v3.20.4
Regulation and Capital Adequacy
 12 Months Ended
Dec. 31, 2020
Text Block [Abstract]  
Regulation and Capital Adequacy
Note 20.
Regulation and Capital Adequacy
The FRB is the primary regulator of Group Inc., a BHC under the U.S. Bank Holding Company Act of 1956 and a financial holding company under amendments to this Act. The firm is subject to consolidated regulatory capital requirements which are calculated in accordance with the regulations of the FRB (Capital Framework).
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. Failure to comply with these capital requirements could result in restrictions being imposed by the firm’s regulators and could limit the firm’s ability to repurchase shares, pay dividends and make certain discretionary compensation payments. 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.
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 Capital Framework includes the minimum risk-based capital and the capital conservation buffer requirements. The buffer must consist entirely of capital that qualifies as Common Equity Tier 1 (CET1) capital.
Prior to October 1, 2020, the capital conservation buffer requirements under both the Standardized and Advanced Capital Rules were comprised of (i) a 2.5% buffer, (ii) the countercyclical capital buffer and (iii) the G-SIB surcharge. Beginning on October 1, 2020, the 2.5% buffer was replaced with the stress capital buffer under the Standardized Capital Rules. The components of
the
capital conservation buffer requirements under the Advanced Capital Rules remain unchanged.
The firm calculates its CET1 capital, Tier 1 capital and Total capital ratios in accordance with the Standardized and Advanced Capital Rules. Beginning on October 1, 2020, each of the ratios calculated under the Standardized and Advanced Capital Rules must meet the respective capital requirements. Prior to October 1, 2020, the lower of each risk-based capital ratio calculated under the Standardized and Advanced Capital Rules was the ratio against which the firm’s compliance with its risk-based capital requirements was assessed.
Under the Capital Framework, the firm is also subject to leverage requirements which consist of a minimum Tier 1 leverage ratio and a minimum supplementary leverage ratio (SLR), as well as the SLR buffer.
Consolidated Regulatory Capital Requirements
Risk-Based Capital Ratios.
The table below presents the risk-based capital requirements.
 
     Standardized      Advanced  
As of December 2020
                 
CET1 capital ratio
  
 
13.6%
 
   
 
9.5%
 
Tier 1 capital ratio
  
 
15.1%
 
   
 
11.0%
 
Total capital ratio
  
 
17.1%
 
   
 
13.0%
 
 
As of December 2019
                 
CET1 capital ratio
     9.5%        9.5%  
Tier 1 capital ratio
     11.0%        11.0%  
Total capital ratio
     13.0%        13.0%  
In the table above:
 
•  
As of December 2020, under both the Standardized and Advanced Capital Rules, the CET1 capital ratio requirement includes a minimum of 4.5%, the Tier 1 capital ratio requirement includes a minimum of 6.0% and the Total capital ratio requirement includes a minimum of 8.0%. These requirements also include the capital conservation buffer requirements, consisting of the
G-SIB
surcharge of 2.5% (Method 2) and the countercyclical capital buffer, which the FRB has set to zero percent. In addition, the capital conservation buffer requirements include the stress capital buffer of 6.6% under the Standardized Capital Rules and a buffer of 2.5% under the Advanced Capital Rules.
 
•  
As of December 2019, under both the Standardized and Advanced Capital Rules, the CET1 capital ratio requirement includes a minimum of 4.5%, the Tier 1 capital ratio requirement includes a minimum of 6.0% and the Total capital ratio requirement includes a minimum of 8.0%. These requirements also include the capital conservation buffer requirements, consisting of a buffer of 2.5%, the
G-SIB
surcharge of 2.5% (Method 2) and the countercyclical capital buffer, which the FRB has set to zero percent.
•  
The
G-SIB
surcharge is updated annually based on financial data from the prior year and is generally applicable for the following year. The
G-SIB
surcharge is calculated using two methodologies, the higher of which is reflected in the firm’s risk-based capital requirements. The first calculation (Method 1) is based on 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 (Method 2) uses similar inputs but includes a measure of reliance on short-term wholesale funding.
The table below presents information about risk-based capital ratios.
 
$ in millions
     Standardized        Advanced  
As of December 2020
                 
CET1 capital
  
 
$  81,641
 
   
 
$  81,641
 
Tier 1 capital
  
 
$  92,730
 
   
 
$  92,730
 
Tier 2 capital
  
 
$  15,424
 
   
 
$  13,279
 
Total capital
  
 
$108,154
 
   
 
$106,009
 
RWAs
  
 
$554,162
 
   
 
$609,750
 
 
CET1 capital ratio
  
 
14.7%
 
   
 
13.4%
 
Tier 1 capital ratio
  
 
16.7%
 
   
 
15.2%
 
Total capital ratio
  
 
19.5%
 
   
 
17.4%
 
 
As of December 2019
                 
CET1 capital
     $  74,850        $  74,850  
Tier 1 capital
     $  85,440        $  85,440  
Tier 2 capital
     $  14,925        $  13,473  
Total capital
     $100,365        $  98,913  
RWAs
     $563,575        $544,653  
 
CET1 capital ratio
     13.3%        13.7%  
Tier 1 capital ratio
     15.2%        15.7%  
Total capital ratio
     17.8%        18.2%  
In the table above:
 
•  
As of December 2019, the lower of the Standardized or Advanced ratios were the ratios against which the firm’s compliance with the capital requirements was assessed under the risk-based Capital Rules, and therefore, the Standardized ratios applied to the firm.
 
•  
As permitted by the FRB, the firm has elected to temporarily delay the estimated effects of adopting CECL on regulatory capital until January 2022 and to subsequently
phase-in
the effects through January 2025. In addition, during 2020 and 2021, the firm has elected to increase regulatory capital by 25% of the increase in the allowance for credit losses since January 1, 2020, as permitted by the rules issued by the FRB. The impact of this increase will also be phased in over the three-year transition period. Reflecting the full impact of CECL as of December 2020 would not have had a material impact on the firm’s capital ratios.
Leverage Ratios.
The table below presents the leverage requirements.
 
 
  
 
Requirements
 
Tier 1 leverage ratio
  
 
4.0%
 
SLR
  
 
5.0%
 
In the table above, the SLR requirement of 5% includes a minimum of 3% and a 2% buffer applicable to G-SIBs.
The table below presents information about leverage ratios.
 
   
For the Three Months
Ended or as of December
  
     
$ in millions
  
 
2020
 
      2019  
Tier 1 capital
  
 
$    
 
92,730
 
      $     85,440  
 
Average total assets
  
 
$1,152,785
 
      $   983,909  
Deductions from Tier 1 capital
  
 
(4,948
) 
      (5,275 ) 
Average adjusted total assets
  
 
1,147,837
 
      978,634  
Impact of SLR temporary amendment
  
 
(202,748
) 
      –  
Average
off-balance
sheet exposures
  
 
387,848
 
      396,833  
Total leverage exposure
  
 
$1,332,937
 
      $1,375,467  
 
Tier 1 leverage ratio
  
 
8.1%
 
      8.7%  
SLR
  
 
7.0%
 
      6.2%  
In the table above:
 
•  
Average total assets represents the average daily assets for the quarter and, for the three months ended December 2020, reflected the impact of CECL transition.
 
•  
Impact of SLR temporary amendment represents the exclusion of average holdings of U.S. Treasury securities and average deposits at the Federal Reserve as permitted by the FRB. The impact of this temporary amendment was an increase in the firm’s SLR by approximately 1.0 percentage points for the three months ended December 2020. This temporary amendment is effective through March 31, 2021.
 
•  
Average
off-balance
sheet exposures represents the monthly average and consists of derivatives, securities financing transactions, commitments and guarantees.
 
•  
Tier 1 leverage ratio is calculated as Tier 1 capital divided by average adjusted total assets.
 
•  
SLR is calculated as Tier 1 capital divided by total leverage exposure.
Risk-Based Capital.
The table below presents information about risk-based capital.
 
    As of December  
     
$ in millions
  
 
2020
 
      2019  
Common shareholders’ equity
  
 
$  84,729
 
      $  79,062  
Impact of CECL transition
  
 
1,126
 
      –  
Deduction for goodwill
  
 
(3,652
) 
      (3,529 ) 
Deduction for identifiable intangible assets
  
 
(601
) 
      (604 ) 
Other adjustments
  
 
39
 
      (79 ) 
CET1 capital
  
 
81,641
 
      74,850  
Preferred stock
  
 
11,203
 
      11,203  
Deduction for investments in covered funds
  
 
(106
) 
      (610 ) 
Other adjustments
  
 
(8
) 
      (3 ) 
Tier 1 capital
  
 
$  92,730
 
      $  85,440  
 
Standardized Tier 2 and Total capital
                 
Tier 1 capital
  
 
$  92,730
 
      $  85,440  
Qualifying subordinated debt
  
 
12,196
 
      12,847  
Junior subordinated debt
  
 
188
 
      284  
Allowance for credit losses
  
 
3,095
 
      1,802  
Other adjustments
  
 
(55
) 
      (8 ) 
Standardized Tier 2 capital
  
 
15,424
 
      14,925  
Standardized Total capital
  
 
$108,154
 
      $100,365  
 
Advanced Tier 2 and Total capital
 
         
Tier 1 capital
  
 
$  92,730
 
      $  85,440  
Standardized Tier 2 capital
  
 
15,424
 
      14,925  
Allowance for credit losses
  
 
(3,095
) 
      (1,802 ) 
Other adjustments
  
 
950
 
      350  
Advanced Tier 2 capital
  
 
13,279
 
      13,473  
Advanced Total capital
  
 
$106,009
 
      $  98,913  
In the table above:
 
•  
Impact of CECL transition represents the impact of adoption as of January 1, 2020 and the impact of increasing regulatory capital by 25% of the increase in allowance for credit losses since January 1, 2020. The allowance for credit losses within Standardized and Advanced Tier 2 capital also reflects the impact of these adjustments.
 
•  
Deduction for goodwill was net of deferred tax liabilities of $680 million as of December 2020 and $667 million as of December 2019.
 
•  
Deduction for identifiable intangible assets was net of deferred tax liabilities of $29 million as of December 2020 and $37 million as of December 2019.
 
•  
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. See Note 8 for further information about the Volcker Rule.
•  
Other adjustments within CET1 capital and Tier 1 capital primarily include 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, debt valuation adjustments and other required credit risk-based deductions. Other adjustments within Advanced Tier 2 capital include eligible credit reserves.
 
•  
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 14 for further information about the firm’s subordinated debt.
 
•  
Junior subordinated debt is debt issued to a Trust. As of December 2020, 20% of this debt was included in Tier 2 capital and 80% was phased out of regulatory capital. As of December 2019, 30% of this debt was included in Tier 2 capital and 70% was phased out of regulatory capital. Junior subordinated debt 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 14 for further information about the firm’s junior subordinated debt and Trust Preferred securities.
The table below presents changes in CET1 capital, Tier 1 capital and Tier 2 capital.
 
$ in millions
     Standardized       Advanced  
Year Ended December 2020
                
CET1 capital
                
Beginning balance
  
 
$  74,850
 
  
 
$  74,850
 
Change in:
                
Common shareholders’ equity
  
 
5,667
 
  
 
5,667
 
Impact of CECL transition
  
 
1,126
 
  
 
1,126
 
Deduction for goodwill
  
 
(123
) 
  
 
(123
) 
Deduction for identifiable intangible assets
  
 
3
 
  
 
3
 
Other adjustments
  
 
118
 
  
 
118
 
Ending balance
  
 
$  81,641
 
  
 
$  81,641
 
Tier 1 capital
                
Beginning balance
  
 
$  85,440
 
  
 
$  85,440
 
Change in:
                
CET1 capital
  
 
6,791
 
  
 
6,791
 
Deduction for investments in covered funds
  
 
504
 
  
 
504
 
Other adjustments
  
 
(5
) 
  
 
(5
) 
Ending balance
  
 
92,730
 
  
 
92,730
 
Tier 2 capital
                
Beginning balance
  
 
14,925
 
  
 
13,473
 
Change in:
                
Qualifying subordinated debt
  
 
(651
) 
  
 
(651
) 
Junior subordinated debt
  
 
(96
) 
  
 
(96
) 
Allowance for credit losses
  
 
1,293
 
  
 
–
 
Other adjustments
  
 
(47
) 
  
 
553
 
Ending balance
  
 
15,424
 
  
 
13,279
 
Total capital
  
 
$108,154
 
  
 
$106,009
 
 
Year Ended December 2019
                
CET1 capital
                
Beginning balance
     $  73,116       $  73,116  
Change in:
                
Common shareholders’ equity
     80       80  
Deduction for goodwill
     (432 )      (432 ) 
Deduction for identifiable intangible assets
     (307 )      (307 ) 
Other adjustments
     2,393       2,393  
Ending balance
     $  74,850       $  74,850  
Tier 1 capital
                
Beginning balance
     $  83,702       $  83,702  
Change in:
                
CET1 capital
     1,734       1,734  
Deduction for investments in covered funds
     5       5  
Other adjustments
     (1 )      (1 ) 
Ending balance
     85,440       85,440  
Tier 2 capital
                
Beginning balance
     14,926       13,743  
Change in:
                
Qualifying subordinated debt
     (300 )      (300 ) 
Junior subordinated debt
     (158 )      (158 ) 
Allowance for credit losses
     449       –  
Other adjustments
     8       188  
Ending balance
     14,925       13,473  
Total capital
     $100,365       $  98,913  
RWAs.
RWAs are calculated in accordance with both the Standardized and Advanced Capital Rules.
Credit Risk
Credit RWAs are calculated based on measures of exposure, which are then risk weighted under the Standardized and Advanced Capital Rules:
 
•  
The Standardized Capital Rules apply prescribed risk-weights, which depend largely on the type of counterparty. The exposure measure for derivatives and securities financing transactions are based on specific formulas which take certain factors into consideration.
 
•  
Under the Advanced Capital Rules, the firm computes risk-weights for wholesale and retail credit exposures in accordance with the Advanced Internal Ratings-Based approach. The exposure measures for derivatives and securities financing transactions are computed utilizing internal models.
 
•  
For both Standardized and Advanced credit RWAs, the risk-weights for securitizations and equities are based on specific required formulaic approaches.
Market Risk
RWAs for market risk in accordance with the Standardized and Advanced Capital Rules are generally consistent. Market RWAs are calculated based on measures of exposure which include the following:
 
•  
Value-at-Risk
(VaR) is the potential loss in value of trading assets and liabilities, as well as certain investments, loans, and other financial assets and liabilities accounted for at fair value, 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 risk management purposes differs from VaR used for regulatory capital requirements (regulatory VaR) due to differences in time horizons, confidence levels and the scope of positions on which VaR is calculated. For risk management purposes, a 95%
one-day
VaR is used, whereas for regulatory capital requirements, a 99%
10-day
VaR is used to determine Market RWAs and a 99%
one-day
VaR is used to determine regulatory VaR exceptions. 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 Capital Framework requires 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 exceeded its 99%
one-day
regulatory VaR on six occasions during 2020 (all of which occurred during March 2020) and exceeded its 99%
one-day
regulatory VaR on one occasion during 2019. As permitted by the FRB, the firm has permanently excluded the six exceptions that occurred in March 2020 in determining the firm’s VaR multiplier used to calculate Market RWAs;
 
•  
Stressed VaR is the potential loss in value of trading assets and liabilities, as well as certain investments, loans, and other financial assets and liabilities accounted for at fair value, during a period of significant market stress;
 
•  
Incremental risk is the potential loss in value of
non-securitized
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 Advanced Capital Rules. The firm utilizes an internal risk-based model to quantify Operational RWAs.
The table below presents information about RWAs.
 
$ in millions
     Standardized        Advanced  
As of December 2020
                 
Credit RWAs
                 
Derivatives
  
 
$120,292
 
   
 
$111,691
 
Commitments, guarantees and loans
  
 
176,501
 
   
 
151,587
 
Securities financing transactions
  
 
71,427
 
   
 
16,568
 
Equity investments
  
 
46,944
 
   
 
49,268
 
Other
  
 
70,274
 
   
 
83,599
 
Total Credit RWAs
  
 
485,438
 
   
 
412,713
 
Market RWAs
                 
Regulatory VaR
  
 
14,913
 
   
 
14,913
 
Stressed VaR
  
 
31,978
 
   
 
31,978
 
Incremental risk
  
 
7,882
 
   
 
7,882
 
Comprehensive risk
  
 
1,758
 
   
 
1,758
 
Specific risk
  
 
12,193
 
   
 
12,193
 
Total Market RWAs
  
 
68,724
 
   
 
68,724
 
Total Operational RWAs
  
 
–
 
   
 
128,313
 
Total RWAs
  
 
$554,162
 
   
 
$609,750
 
 
As of December 2019
                 
Credit RWAs
                 
Derivatives
     $120,906        $  72,631  
Commitments, guarantees and loans
     179,740        134,456  
Securities financing transactions
     65,867        13,834  
Equity investments
     56,814        61,892  
Other
     75,660        78,266  
Total Credit RWAs
     498,987        361,079  
Market RWAs
                 
Regulatory VaR
     8,933        8,933  
Stressed VaR
     30,911        30,911  
Incremental risk
     4,308        4,308  
Comprehensive risk
     1,393        1,191  
Specific risk
     19,043        19,043  
Total Market RWAs
     64,588        64,386  
Total Operational RWAs
     –        119,188  
Total RWAs
     $563,575        $544,653  
In the table above:
 
•  
Securities financing transactions represents 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.
 
$ in millions
     Standardized        Advanced  
Year Ended December 2020
                 
RWAs
                 
Beginning balance
  
 
$563,575
 
   
 
$544,653
 
Credit RWAs
                 
Change in:
                 
Derivatives
  
 
(614
) 
   
 
39,060
 
Commitments, guarantees and loans
  
 
(3,239
) 
   
 
17,131
 
Securities financing transactions
  
 
5,560
 
   
 
2,734
 
Equity investments
  
 
(9,870
) 
   
 
(12,624
) 
Other
  
 
(5,386
) 
   
 
5,333
 
Change in Credit RWAs
  
 
(13,549
) 
   
 
51,634
 
Market RWAs
                 
Change in:
                 
Regulatory VaR
  
 
5,980
 
   
 
5,980
 
Stressed VaR
  
 
1,067
 
   
 
1,067
 
Incremental risk
  
 
3,574
 
   
 
3,574
 
Comprehensive risk
  
 
365
 
   
 
567
 
Specific risk
  
 
(6,850
) 
   
 
(6,850
) 
Change in Market RWAs
  
 
4,136
 
   
 
4,338
 
Change in Operational RWAs
  
 
–
 
   
 
9,125
 
Ending balance
  
 
$554,162
 
   
 
$609,750
 
 
Year Ended December 2019
                 
RWAs
                 
Beginning balance
     $547,910        $558,111  
Credit RWAs
                 
Change in:
                 
Derivatives
     (1,605 )       (9,670 ) 
Commitments, guarantees and loans
     19,435        (8,900 ) 
Securities financing transactions
     (496 )       (4,425 ) 
Equity investments
     3,251        6,738  
Other
     5,064        8,585  
Change in Credit RWAs
     25,649        (7,672 ) 
Market RWAs
                 
Change in:
                 
Regulatory VaR
     1,151        1,151  
Stressed VaR
     2,959        2,959  
Incremental risk
     (6,161 )       (6,161 ) 
Comprehensive risk
     (1,377 )       (1,579 ) 
Specific risk
     (6,556 )       (6,556 ) 
Change in Market RWAs
     (9,984 )       (10,186 ) 
Change in Operational RWAs
     –        4,400  
Ending balance
     $563,575        $544,653  
RWAs Rollforward Commentary
Year Ended December 2020.
Standardized Credit RWAs as of December 2020 decreased by $13.55 billion compared with December 2019, primarily reflecting a decrease in equity investments, principally due to the sale of certain equity positions, and a decrease in other, principally due to decreased receivables as a result of changes in risk measurements. These decreases were partially offset by an increase in securities financing transactions, principally due to increased funding exposures. Standardized Market RWAs as of December 2020 increased by $4.14 billion compared with December 2019, primarily reflecting an increase in regulatory VaR, principally due to increased market volatility, and an increase in incremental risk, principally due to increased exposures in equities held for market-making purposes. These increases were partially offset by a decrease in specific risk, principally due to changes in risk measurements on certain exposures.
Advanced Credit RWAs as of December 2020 increased by $51.63 billion compared with December 2019, primarily reflecting an increase in derivatives, principally due to the impact of higher levels of volatility and counterparty credit risk and an increase in commitments, guarantees and loans, principally due to increased lending activity. These increases were partially offset by a decrease in equity investments, principally due to the sale of certain equity positions. Advanced Market RWAs as of December 2020 increased by $4.34 billion compared with December 2019, primarily reflecting an increase in regulatory VaR, principally due to increased market volatility, and an increase in incremental risk, principally due to increased exposures in equities held for market-making purposes. These increases were partially offset by a decrease in specific risk, principally due to changes in risk measurements on certain exposures. Advanced Operational RWAs as of December 2020 increased by $9.13 billion compared with December 2019. The vast majority of this increase was associated with litigation and regulatory proceedings.
Year Ended December 2019.
Standardized Credit RWAs as of December 2019 increased by $25.65 billion compared with December 2018, primarily reflecting an increase in commitments, guarantees and loans, principally due to an increase in lending activity, and an increase in other credit RWAs, principally due to the recognition of operating lease
right-of-use
assets upon adoption of ASU
No. 2016-02
and an increase in corporate debt exposures. Standardized Market RWAs as of December 2019 decreased by $9.98 billion compared with December 2018, primarily reflecting a decrease in specific risk, principally due to reduced exposures, and a decrease in incremental risk, principally due to reduced exposures and changes in risk measurements.
Advanced Credit RWAs as of December 2019 decreased by $7.67 billion compared with December 2018. Beginning in the fourth quarter of 2019, the firm made changes to the calculation of the loss given default for certain wholesale exposures which resulted in a decrease in credit RWAs, primarily in commitments, guarantees and loans and derivatives. This decrease was partially offset by an increase in other credit RWAs, principally due to the recognition of operating lease
right-of-use
assets upon adoption of ASU
No. 2016-02
and an increase in corporate debt exposures. Advanced Market RWAs as of December 2019 decreased by $10.19 billion compared with December 2018, primarily reflecting a decrease in specific risk, principally due to reduced exposures, and a decrease in incremental risk, principally due to reduced exposures and changes in risk measurements. Advanced Operational RWAs as of December 2019 increased by $4.40 billion compared with December 2018, associated with litigation and regulatory proceedings.
Bank Subsidiaries
Regulatory Capital Ratios.
GS Bank USA, the firm’s primary U.S. bank subsidiary, is 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 (NYDFS) and the Consumer Financial Protection Bureau, and is subject to regulatory capital requirements that are calculated under the Capital Framework. GS Bank USA is an Advanced approach banking organization under the Capital Framework.
The Capital Framework includes the minimum risk-based capital and the capital conservation buffer requirements (consisting of a 2.5% buffer and the countercyclical capital buffer). The buffer must consist entirely of capital that qualifies as CET1 capital. In addition, the Capital Framework includes the leverage ratio requirement.
GS Bank USA is required to calculate the CET1 capital, Tier 1 capital and Total capital ratios in accordance with both the Standardized and Advanced Capital Rules. The lower of each risk-based capital ratio under the Standardized and Advanced Capital Rules is the ratio against which GS Bank USA’s compliance with its risk-based capital requirements is assessed. In addition, under the regulatory framework for prompt corrective action applicable to GS Bank USA, in order to meet the quantitative requirements for a “well-capitalized” depository institution, GS Bank USA must also meet the “well-capitalized” requirements in the table below. 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 the capital requirements, including a breach of the buffers described below, could result in restrictions being imposed by the regulators.
The table below presents GS Bank USA’s risk-based capital, leverage and “well-capitalized” requirements.
 
 
  
 
Requirements
 
   
 
“Well-capitalized”
Requirements
 
 
Risk-based capital requirements
                 
CET1 capital ratio
  
 
7.0%
 
   
 
6.5%
 
Tier 1 capital ratio
  
 
8.5%
 
   
 
8.0%
 
Total capital ratio
  
 
10.5%
 
   
 
10.0%
 
 
Leverage requirements
                 
Tier 1 leverage ratio
  
 
4.0%
 
   
 
5.0%
 
SLR
  
 
3.0%
 
   
 
6.0%
 
In the table above:
 
•  
The CET1 capital ratio requirement includes a minimum of 4.5%, the Tier 1 capital ratio requirement includes a minimum of 6.0% and the Total capital ratio requirement includes a minimum of 8.0%. These requirements also include the capital conservation buffer requirements consisting of
 a
2.5% buffer and the countercyclical capital buffer, which the FRB has set to zero percent.
 
•  
The “well-capitalized” requirements are the binding requirements for leverage ratios.
The table below presents information about GS Bank USA’s risk-based capital ratios.
 
$ in millions
     Standardized        Advanced  
As of December 2020
                 
CET1 capital
  
 
$  30,656
 
   
 
$  30,656
 
Tier 1 capital
  
 
$  30,656
 
   
 
$  30,656
 
Tier 2 capital
  
 
$    6,288
 
   
 
$    4,903
 
Total capital
  
 
$  36,944
 
   
 
$  35,559
 
RWAs
  
 
$266,153
 
   
 
$165,799
 
 
CET1 capital ratio
  
 
11.5%
 
   
 
18.5%
 
Tier 1 capital ratio
  
 
11.5%
 
   
 
18.5%
 
Total capital ratio
  
 
13.9%
 
   
 
21.4%
 
 
As of December 2019
                 
CET1 capital
     $  29,176        $  29,176  
Tier 1 capital
     $  29,176        $  29,176  
Tier 2 capital
     $    5,293        $    4,486  
Total capital
     $  34,469        $  33,662  
RWAs
     $258,541        $135,596  
 
CET1 capital ratio
     11.3%        21.5%  
Tier 1 capital ratio
     11.3%        21.5%  
Total capital ratio
     13.3%        24.8%  
In the table above:
 
•  
The lower of the Standardized or Advanced ratio is the ratio against which GS Bank USA’s compliance with the capital requirements is assessed under the risk-based Capital Rules, and therefore, the Standardized ratios applied to GS Bank USA as of both December 2020 and December 2019.
 
•  
As permitted by the FRB, GS Bank USA has elected to temporarily delay the estimated effects of adopting CECL on regulatory capital until January 2022 and to subsequently
phase-in
the effects through January 2025. In addition, during 2020 and 2021, GS Bank USA has elected to increase regulatory capital by 25% of the increase in the allowance for credit losses since January 1, 2020, as permitted by the rules issued by the FRB. The impact of this increase will also be phased in over the three-year transition period. Reflecting the full impact of CECL as of December 2020 would not have had a material impact on GS Bank USA’s Standardized risk-based capital ratios.
•  
The Standardized risk-based capital ratios were essentially unchanged from December 2019 to December 2020. The Advanced risk-based capital ratios decreased from December 2019 to December 2020, reflecting an increase in both Credit and Market RWAs, partially offset by an increase in capital, principally due to net earnings.
The table below presents information about GS Bank USA’s leverage ratios.
 
    For the Three Months
Ended or as of December		  
     
$ in millions
  
 
2020
 
        2019  
Tier 1 capital
  
 
$  30,656
 
        $  29,176  
Average adjusted total assets
  
 
$283,869
 
        $220,974  
Total leverage exposure
  
 
$343,198
 
        $413,852  
 
Tier 1 leverage ratio
  
 
10.8%
 
        13.2%  
SLR
  
 
8.9%
 
        7.0%  
In the table above:
 
•  
Average adjusted total assets represents the average daily assets for the quarter adjusted for deductions from Tier 1 capital, and for the three months ended December 2020, reflected the impact of CECL transition.
 
•  
Total leverage exposure, for the three months ended December 2020, excluded average holdings of U.S. Treasury securities and average deposits at the Federal Reserve as permitted by the FRB. The impact of this temporary amendment was an increase in GS Bank USA’s SLR by approximately 2.4 percentage points for the three months ended December 2020. This temporary amendment is effective through March 31, 2021.
 
•  
Tier 1 leverage ratio is calculated as Tier 1 capital divided by average adjusted total assets.
 
•  
SLR is calculated as Tier 1 capital divided by total leverage exposure.
The firm’s principal
non-U.S.
bank subsidiaries, GSIB and GSBE, are also subject to regulatory capital requirements. GSIB is regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), and GSBE is directly supervised by the European Central Bank and additionally by BaFin and Deutsche Bundesbank in the context of the E.U. Single Supervisory Mechanism. As of both December 2020 and December 2019, GSIB and GSBE were in compliance with their 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. The amount deposited by GS Bank USA at the Federal Reserve was $52.71 billion as of December 2020 and $50.55 billion as of December 2019, which exceeded required reserve amounts by $52.71 billion as of December 2020 (as the FRB reduced reserve requirement ratios to zero percent in 2020) and $50.29 billion as of December 2019.
Restrictions on Payments
Group Inc. may be limited in its ability to access capital held at certain subsidiaries as a result of regulatory, tax or other constraints. These limitations include 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. Also, as a result of GS Bank USA’s election to exclude holdings of U.S. Treasury securities and deposits at the Federal Reserve from its total leverage exposure, any dividend by GS Bank USA during the period from July 1, 2020 through March 31, 2021 is subject to the prior approval of the FRB. Furthermore, the amount of dividends that may be paid by GS Bank USA are limited to the lesser of the amounts calculated under a recent earnings test and an undivided profits test. The FRB, the FDIC and the NYDFS have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise (including GS Bank USA) if, in the regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.
In addition, subsidiaries not subject to separate regulatory capital requirements may hold capital to satisfy local tax and legal guidelines, rating agency requirements (for entities with assigned credit ratings) or internal policies, including policies concerning the minimum amount of capital a subsidiary should hold based on its underlying level of risk.
Group Inc.’s equity investment in subsidiaries was $103.80 billion as of December 2020 and $95.68 billion as of December 2019, of which Group Inc. was required to maintain $63.68 billion as of December 2020 and $57.58 billion as of December 2019, of minimum equity capital in its regulated subsidiaries in order to satisfy the regulatory requirements of such subsidiaries.
Group Inc.’s capital invested in certain
non-U.S.
subsidiaries is exposed to foreign exchange risk, substantially all of which is managed through a combination of derivatives and
non-U.S.
denominated debt. See Note 7 for information about the firm’s net investment hedges used to hedge this risk.