Fourth Quarter 2021 Pillar 3 Disclosures
PILLAR 3 DISCLOSURES
For the period ended
Pillar 3 Disclosures
TABLE OF CONTENTS
Page No. |
|
2 |
|
5 |
|
6 |
|
7 |
|
8 |
|
Equity Exposures in the Banking Book |
14 |
Securitizations in the Banking Book |
17 |
Market Risk |
20 |
Operational Risk |
25 |
Model Risk |
26 |
Interest Rate Sensitivity |
27 |
Forward-Looking Statements |
28 |
Index of References |
29 |
INDEX OF TABLES
Page No. |
||
|
5 |
|
Table 2 |
|
5 |
Capital Structure |
6 |
|
RWAs by Exposure Category |
7 |
|
Table 5 |
Credit Risk Wholesale Exposures by |
11 |
Table 6 |
Credit Risk Retail Exposures by |
12 |
Table 7 |
Equity Exposures in the Banking Book |
16 |
Table 8 |
Securitization Exposures and Related RWAs by Exposure Type |
19 |
Table 9 |
Securitization Exposures and Related RWAs by Regulatory Capital Approach |
19 |
Table 10 |
Securitization Activity - Banking Book |
20 |
Table 11 |
Regulatory VaR |
21 |
Table 12 |
Stressed VaR |
22 |
Table 13 |
Incremental Risk |
22 |
Table 14 |
Comprehensive Risk |
22 |
Table 15 |
Daily Regulatory VaR |
23 |
Table 16 |
Specific Risk |
23 |
Table 17 |
Trading Book Securitization Exposures |
24 |
Pillar 3 Disclosures
Introduction
Overview
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 would 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.
The Capital Framework, as described below, requires disclosures based on the third pillar of Basel III (Pillar 3). The purpose of Pillar 3 disclosures is to provide information about banking institutions' risk management practices and regulatory capital ratios. This document is designed to satisfy these requirements and should be read in conjunction with the firm's most recent Annual Report on Form 10-K and
Capital Framework
The regulations under the Capital Framework are largely based on the
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.
The firm calculates its CET1 capital, Tier 1 capital and Total capital ratios in accordance with both the Standardized and Advanced Capital Rules. Each of the ratios calculated under the Standardized and Advanced Capital Rules must meet its respective capital requirements.
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.
As of
The Advanced Capital Rules require an Advanced approach BHC to meet a series of qualification requirements on an ongoing basis. They also require notification to supervisors of any change to a model that results in a material change in its RWAs, or of any significant change to its modeling assumptions. These qualification requirements address the following areas: the bank's governance processes and systems for maintaining adequate capital commensurate with its risk profile; its internal systems for segmenting exposures and applying risk weights; its quantification of risk parameters used, including its model-based estimates of exposures; its operational risk management processes, data management and quantification systems; the data management systems that are designed to support the timely and accurate reporting of risk-based capital requirements; and the control, oversight and validation mechanisms exercised by senior management and by the Board of Directors of
Pillar 3 Disclosures
The information presented in this document is calculated in accordance with the Capital Framework, with RWAs calculated in accordance with the Advanced Capital Rules, unless otherwise specified.
Definition of RWAs. As of
See Note 20 "Regulation and Capital Adequacy" in Part II, Item 8 "Financial Statements and Supplementary Data" in the 2021 Form 10-K for further information about the Capital Framework and the requirement to calculate RWAs in accordance with both the Standardized and Advanced Capital Rules. Also, see "Regulation" in Part I, Item 1 "Business" in the 2021 Form 10-K for further information about regulatory capital requirements.
Basis of Consolidation
The Pillar 3 disclosures and the firm's regulatory capital ratio calculations are prepared at the consolidated
See Note 2 "Basis of Presentation" and Note 3 "Significant Accounting Policies" in Part II, Item 8 "Financial Statements and Supplementary Data" in the 2021 Form 10-K for further information about the basis of presentation of the firm's financial statements and policies on consolidation accounting.
Fair Value
Trading assets and liabilities, certain investments and loans, and certain other financial assets and liabilities, are included in the firm's consolidated balance sheets at fair value (i.e., marked-to-market), with related gains or losses generally recognized in the consolidated statements of earnings and, therefore, in capital. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The use of fair value to measure financial instruments is fundamental to the firm's risk management practices and is the most critical accounting policy. The daily discipline of marking substantially all of the firm's inventory to current market levels is an effective tool for assessing and managing risk and provides transparent and realistic insight into the firm's inventory exposures. The use of fair value is an important aspect to consider when evaluating the firm's capital base and capital ratios, as changes in the fair value of the firm's positions are reflected in the current period's shareholders' equity, and accordingly, regulatory capital; it is also a factor used to determine the classification of positions into the banking book and trading book, as discussed further below.
See Note 3 "Significant Accounting Policies" in Part II, Item 8 "Financial Statements and Supplementary Data" and "Critical Accounting Policies - Fair Value" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K for further information about the determination of fair value under
Banking Book/Trading Book Classification
In order to determine the appropriate regulatory capital treatment for the firm's exposures, positions must be first classified as either banking book or trading book. Positions are classified as banking book unless they qualify to be classified as trading book.
Banking book positions are not generally held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits. They may be accounted for at amortized cost, fair value or in accordance with the equity method. Banking book positions are subject to credit risk regulatory capital requirements. Credit risk represents the potential for loss due to the default or deterioration in credit quality of a counterparty (e.g., an over-the-counter (OTC) derivatives counterparty or a borrower) or an issuer of securities or other instruments the firm holds. See "Credit Risk" for further information.
Pillar 3 Disclosures
Trading book positions generally meet the following criteria: they are assets or liabilities that are accounted for at fair value; they are risk managed using a Value-at-Risk (VaR) internal model; and they are positions that the firm holds, generally as part of the market-making and underwriting businesses, for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits. In accordance with the Capital Framework, trading book positions are generally considered covered positions. Foreign exchange and commodity positions are also typically considered covered positions, whether or not they meet the other criteria for classification as trading book positions. Covered positions are subject to market risk regulatory capital requirements which are designed to cover the risk of loss in value of these positions due to changes in market conditions. See "Market Risk" for further information. Certain trading book positions, such as derivatives, are also subject to counterparty credit risk regulatory capital requirements.
Restrictions on the Transfer of Funds or
See Note 20 "Regulation and Capital Adequacy" in Part II, Item 8 "Financial Statements and Supplementary Data" and "Risk Management - Liquidity Risk Management" and "
Compliance with Capital Requirements
As of
See Note 20 "Regulation and Capital Adequacy" in Part II, Item 8 "Financial Statements and Supplementary Data" and "
Other Items
See "
See "Risk Management - Overview and Structure of Risk Management" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K for further information about the firm's risk management framework, including Board governance, processes and committee structure.
Measures of exposures and other metrics disclosed in this report and the
Disclosure documents are located at: www.goldmansachs.com/investor-relations.
Pillar 3 Disclosures
The table below presents the risk-based capital and leverage requirements as of both
Table 1: Risk-Based |
Capital and Leverage |
Requirements |
Requirements |
Risk-based capital requirements |
9.5% |
CET1 capital ratio |
|
Tier 1 capital ratio |
11.0% |
Total capital ratio |
13.0% |
Leverage requirements |
4.0% |
Tier 1 leverage ratio |
|
SLR |
5.0% |
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 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 Tier 1 leverage ratio requirement is a minimum of 4%. The SLR requirement of 5% includes a minimum of 3% and a 2% buffer applicable to G-SIBs.
See "Regulation" in Part I, Item 1 "Business" in the 2021 Form 10-K and "Regulatory and Other Matters" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K for further information about regulatory capital reforms that impacts the firm.
The table below presents information about risk-based capital and leverage ratios, calculated in accordance with the Advanced Capital Rules.
Table 2:
As of December |
||||
$ in millions |
2021 |
2020 |
||
CET1 capital |
$ |
96,254 |
$ |
81,641 |
Tier 1 capital |
$ |
106,766 |
$ |
92,730 |
Tier 2 capital |
$ |
12,051 |
$ |
13,279 |
Total capital |
$ |
118,817 |
$ |
106,009 |
RWAs |
$ |
647,921 |
$ |
609,750 |
CET1 capital ratio |
14.9% |
13.4% |
||
Tier 1 capital ratio |
16.5% |
15.2% |
||
Total capital ratio |
18.3% |
17.4% |
||
Average adjusted total assets |
$ |
1,462,187 |
$ |
1,147,837 |
Tier 1 leverage ratio |
7.3% |
8.1% |
||
Total leverage exposure |
$ |
1,910,521 |
$ |
1,332,937 |
SLR |
5.6% |
7.0% |
In the table above:
- CET1 capital ratio is calculated as CET1 capital divided by RWAs, the Tier 1 capital ratio is calculated as Tier 1 capital divided by RWAs, and the Total capital ratio is calculated as Total capital divided by RWAs.
- Tier 1 leverage ratio is calculated as Tier 1 capital divided by average adjusted total assets for the quarter (which includes adjustments for goodwill and identifiable intangible assets, and certain investments in nonconsolidated financial institutions, as well as the impact of CECL transition).
- SLR is calculated as Tier 1 capital divided by total leverage exposure (which includes average adjusted total assets for the quarter and monthly average of certain off-balance sheet exposures). As of
December 2020 , total leverage exposure excluded average holdings ofU.S. Treasury securities and average deposits at theFederal Reserve as permitted by the FRB. EffectiveApril 1, 2021 , the amendment permitting this exclusion expired. See theFFIEC 101 Report for further information about the firm's SLR.
Pillar 3 Disclosures
- As permitted by the FRB, the firm elected to temporarily delay the estimated effects of adopting CECL on regulatory capital until
January 2022 and to subsequently phase-in the effects throughJanuary 2025 . In addition, the firm elected to increase regulatory capital by 25% of the increase in the allowance for credit losses sinceJanuary 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 ofDecember 2021 , the firm's Advanced ratios would have been 14.7% for CET1 capital, 16.3% for Tier 1 capital and 18.4% for Total capital. The firm's Standardized ratios would have been 14.1% for CET1 capital, 15.6% for Tier 1 capital and 18.0% for Total capital.
Capital Structure
The table below presents information about risk-based capital in accordance with the Advanced Capital Rules.
Table 3: Capital Structure
As of December |
||||
$ in millions |
2021 |
2020 |
||
Common stock |
$ |
9 |
$ |
9 |
Share-based awards |
4,211 |
3,468 |
||
Additional paid-in capital |
56,396 |
55,679 |
||
Retained earnings |
131,811 |
112,947 |
||
Accumulated other comprehensive loss |
(2,068) |
(1,434) |
||
Stock held in treasury, at cost |
(91,136) |
(85,940) |
||
Common shareholders' equity |
99,223 |
84,729 |
||
Impact of CECL transition |
1,105 |
1,126 |
||
Deduction for goodwill |
(3,610) |
(3,652) |
||
Deduction for identifiable intangible assets |
(401) |
(601) |
||
Other adjustments |
(63) |
39 |
||
CET1 capital |
96,254 |
81,641 |
||
Preferred stock |
10,703 |
11,203 |
||
Deduction for investments in covered funds |
(189) |
(106) |
||
Other adjustments |
(2) |
(8) |
||
Tier 1 capital |
106,766 |
92,730 |
||
Qualifying subordinated debt |
11,554 |
12,196 |
||
Junior subordinated debt |
94 |
188 |
||
Other adjustments |
403 |
895 |
||
Tier 2 capital |
12,051 |
13,279 |
||
Total capital |
$ |
118,817 |
$ |
106,009 |
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 the allowance for credit losses sinceJanuary 1, 2020 . Other adjustments within Tier 2 capital also reflects the impact of these adjustments.
- Deduction for goodwill was net of deferred tax liabilities of
$675 million as ofDecember 2021 and$680 million as ofDecember 2020 . - Deduction for identifiable intangible assets was net of deferred tax liabilities of
$17 million as ofDecember 2021 and$29 million as ofDecember 2020 . - 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 "Investments" in Part II, Item 8 "Financial Statements and Supplementary Data" in the 2021 Form 10-K 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 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. - Junior subordinated debt is debt issued to a Trust. As of
December 2021 , 10% of this debt was included in Tier 2 capital and 90% was phased out of regulatory capital. As ofDecember 2020 , 20% of this debt was included in Tier 2 capital and 80% was phased out of regulatory capital. Junior subordinated debt is reduced by the amount of Trust Preferred securities purchased by the firm and was fully phased out of Tier 2 capital beginning inJanuary 2022 .
See Note 14 "Unsecured Borrowings" and Note 19 "Shareholders' Equity" in Part II, Item 8 "Financial Statements and Supplementary Data" in the 2021 Form 10-K for further information about the terms and conditions of the common stock, perpetual non-cumulative preferred stock, junior subordinated debt issued to trusts and qualifying subordinated debt.
Pillar 3 Disclosures
See "
- Note 12 "Other Assets" for information about the firm's goodwill and identifiable intangible assets;
- Note 14 "Unsecured Borrowings" for information about the firm's qualifying subordinated debt, junior subordinated debt and Trust Preferred securities; and
- Note 19 "Shareholders' Equity" for information about common equity, preferred equity and accumulated other comprehensive income/(loss).
Total Loss-Absorbing Capacity (TLAC)
The firm is also subject to the FRB's TLAC and related requirements. Failure to comply with the TLAC and related requirements would result in restrictions being imposed by the FRB and could limit the firm's ability to repurchase shares, pay dividends and make certain discretionary compensation payments.
See "
Risk-Weighted Assets
The table below presents information about RWAs calculated in accordance with the Advanced Capital Rules.
Table 4: RWAs by Exposure Category
As of December |
Section |
|||||
$ in millions |
2021 |
2020 |
Reference |
|||
Credit RWAs |
$ |
243,982 |
||||
Wholesale exposures |
$ |
222,129 |
Credit Risk |
|||
Retail exposures |
32,943 |
20,028 |
Credit Risk |
|||
Cleared exposures |
4,775 |
4,295 |
Credit Risk |
|||
Other assets |
39,476 |
38,401 |
Credit Risk |
|||
43,002 |
Equity Exposures in |
|||||
Equity exposures |
46,481 |
the Banking Book |
||||
12,643 |
Securitizations in the |
|||||
Securitization exposures |
10,096 |
Banking Book |
||||
Credit RWAs subject |
376,821 |
|||||
to the 6% add-on |
341,430 |
|||||
6% add-on |
22,609 |
20,486 |
||||
Credit valuation |
39,069 |
|||||
adjustment |
50,797 |
Credit Risk |
||||
Total Credit RWAs |
438,499 |
412,713 |
||||
Market RWAs |
13,510 |
|||||
Regulatory VaR |
14,913 |
Market Risk |
||||
Stressed VaR |
38,922 |
31,978 |
Market Risk |
|||
Incremental risk |
6,867 |
7,882 |
Market Risk |
|||
Comprehensive risk |
2,521 |
1,758 |
Market Risk |
|||
Specific risk |
14,689 |
12,193 |
Market Risk |
|||
Total Market RWAs |
76,509 |
68,724 |
||||
Total Operational RWAs |
132,913 |
128,313 |
Operational Risk |
|||
Total RWAs |
$ |
647,921 |
$ |
609,750 |
Further information about each of the material components in the table above, including a description of the methodologies used, can be found in the remainder of this document, under the section references indicated above.
Total Credit RWAs as of
Pillar 3 Disclosures
Credit Risk
Overview
Credit risk represents the potential for loss due to the default or deterioration in credit quality of a counterparty (e.g., an OTC derivatives counterparty or a borrower) or an issuer of securities or other instruments the firm holds. The firm's exposure to credit risk comes mostly from client transactions in OTC derivatives and loans and lending commitments. Credit risk also comes from cash placed with banks, securities financing transactions (i.e., resale and repurchase agreements and securities borrowing and lending activities) and customer and other receivables.
Credit Risk, which is independent of the firm's revenue- producing units and reports to the chief risk officer, has primary responsibility for assessing, monitoring and managing credit risk through firmwide oversight across the firm's global businesses. In addition, the firm holds other positions that give rise to credit risk (e.g., bonds and secondary bank loans). These credit risks are captured as a component of market risk measures, which are monitored and managed by Market Risk. The firm also enters into derivatives to manage market risk exposures. Such derivatives also give rise to credit risk, which is monitored and managed by Credit Risk.
Credit Risk Management Process
The firm's process for managing credit risk includes the critical components of the risk management framework described in "Risk Management - Overview and Structure of Risk Management" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K, as well as the following:
- Monitoring compliance with established credit risk limits and reporting the firm's credit exposures and credit concentrations;
- Establishing or approving underwriting standards;
- Assessing the likelihood that a counterparty will default on its payment obligations;
- Measuring the firm's current and potential credit exposure and losses resulting from a counterparty default;
- Using credit risk mitigants, including collateral and hedging; and
- Maximizing recovery through active workout and restructuring of claims.
The firm also performs credit reviews, which include initial and ongoing analyses of counterparties. For substantially all of the firm's credit exposures, the core of the process is an annual counterparty credit review. A credit review is an independent analysis of the capacity and willingness of a counterparty to meet its financial obligations, resulting in an internal credit rating. The determination of internal credit ratings also incorporates assumptions with respect to the nature of and outlook for the counterparty's industry, and the economic environment. Senior personnel, with expertise in specific industries, inspect and approve credit reviews and internal credit ratings.
The firm's risk assessment process may also include, where applicable, reviewing certain key metrics, including, but not limited to, delinquency status, collateral values,
The firm's credit risk management systems capture credit exposure to individual counterparties and on an aggregate basis to counterparties and their subsidiaries. These systems also provide management with comprehensive information about the firm's aggregate credit risk by product, internal credit rating, industry, country and region.
Risk Measures
The firm measures credit risk based on the potential loss in the event of non-payment by a counterparty using current and potential exposure. For derivatives and securities financing transactions, current exposure represents the amount presently owed to the firm after taking into account applicable netting and collateral arrangements, while potential exposure represents the estimate of the future exposure that could arise over the life of a transaction based on market movements within a specified confidence level. Potential exposure also takes into account netting and collateral arrangements. For loans and lending commitments, the primary measure is a function of the notional amount of the position.
Limits
The firm uses credit risk limits at various levels, as well as underwriting standards to manage the size and nature of its credit exposures. Limits for industries and countries are based on the firm's risk appetite and are designed to allow for regular monitoring, review, escalation and management of credit risk concentrations. See "Risk Management - Overview and Structure of Risk Management" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K for information about the firm's limit approval process.
Pillar 3 Disclosures
Credit Risk is responsible for monitoring these limits, and identifying and escalating to senior management and/or the appropriate risk committee, on a timely basis, instances where limits have been exceeded.
Credit Exposures
See Note 7 "Derivatives and Hedging Activities" and Note 11 "Collateralized Agreements and Financings" in Part II, Item 8 "Financial Statements and Supplementary Data" and "Risk Management - Credit Risk Management" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K for information about the firm's credit exposures, including the gross fair value, netting benefits and current exposure of its derivative exposures and securities financing transactions.
See "Risk Management - Credit Risk Management" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K for information about the firm's credit exposures to counterparties that defaulted.
Allowance for Credit Losses
See Note 9 "Loans" in Part II, Item 8 "Financial Statements and Supplementary Data" in the 2021 Form 10-K for information about the firm's past due loans, loans on nonaccrual status, and allowance for credit losses.
Credit RWAs
Credit RWAs are calculated based on measures of credit exposure, which are then risk weighted. Wholesale exposures generally include credit exposures to corporates, sovereigns or government entities (other than securitization, retail or equity exposures). Retail exposures are composed of residential mortgage exposures, qualifying revolving exposures, or other retail exposures, that are managed as part of a segment with homogeneous risk characteristics, not on an individual exposure basis. Certain loans to individuals, including some loans backed by residential real estate, are categorized as wholesale, rather than retail, exposures under the Capital Framework, as the associated credit risk is assessed on an individual basis and not as part of a portfolio of exposures. The firm computes risk weights for certain exposures in accordance with the Advanced Internal Ratings- Based (AIRB) approach, which utilizes internal assessments of each counterparty's creditworthiness. In addition, the firm utilizes internal models to measure exposures for derivatives and securities financing products using the Internal Models Methodology (IMM).
Exposure at Default (EAD). For on-balance sheet wholesale exposures, such as receivables and cash, the EAD is generally based on the carrying value. For the calculation of EAD for off-balance sheet exposures, including commitments and guarantees, a credit equivalent exposure amount is calculated based on the notional amount of each transaction multiplied by a credit conversion factor designed to estimate the net additions to funded exposures that would be likely to occur over a one-year horizon, assuming the obligor were to default. Historical studies and empirical data are generally used to estimate the credit conversion factor.
For on-balance sheet retail exposures, the EAD is generally based on the carrying value. For off-balance sheet retail exposures, EAD is the firm's best estimate of net additions to funded exposures that would be likely to occur over a one- year horizon assuming the retail exposures in the segment were to default.
For substantially all of the counterparty credit risk arising from OTC derivatives, exchange-traded derivatives and securities financing transactions, the firm uses internal models to calculate the distribution of exposure upon which the EAD calculation is based, in accordance with the IMM. The models estimate Expected Exposures (EE) at various points in the future using risk factor simulations. As defined in the Capital Framework, EE is the expected value of the probability distribution of non-negative credit risk exposures to a counterparty at any specified future date before the maturity date of the longest term transaction in a netting set. The model parameters are derived from historical and implied market data using the most recent three-year period, as well as a stressed three-year period. The models also estimate the Effective Expected Positive Exposure (EEPE) over the first year of the portfolio, which is the time-weighted average of non-declining positive credit exposure over the EE simulation. In accordance with the Advanced Capital Rules, the firm calculates two EEPEs: one based on stressed conditions and one based on unstressed conditions. For the stressed EEPE calculation, the model is re-calibrated using historical market parameters from a period of stress as identified by elevated credit spreads for the firm's counterparties. Both stressed and unstressed EAD are calculated by multiplying the EEPE by a standard regulatory factor of 1.4. The firm's RWAs calculated in accordance with the IMM are the greater of the RWAs based on the stressed or unstressed EEPE.
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