents the firm’s aggregate investments in applicable covered funds, as permitted by the Volcker Rule, that were purchased after December 2013. Substantially all of these investments in covered funds were purchased in connection with the firm’s market-making activities. This deduction was not subject to a transition period. See Note 6 for further information about the Volcker Rule.

•

Other adjustments within CET1 and Tier 1 capital primarily include accumulated other comprehensive loss, credit valuation adjustments on derivative liabilities, the overfunded portion of the firm’s defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax assets and other required credit risk-based deductions. The deductions for such items are generally required to be phased into CET1 ratably over five years from 2014 to 2018. As of September 2016 and December 2015, CET1 reflects 60% and 40% of such deductions, respectively. The balance that is not deducted from CET1 during the transitional period is generally deducted from Tier 1 capital within other adjustments.

•

As of September 2016, junior subordinated debt issued to trusts is fully phased out of Tier 1 capital, with 60% included in Tier 2 capital and 40% fully phased out of regulatory capital. As of December 2015, junior subordinated debt issued to trusts is reflected in both Tier 1 capital (25%) and Tier 2 capital (75%). Junior subordinated debt issued to trusts is reduced by the amount of trust preferred securities purchased by the firm and will be fully phased out of Tier 2 capital by 2022 at a rate of 10% per year. See Note 16 for additional information about the firm’s junior subordinated debt issued to trusts and trust preferred securities purchased by the firm.

•

Qualifying subordinated debt is subordinated debt issued by Group Inc. with an original maturity of five years or greater. The outstanding amount of subordinated debt qualifying for Tier 2 capital is reduced upon reaching a remaining maturity of five years. See Note 16 for additional information about the firm’s subordinated debt.

The tables below present changes in CET1, Tier 1 capital and Tier 2 capital for the nine months ended September 2016 and year ended December 2015.


	Nine Months Ended September 2016
$ in millions		Standardized		Basel III Advanced
Common Equity Tier 1
Beginning balance		$71,363		$71,363

Change in common shareholders’ equity		379		379

Change in deductions for:
Transitional provisions		(839	)	(839	)

Goodwill and identifiable intangible assets, net of deferred tax liabilities		11		11

Investments in nonconsolidated financial institutions		669		669

Change in other adjustments		114		114
Ending balance		$71,697		$71,697
Tier 1 capital
Beginning balance		$81,511		$81,511

Change in deductions for:
Transitional provisions		(558	)	(558	)

Investments in covered funds		(174	)	(174	)

Other net increase in CET1		1,173		1,173

Redesignation of junior subordinated debt issued to trusts		(330	)	(330	)

Change in preferred stock		3		3

Change in other adjustments		119		119
Ending balance		81,744		81,744
Tier 2 capital
Beginning balance		16,705		16,103

Change in qualifying subordinated debt		(324	)	(324	)

Redesignation of junior subordinated debt issued to trusts		(198	)	(198	)

Change in the allowance for losses on loans and lending commitments		97		—

Change in other adjustments		15		15
Ending balance		16,295		15,596
Total capital		$98,039		$97,340


	Year Ended December 2015
$ in millions		Standardized		Basel III Advanced
Common Equity Tier 1
Beginning balance		$69,830		$69,830

Change in common shareholders’ equity		1,931		1,931

Change in deductions for:
Transitional provisions		(1,368	)	(1,368	)

Goodwill and identifiable intangible assets, net of deferred tax liabilities		75		75

Investments in nonconsolidated financial institutions		1,059		1,059

Change in other adjustments		(164	)	(164	)
Ending balance		$71,363		$71,363
Tier 1 capital
Beginning balance		$78,433		$78,433

Change in deductions for:
Transitional provisions		(1,073	)	(1,073	)

Investments in covered funds		(413	)	(413	)

Other net increase in CET1		2,901		2,901

Redesignation of junior subordinated debt issued to trusts		(330	)	(330	)

Change in preferred stock		2,000		2,000

Change in other adjustments		(7	)	(7	)
Ending balance		81,511		81,511
Tier 2 capital
Beginning balance		12,861		12,545

Increased deductions for transitional provisions		(53	)	(53	)

Change in qualifying subordinated debt		3,238		3,238

Redesignation of junior subordinated debt issued to trusts		330		330

Change in the allowance for losses on loans and lending commitments		286		—

Change in other adjustments		43		43
Ending balance		16,705		16,103
Total capital		$98,216		$97,614

The increased deductions for transitional provisions in the tables above represent the increased phase-in of deductions from 40% to 60% (effective January 1, 2016) for the nine months ended September 2016 and from 20% to 40% (effective January 1, 2015) for the year ended December 2015.

The tables below present the components of RWAs calculated in accordance with the Standardized and Basel III Advanced Rules.


	Standardized Capital Rules as of
$ in millions		September 2016	December 2015
Credit RWAs
Derivatives		$126,732	$136,841

Commitments, guarantees and loans		116,966	111,391

Securities financing transactions		78,050	71,392

Equity investments		40,423	37,687

Other		58,762	62,807
Total Credit RWAs		420,933	420,118
Market RWAs
Regulatory VaR		9,525	12,000

Stressed VaR		24,925	21,738

Incremental risk		9,188	9,513

Comprehensive risk		5,638	5,725

Specific risk		42,811	55,013
Total Market RWAs		92,087	103,989
Total RWAs		$513,020	$524,107

	Basel III Advanced Rules as of
$ in millions		September 2016	December 2015
Credit RWAs
Derivatives		$123,920	$113,671

Commitments, guarantees and loans		116,582	114,523

Securities financing transactions		16,863	14,901

Equity investments		42,961	40,110

Other		62,283	60,877
Total Credit RWAs		362,609	344,082
Market RWAs
Regulatory VaR		9,525	12,000

Stressed VaR		24,925	21,738

Incremental risk		9,188	9,513

Comprehensive risk		4,813	4,717

Specific risk		42,811	55,013
Total Market RWAs		91,262	102,981
Total Operational RWAs		126,125	130,588
Total RWAs		$579,996	$577,651

In the tables above:

•

Securities financing transactions represent resale and repurchase agreements and securities borrowed and loaned transactions.

•

Other primarily includes receivables, other assets, and cash and cash equivalents.

The table below presents changes in RWAs calculated in accordance with the Standardized and Basel III Advanced Rules for the nine months ended September 2016. The increased deductions for transitional provisions represent the increased phase-in of deductions from 40% to 60%, effective January 1, 2016.


	Nine Months Ended September 2016
$ in millions		Standardized		Basel III Advanced
Risk-Weighted Assets
Beginning balance		$524,107		$577,651

Credit RWAs
Increased deductions for transitional provisions		(531	)	(531	)

Change in:
Derivatives		(10,109	)	10,249

Commitments, guarantees and loans		5,575		2,059

Securities financing transactions		6,658		1,962

Equity investments		3,267		3,382

Other		(4,045	)	1,406
Change in Credit RWAs		815		18,527
Market RWAs
Change in:
Regulatory VaR		(2,475	)	(2,475	)

Stressed VaR		3,187		3,187

Incremental risk		(325	)	(325	)

Comprehensive risk		(87	)	96

Specific risk		(12,202	)	(12,202	)
Change in Market RWAs		(11,902	)	(11,719	)
Operational RWAs
Change in operational risk		—		(4,463	)
Change in Operational RWAs		—		(4,463	)
Ending balance		$513,020		$579,996

Standardized Credit RWAs as of September 2016 increased by $815 million compared with December 2015, primarily reflecting increases in securities financing transactions due to increased exposures, and an increase in lending exposures. These increases were partially offset by a decrease in derivatives, principally due to reduced exposures. Standardized Market RWAs decreased by $11.90 billion compared with December 2015, reflecting a decrease in specific risk as a result of reduced risk exposures.

Basel III Advanced Credit RWAs as of September 2016 increased by $18.53 billion compared with December 2015, primarily reflecting an increase in derivatives, principally due to higher counterparty credit risk, and an increase in equity investments, principally due to increased exposures and the impact of market movements. Basel III Advanced Market RWAs as of September 2016 decreased by $11.72 billion compared with December 2015, reflecting a decrease in specific risk as a result of reduced risk exposures. Basel III Advanced Operational RWAs as of September 2016 decreased by $4.46 billion compared with December 2015, reflecting a decrease in the frequency of certain events incorporated within the firm’s risk-based model.

The table below presents changes in RWAs calculated in accordance with the Standardized and Basel III Advanced Rules for the year ended December 2015. The increased deductions for transitional provisions represent the increased phase-in of deductions from 20% to 40%, effective January 1, 2015.


	Year Ended December 2015
$ in millions		Standardized		Basel III Advanced
Risk-Weighted Assets
Beginning balance		$619,216		$570,313

Credit RWAs
Increased deductions for transitional provisions		(1,073	)	(1,073	)

Change in:
Derivatives		(43,930	)	(8,830	)

Commitments, guarantees and loans		21,608		19,314

Securities financing transactions		(20,724	)	(717	)

Equity investments		131		934

Other		(8,589	)	6,510
Change in Credit RWAs		(52,577	)	16,138
Market RWAs
Change in:
Regulatory VaR		1,762		1,762

Stressed VaR		(7,887	)	(7,887	)

Incremental risk		(7,437	)	(7,437	)

Comprehensive risk		(4,130	)	(3,433	)

Specific risk		(24,840	)	(24,905	)
Change in Market RWAs		(42,532	)	(41,900	)
Operational RWAs
Change in operational risk		—		33,100
Change in Operational RWAs		—		33,100
Ending balance		$524,107		$577,651

Standardized Credit RWAs as of December 2015 decreased by $52.58 billion compared with December 2014, reflecting decreases in derivatives and securities financing transactions, primarily due to lower exposures. These decreases were partially offset by an increase in lending activity. Standardized Market RWAs as of December 2015 decreased by $42.53 billion compared with December 2014, primarily due to decreased specific risk, as a result of reduced risk exposures.

Basel III Advanced Credit RWAs as of December 2015 increased by $16.14 billion compared with December 2014, primarily reflecting an increase in lending activity. This increase was partially offset by a decrease in RWAs related to derivatives, due to lower counterparty credit risk. Basel III Advanced Market RWAs as of December 2015 decreased by $41.90 billion compared with December 2014, primarily due to decreased specific risk, as a result of reduced risk exposures. Basel III Advanced Operational RWAs as of December 2015 increased by $33.10 billion compared with December 2014, substantially all of which is associated with mortgage-related legal matters and regulatory proceedings.

See “Definition of Risk-Weighted Assets” above for a description of the calculations of Credit RWAs, Market RWAs and Operational RWAs, including the differences in the calculation of Credit RWAs under each of the Standardized Capital Rules and the Basel III Advanced Rules.

Bank Subsidiaries

Regulatory Capital Ratios. GS Bank USA, an FDIC-insured, New York State-chartered bank and a member of the Federal Reserve System, is supervised and regulated by the Federal Reserve Board, the FDIC, the New York State Department of Financial Services and the Consumer Financial Protection Bureau, and is subject to regulatory capital requirements that are calculated in substantially the same manner as those applicable to bank holding companies. For purposes of assessing the adequacy of its capital, GS Bank USA calculates its capital ratios in accordance with the risk-based capital and leverage requirements applicable to state member banks. Those requirements are based on the Revised Capital Framework described above. GS Bank USA is an Advanced approach banking organization under the Revised Capital Framework.

Under the regulatory framework for prompt corrective action applicable to GS Bank USA, in order to meet the quantitative requirements for being a “well-capitalized” depository institution, GS Bank USA must meet higher minimum requirements than the minimum ratios in the table below. The table below presents the minimum ratios and the “well-capitalized” minimum ratios required for GS Bank USA.

Minimum Ratio as of

“Well-capitalized”
Minimum Ratio

September 2016

December 2015

CET1 ratio

5.125%

4.5%

6.5%

Tier 1 capital ratio

6.625%

6.0%

8.0%

Total capital ratio

8.625%

8.0%

10.0%

Tier 1 leverage ratio

4.000%

4.0%

5.0%

GS Bank USA was in compliance with its minimum capital requirements and the “well-capitalized” minimum ratios as of September 2016 and December 2015. In the table above, the minimum ratios as of September 2016 reflect the 25% phase-in of the capital conservation buffer (0.625%) and the counter-cyclical capital buffer described above (0%). GS Bank USA’s capital levels and prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. Failure to comply with these capital requirements, including a breach of the buffers discussed above, could result in restrictions being imposed by GS Bank USA’s regulators.

Similar to the firm, GS Bank USA is required to calculate each of the CET1, Tier 1 capital and Total capital ratios in accordance with both the Standardized Capital Rules and Basel III Advanced Rules. The lower of each ratio calculated in accordance with the Standardized Capital Rules and Basel III Advanced Rules is the ratio against which GS Bank USA’s compliance with its minimum ratio requirements is assessed. Each of the ratios calculated in accordance with the Standardized Capital Rules was lower than that calculated in accordance with the Basel III Advanced Rules and therefore the Standardized Capital ratios were the ratios that applied to GS Bank USA as of September 2016 and December 2015. The capital ratios that apply to GS Bank USA can change in future reporting periods as a result of these regulatory requirements.

The table below presents the ratios for GS Bank USA calculated in accordance with both the Standardized and Basel III Advanced Rules.


	As of
$ in millions		September 2016		December 2015
Standardized
Common Equity Tier 1		$ 24,121		$ 23,017
Tier 1 capital		24,121		23,017

Tier 2 capital		2,381		2,311
Total capital		$ 26,502		$ 25,328
Basel III Advanced
Common Equity Tier 1		$ 24,121		$ 23,017
Tier 1 capital		24,121		23,017

Standardized Tier 2 capital		2,381		2,311

Allowance for losses on loans and lending commitments		(381	)	(311	)

Other adjustments		—		—
Tier 2 capital		2,000		2,000
Total capital		$ 26,121		$ 25,017
RWAs
Standardized		$194,629		$202,197

Basel III Advanced		137,135		131,059
CET1 ratio
Standardized		12.4%		11.4%

Basel III Advanced		17.6%		17.6%
Tier 1 capital ratio
Standardized		12.4%		11.4%

Basel III Advanced		17.6%		17.6%
Total capital ratio
Standardized		13.6%		12.5%

Basel III Advanced		19.0%		19.1%
Tier 1 leverage ratio		15.0%		16.4%

The increase in GS Bank USA’s Standardized capital ratios from December 2015 to September 2016 is primarily due to a decrease in credit RWAs, reflecting a decrease in derivatives exposures, as well as an increase in Common Equity Tier 1 capital. GS Bank USA’s Basel III Advanced capital ratios as of September 2016 were essentially unchanged compared with December 2015.

The firm’s principal non-U.S. bank subsidiary, GSIB, is a wholly-owned credit institution, regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and is subject to minimum capital requirements. As of September 2016 and December 2015, GSIB was in compliance with all regulatory capital requirements.

Broker-Dealer Subsidiaries

U.S. Regulated Broker-Dealer Subsidiaries. The firm’s U.S. regulated broker-dealer subsidiaries include GS&Co. and GSEC. As registered U.S. broker-dealers, GS&Co. and GSEC are subject to regulatory capital requirements including those imposed by the SEC and the Financial Industry Regulatory Authority, Inc. (FINRA). In addition, GS&Co. is a registered futures commission merchant and is subject to regulatory capital requirements imposed by the U.S. Commodity Futures Trading Commission (CFTC), the Chicago Mercantile Exchange and the National Futures Association. In August 2016, GSEC withdrew its registration as a futures commission merchant in connection with the transfer of substantially all of its clearing business to GS&Co. Rule 15c3-1 of the SEC and Rule 1.17 of the CFTC specify uniform minimum net capital requirements, as defined, for their registrants, and also effectively require that a significant part of the registrants’ assets be kept in relatively liquid form. GS&Co. and GSEC have elected to calculate their minimum capital requirements in accordance with the “Alternative Net Capital Requirement” as permitted by Rule 15c3-1.

As of September 2016 and December 2015, GS&Co. had regulatory net capital, as defined by Rule 15c3-1, of $17.65 billion and $14.75 billion, respectively, which exceeded the amount required by $15.24 billion and $12.37 billion, respectively. As of September 2016 and December 2015, GSEC had regulatory net capital, as defined by Rule 15c3-1, of $139 million and $1.71 billion, respectively, which exceeded the amount required by $138 million and $1.59 billion, respectively. The decrease in GSEC’s regulatory net capital from December 2015 to September 2016 was related to the firm substantially completing the transfer of GSEC’s clearing business to GS&Co.

In addition to its alternative minimum net capital requirements, GS&Co. is also required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1. GS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As of September 2016 and December 2015, GS&Co. had tentative net capital and net capital in excess of both the minimum and the notification requirements.

Non-U.S. Regulated Broker-Dealer Subsidiaries. The firm’s principal non-U.S. regulated broker-dealer subsidiaries include Goldman Sachs International (GSI) and Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firm’s U.K. broker-dealer, is regulated by the PRA and the FCA. GSJCL, the firm’s Japanese broker-dealer, is regulated by Japan’s Financial Services Agency. These and certain other non-U.S. subsidiaries of the firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of September 2016 and December 2015, these subsidiaries were in compliance with their local capital adequacy requirements.

Restrictions on Payments

Group Inc.’s ability to withdraw capital from its regulated subsidiaries is limited by minimum equity capital requirements applicable to those subsidiaries, provisions of applicable law and regulations and other regulatory restrictions that limit the ability of those subsidiaries to declare and pay dividends without prior regulatory approval even if the relevant subsidiary would satisfy the equity capital requirements applicable to it after giving effect to the dividend. For example, the Federal Reserve Board, the FDIC and the New York State Department of Financial Services have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise (including GS Bank USA) if, in the relevant regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in the light of the financial condition of the banking organization.

As of September 2016 and December 2015, Group Inc. was required to maintain $47.47 billion and $48.09 billion, respectively, of minimum equity capital in its regulated subsidiaries in order to satisfy the regulatory requirements of such subsidiaries.

Other

The deposits of GS Bank USA are insured by the FDIC to the extent provided by law. The Federal Reserve Board requires that GS Bank USA maintain cash reserves with the Federal Reserve Bank of New York. The amount deposited by GS Bank USA held at the Federal Reserve Bank of New York was $66.66 billion and $49.36 billion as of September 2016 and December 2015, respectively, which exceeded required reserve amounts by $66.59 billion and $49.25 billion as of September 2016 and December 2015, respectively. The increase in the amount deposited by GS Bank USA held at the Federal Reserve Bank of New York from December 2015 to September 2016 is primarily a result of the acquisition of GE Capital Bank’s online deposit platform in April 2016. See Note 14 for further information about this acquisition.