Note 20.

Regulation and Capital Adequacy

The FRB is the primary regulator of Group Inc., a bank holding company (BHC) under the U.S. Bank Holding Company Act of 1956 and a financial holding company under amendments to this Act. As a BHC, the firm is subject to consolidated regulatory capital requirements which are calculated in accordance with the risk-based capital and leverage regulations of the FRB, subject to certain transitional provisions (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 Capital Framework are largely based on the Basel Committee on Banking Supervision’s (Basel Committee) capital framework for strengthening international capital standards (Basel III) and also implement certain provisions of the Dodd-Frank Act. Under the Capital Framework, the firm is an “Advanced approach” banking organization and has been designated as a global systemically important bank (G-SIB).

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 Capital Framework (together, the Standardized Capital Rules) and (ii) the Advanced approach and market risk rules set out in the Capital Framework (together, the Basel III Advanced Rules). The lower of each capital 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 capital 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 both December 2017 and December 2016. 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 December
		2017	2016
CET1 ratio		7.000%	5.875%
Tier 1 capital ratio		8.500%	7.375%
Total capital ratio		10.500%	9.375%
Tier 1 leverage ratio		4.000%	4.000%

In the table above:

•

The minimum capital ratios as of December 2017 reflect (i) the 50% phase-in of the capital conservation buffer of 2.5%, (ii) the 50% phase-in of the G-SIB buffer of 2.5% (based on 2015 financial data), and (iii) the countercyclical capital buffer of zero percent, each described below.

•

The minimum capital ratios as of December 2016 reflect (i) the 25% phase-in of the capital conservation buffer of 2.5%, (ii) the 25% phase-in of the G-SIB buffer of 3% (based on 2014 financial data), and (iii) the countercyclical capital buffer of zero percent, each described below.

•

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 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. The second calculation uses similar inputs, but it includes a measure of reliance on short-term wholesale funding. The firm’s G-SIB buffer will be updated annually based on financial data from the prior year, and will be generally applicable for the following year.

The Capital Framework also provides for a countercyclical 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 December 2017, the FRB has set the countercyclical capital buffer at zero percent.

Failure to meet the capital levels inclusive of the buffers could limit 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 and securities financing transactions. The Capital Framework requires that a BHC 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 BHC 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 net revenues used to determine risk management VaR exceptions (i.e., comparing the daily net revenues to the VaR measure calculated as of the end of the prior business day) include intraday activity, whereas the FRB’s regulatory capital rules require that intraday activity be excluded from daily 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 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 did not exceed its 99% one-day regulatory VaR during 2017 and exceeded its 99% one-day regulatory VaR on two occasions during 2016. 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 capital ratios calculated in accordance with the Basel III Advanced Rules was lower than that calculated in accordance with the Standardized Capital Rules as of both December 2017 and December 2016, 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 Capital Rules and Basel III Advanced Rules.


	As of December
$ in millions		2017		2016
Common shareholders’ equity		$ 70,390		$ 75,690
Deduction for goodwill and identifiable intangible assets, net of deferred tax liabilities		(3,269	)	(2,874	)
Deduction for investments in nonconsolidated financial institutions		–		(424	)
Other adjustments		(11	)	(346	)
Common Equity Tier 1		67,110		72,046
Preferred stock		11,853		11,203
Deduction for investments in covered funds		(590	)	(445	)
Other adjustments		(42	)	(364	)
Tier 1 capital		$ 78,331		$ 82,440
Standardized Tier 2 and Total capital
Tier 1 capital		$ 78,331		$ 82,440
Qualifying subordinated debt		13,360		14,566
Junior subordinated debt issued to trusts		567		792
Allowance for losses on loans and lending commitments		1,078		722
Other adjustments		(28	)	(6	)
Standardized Tier 2 capital		14,977		16,074
Standardized Total capital		$ 93,308		$ 98,514
Basel III Advanced Tier 2 and Total capital
Tier 1 capital		$ 78,331		$ 82,440
Standardized Tier 2 capital		14,977		16,074
Allowance for losses on loans and lending commitments		(1,078	)	(722	)
Basel III Advanced Tier 2 capital		13,899		15,352
Basel III Advanced Total capital		$ 92,230		$ 97,792
RWAs
Standardized		$555,611		$496,676
Basel III Advanced		$617,646		$549,650
CET1 ratio
Standardized		12.1%		14.5%
Basel III Advanced		10.9%		13.1%
Tier 1 capital ratio
Standardized		14.1%		16.6%
Basel III Advanced		12.7%		15.0%
Total capital ratio
Standardized		16.8%		19.8%
Basel III Advanced		14.9%		17.8%
Tier 1 leverage ratio		8.4%		9.4%

Effective January 2018, the firm was subject to the fully phased-in CET1 ratios. As of December 2017, the firm’s CET1 ratios, on a fully phased-in basis, calculated in accordance with the Standardized Capital Rules and Basel III Advanced Rules were lower by 0.2 percentage points, as compared to the transitional CET1 ratios.

In the table above:

•

Deduction for goodwill and identifiable intangible assets, net of deferred tax liabilities, included goodwill of $3.67 billion as of both December 2017 and December 2016, and identifiable intangible assets of $298 million (80% of $373 million) and $257 million (60% of $429 million) as of December 2017 and December 2016, respectively, net of associated deferred tax liabilities of $694 million and $1.05 billion as of December 2017 and December 2016, 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.

•

Deduction for investments in nonconsolidated financial institutions represents 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 December 2017 and December 2016, CET1 reflects 80% and 60% of the deduction, respectively. The balance that is not deducted during the transitional period is risk weighted.

•

Deduction for investments in covered funds represents the firm’s aggregate investments in applicable covered funds, excluding investments that are subject to an extended conformance period. 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 credit valuation adjustments on derivative liabilities, pension and postretirement liabilities, the overfunded portion of the firm’s defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax assets, debt valuation adjustments and other required credit risk-based deductions. The deduction for such items is generally required to be phased into CET1 ratably over five years from 2014 to 2018. As of December 2017 and December 2016, CET1 reflects 80% and 60% of such deduction, 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 December 2017, junior subordinated debt issued to trusts was fully phased out of Tier 1 capital, with 50% included in Tier 2 capital and 50% fully phased out of regulatory capital. As of December 2016, junior subordinated debt issued to trusts was fully phased out of Tier 1 capital, with 60% included in Tier 2 capital and 40% fully phased out of regulatory capital. 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 further 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 further information about the firm’s subordinated debt.

The tables below present changes in CET1, Tier 1 capital and Tier 2 capital.


	Year Ended December 2017
$ in millions		Standardized		Basel III Advanced
Common Equity Tier 1
Beginning balance		$72,046		$72,046
Change in common shareholders’ equity		(5,300	)	(5,300	)
Change in deduction for:
Transitional provisions		(426	)	(426	)
Goodwill and identifiable intangible assets, net of deferred tax liabilities		(324	)	(324	)
Investments in nonconsolidated financial institutions		586		586
Change in other adjustments		528		528
Ending balance		$67,110		$67,110
Tier 1 capital
Beginning balance		$82,440		$82,440
Change in deduction for:
Transitional provisions		(274	)	(274	)
Investments in covered funds		(145	)	(145	)
Other net decrease in CET1		(4,510	)	(4,510	)
Change in preferred stock		650		650
Change in other adjustments		170		170
Ending balance		78,331		78,331
Tier 2 capital
Beginning balance		16,074		15,352
Change in qualifying subordinated debt		(1,206	)	(1,206	)
Redesignation of junior subordinated debt issued to trusts		(225	)	(225	)
Change in the allowance for losses on loans and lending commitments		356		–
Change in other adjustments		(22	)	(22	)
Ending balance		14,977		13,899
Total capital		$93,308		$92,230


	Year Ended December 2016
$ in millions		Standardized		Basel III Advanced
Common Equity Tier 1
Beginning balance		$71,363		$71,363
Change in common shareholders’ equity		162		162
Change in deduction for:
Transitional provisions		(839	)	(839	)
Goodwill and identifiable intangible assets, net of deferred tax liabilities		16		16
Investments in nonconsolidated financial institutions		895		895
Change in other adjustments		449		449
Ending balance		$72,046		$72,046
Tier 1 capital
Beginning balance		$81,511		$81,511
Change in deduction for:
Transitional provisions		(558	)	(558	)
Investments in covered funds		(32	)	(32	)
Other net increase in CET1		1,522		1,522
Redesignation of junior subordinated debt issued to trusts		(330	)	(330	)
Change in preferred stock		3		3
Change in other adjustments		324		324
Ending balance		82,440		82,440
Tier 2 capital
Beginning balance		16,705		16,103
Change in qualifying subordinated debt		(566	)	(566	)
Redesignation of junior subordinated debt issued to trusts		(198	)	(198	)
Change in the allowance for losses on loans and lending commitments		120		–
Change in other adjustments		13		13
Ending balance		16,074		15,352
Total capital		$98,514		$97,792

In the tables above, the change in the deduction for transitional provisions represents the increased phase-in of the deduction from 60% to 80% (effective January 1, 2017) for 2017 and from 40% to 60% (effective January 1, 2016) for 2016.

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


	Standardized Capital Rules as of December
$ in millions		2017	2016
Credit RWAs
Derivatives		$126,076	$124,286
Commitments, guarantees and loans		145,104	115,744
Securities financing transactions		77,962	71,319
Equity investments		48,155	41,428
Other		70,933	58,636
Total Credit RWAs		468,230	411,413
Market RWAs
Regulatory VaR		7,532	9,750
Stressed VaR		32,753	22,475
Incremental risk		8,441	7,875
Comprehensive risk		2,397	5,338
Specific risk		36,258	39,825
Total Market RWAs		87,381	85,263
Total RWAs		$555,611	$496,676

	Basel III Advanced Rules as of December
$ in millions		2017	2016
Credit RWAs
Derivatives		$102,986	$105,096
Commitments, guarantees and loans		163,375	122,792
Securities financing transactions		19,362	14,673
Equity investments		51,626	44,095
Other		75,968	63,431
Total Credit RWAs		413,317	350,087
Market RWAs
Regulatory VaR		7,532	9,750
Stressed VaR		32,753	22,475
Incremental risk		8,441	7,875
Comprehensive risk		1,870	4,550
Specific risk		36,258	39,825
Total Market RWAs		86,854	84,475
Total Operational RWAs		117,475	115,088
Total RWAs		$617,646	$549,650

In the tables above:

•

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

•

Other includes receivables, certain debt securities, cash and cash equivalents and other assets.

The table below presents changes in RWAs calculated in accordance with the Standardized Capital Rules and Basel III Advanced Rules.


	Year Ended December 2017
$ in millions		Standardized		Basel III Advanced
Risk-Weighted Assets
Beginning balance		$496,676		$549,650
Credit RWAs
Change in:
Deduction for transitional provisions		(233	)	(233	)
Derivatives		1,790		(2,110	)
Commitments, guarantees and loans		29,360		40,583
Securities financing transactions		6,643		4,689
Equity investments		6,889		7,693
Other		12,368		12,608
Change in Credit RWAs		56,817		63,230
Market RWAs
Change in:
Regulatory VaR		(2,218	)	(2,218	)
Stressed VaR		10,278		10,278
Incremental risk		566		566
Comprehensive risk		(2,941	)	(2,680	)
Specific risk		(3,567	)	(3,567	)
Change in Market RWAs		2,118		2,379
Operational RWAs
Change in operational risk		–		2,387
Change in Operational RWAs		–		2,387
Ending balance		$555,611		$617,646

In the table above, the increased deduction for transitional provisions represents the increased phase-in of the deduction from 60% to 80%, effective January 1, 2017.

Standardized Credit RWAs as of December 2017 increased by $56.82 billion compared with December 2016, primarily reflecting an increase in commitments, guarantees and loans, principally due to increased lending activity. Standardized Market RWAs as of December 2017 increased by $2.12 billion compared with December 2016, primarily reflecting an increase in stressed VaR as a result of increased risk exposures partially offset by decreases in specific risk, as a result of changes in risk exposures, and comprehensive risk, as a result of changes in risk measurements.

Basel III Advanced Credit RWAs as of December 2017 increased by $63.23 billion compared with December 2016, primarily reflecting an increase in commitments, guarantees and loans, principally due to increased lending activity. Basel III Advanced Market RWAs as of December 2017 increased by $2.38 billion compared with December 2016, primarily reflecting an increase in stressed VaR as a result of increased risk exposures partially offset by decreases in specific risk, as a result of changes in risk exposures, and comprehensive risk, as a result of changes in risk measurements.

The table below presents changes in RWAs calculated in accordance with the Standardized Capital Rules and Basel III Advanced Rules.


	Year Ended December 2016
$ in millions		Standardized		Basel III Advanced
Risk-Weighted Assets
Beginning balance		$524,107		$577,651
Credit RWAs
Change in:
Deduction for transitional provisions		(531	)	(531	)
Derivatives		(12,555	)	(8,575	)
Commitments, guarantees and loans		4,353		8,269
Securities financing transactions		(73	)	(228	)
Equity investments		4,196		4,440
Other		(4,095	)	2,630
Change in Credit RWAs		(8,705	)	6,005
Market RWAs
Change in:
Regulatory VaR		(2,250	)	(2,250	)
Stressed VaR		737		737
Incremental risk		(1,638	)	(1,638	)
Comprehensive risk		(387	)	(167	)
Specific risk		(15,188	)	(15,188	)
Change in Market RWAs		(18,726	)	(18,506	)
Operational RWAs
Change in operational risk		–		(15,500	)
Change in Operational RWAs		–		(15,500	)
Ending balance		$496,676		$549,650

In the table above, the increased deduction for transitional provisions represents the increased phase-in of the deduction from 40% to 60%, effective January 1, 2016.

Standardized Credit RWAs as of December 2016 decreased by $8.71 billion compared with December 2015, primarily reflecting a decrease in derivatives, principally due to reduced exposures, and a decrease in receivables included in other credit RWAs reflecting the impact of firm and client activity. This decrease was partially offset by increases in commitments, guarantees and loans principally due to increased lending activity, and equity investments, principally due to increased exposures and the impact of market movements. Standardized Market RWAs as of December 2016 decreased by $18.73 billion compared with December 2015, primarily reflecting a decrease in specific risk as a result of reduced risk exposures.

Basel III Advanced Credit RWAs as of December 2016 increased by $6.01 billion compared with December 2015, primarily reflecting an increase in commitments, guarantees and loans principally due to increased lending activity, and an increase in equity investments, principally due to increased exposures and the impact of market movements. These increases were partially offset by a decrease in derivatives, principally due to lower counterparty credit risk and reduced exposure. Basel III Advanced Market RWAs as of December 2016 decreased by $18.51 billion compared with December 2015, primarily reflecting a decrease in specific risk as a result of reduced risk exposures. Basel III Advanced Operational RWAs as of December 2016 decreased by $15.50 billion compared with December 2015, reflecting a decrease in the frequency of certain events incorporated within the firm’s risk-based model.

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 FRB, 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 BHCs. 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 Capital Framework described above. GS Bank USA is an Advanced approach banking organization under the 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. As of both December 2017 and December 2016, GS Bank USA was in compliance with its minimum capital requirements and the “well-capitalized” minimum ratios.

The table below presents the minimum ratios and the “well-capitalized” minimum ratios required for GS Bank USA.

Minimum Ratio as of December

“Well-capitalized”
Minimum Ratio

2017

2016

CET1 ratio

5.750%

5.125%

6.5%

Tier 1 capital ratio

7.250%

6.625%

8.0%

Total capital ratio

9.250%

8.625%

10.0%

Tier 1 leverage ratio

4.000%

4.000%

5.0%

In the table above:

•

The minimum capital ratios as of December 2017 reflect (i) the 50% phase-in of the capital conservation buffer of 2.5% and (ii) the countercyclical capital buffer of zero percent, each described above.

•

The minimum capital ratios as of December 2016 reflect (i) the 25% phase-in of the capital conservation buffer of 2.5% and (ii) the countercyclical capital buffer of zero percent, each described above.

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 described 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 capital 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 capital 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 both December 2017 and December 2016. 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 Capital Rules and Basel III Advanced Rules.


	As of December
$ in millions		2017		2016
Standardized
Common Equity Tier 1		$ 25,343		$ 24,485
Tier 1 capital		25,343		24,485
Tier 2 capital		2,547		2,382
Total capital		$ 27,890		$ 26,867
Basel III Advanced
Common Equity Tier 1		$ 25,343		$ 24,485
Tier 1 capital		25,343		24,485
Standardized Tier 2 capital		2,547		2,382
Allowance for losses on loans and lending commitments		(547	)	(382	)
Tier 2 capital		2,000		2,000
Total capital		$ 27,343		$ 26,485
RWAs
Standardized		$229,775		$204,232
Basel III Advanced		$164,602		$131,051
CET1 ratio
Standardized		11.0%		12.0%
Basel III Advanced		15.4%		18.7%
Tier 1 capital ratio
Standardized		11.0%		12.0%
Basel III Advanced		15.4%		18.7%
Total capital ratio
Standardized		12.1%		13.2%
Basel III Advanced		16.6%		20.2%
Tier 1 leverage ratio		15.0%		14.4%

The decrease in GS Bank USA’s Standardized and Basel III Advanced capital ratios from December 2016 to December 2017 is primarily due to an increase in credit RWAs, principally due to an increase in lending activity.

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 both December 2017 and December 2016, GSIB was in compliance with all regulatory capital requirements.

Other. The deposits of GS Bank USA are insured by the FDIC to the extent provided by law. The FRB requires that GS Bank USA maintain cash reserves with the Federal Reserve Bank of New York. The amount deposited by GS Bank USA at the Federal Reserve Bank of New York was $50.86 billion and $74.24 billion as of December 2017 and December 2016, respectively, which exceeded required reserve amounts by $50.74 billion and $74.09 billion as of December 2017 and December 2016, respectively.

Broker-Dealer Subsidiaries

U.S. Regulated Broker-Dealer Subsidiaries. GS&Co. is the firm’s primary U.S. regulated broker-dealer subsidiary and is subject to regulatory capital requirements including those imposed by the SEC and the Financial Industry Regulatory Authority, Inc. In addition, GS&Co. is a registered futures commission merchant and is subject to regulatory capital requirements imposed by the CFTC, the Chicago Mercantile Exchange and the National Futures Association. 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. has elected to calculate its minimum capital requirements in accordance with the “Alternative Net Capital Requirement” as permitted by Rule 15c3-1.

As of December 2017 and December 2016, GS&Co. had regulatory net capital, as defined by Rule 15c3-1, of $15.57 billion and $17.17 billion, respectively, which exceeded the amount required by $13.15 billion and $14.66 billion, respectively. 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 both December 2017 and December 2016, 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 both December 2017 and December 2016, 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 (e.g., the amount of dividends that may be paid by GS Bank USA is limited to the lesser of the amounts calculated under a recent earnings test and an undivided profits test) even if the relevant subsidiary would satisfy the equity capital requirements applicable to it after giving effect to the dividend. For example, the FRB, 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 December 2017 and December 2016, Group Inc. was required to maintain $53.02 billion and $46.49 billion, respectively, of minimum equity capital in its regulated subsidiaries in order to satisfy the regulatory requirements of such subsidiaries.