The Goldman Sachs Group, Inc. (GS, NYSE)
Industry: Capital Markets
Annual report, fiscal year 2016


The Goldman Sachs Group, Inc.

## ANNUAL
REPORT
2016



## Our clients’ interests always come first.

Our experience shows that if we serve our clients well, our own success will follow.

## Our assets are our people, capital and reputation.

If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.

## Our goal is to provide superior returns to our shareholders.

Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.

## We take great pride in the

professional quality of our work. We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest.

## We stress creativity and

imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client's problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry.
We make an unusual effort to identify and recruit the very best person for every job.
Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm.

We offer our people the opportunity to move ahead more rapidly than is possible at most other places. Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.

## We stress teamwork in everything we do.

While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the firm and its clients.

The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success.

We consider our size an asset that we try hard to preserve. We want to be big enough to undertake the largest project that any of our clients could contemplate, yet small enough to maintain the loyalty, the intimacy and the esprit de corps that we all treasure and that contribute greatly to our success.

## We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs.

We know that the world of finance will not stand still and that complacency can lead to extinction.

## We regularly receive confidential information as part of our normal client relationships.

To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.

## Our business is highly competitive, and we aggressively seek to expand our client relationships.

However, we must always be fair competitors and must never denigrate other firms.

## Integrity and honesty are at the heart of our business.

We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.



## Fellow Shareholders:

We started 2016 with concerns about global economic growth, leading some to comment that the world was headed into a recession. While those concerns moderated in the second quarter and the global economic outlook improved in the second half, other concerns drew to the forefront. Few predicted with conviction the outcome of the United Kingdom’s referendum on remaining a part of the European Union, the results of the presidential election in the United States or the markets’ reactions to either event.

In last year’s letter, we characterized 2015 as a “tale of two halves.” That was certainly true again in 2016, but in reverse order. As our clients — and by extension, the firm — navigated the challenging operating environment in the first half, our net revenues declined by 28 percent year over year for the period, with the majority of that decline occurring in the first quarter. As conditions improved in the second half, so did client sentiment. As a result, net revenues increased by nearly 16 percent year over year in the second half, including two consecutive quarters of more than 11 percent annualized return on average common shareholders’ equity.

The events of the past year are a stark reminder of how quickly expectations and conditions can change, and of the importance for us to be nimble and to concentrate on the things we can control. Despite the difficult start to the year, we remained focused on our clients and operating efficiently, without surrendering the ability to pursue potential opportunities. For the full year, the firm generated net revenues of $30.6 billion, net earnings of $7.4 billion and diluted earnings per common share of $16.29. Our return on average common shareholders' equity was 9.4 percent.
Despite our focus on cost discipline, we did not stop investing in our franchise — including investments in technology, attracting and retaining top talent, and seeking new business opportunities, including our efforts to expand our lending footprint, most notably through Goldman Sachs Bank USA. We believe that our consistent investment in our franchise positioned us to serve our clients when activity increased in the back half of 2016.

Managing the firm with discipline while preserving optionality for upside can be a difficult balancing act. We do not hold preconceived expectations for certain outcomes, but rather approach our own operations with the same mindset we do when helping our clients. We spend a great deal of time thinking about and preparing for downside scenarios, but we are always cognizant that the economy, markets and sentiment could break to the high side, and we position ourselves for that possibility.

We believe our client franchise benefits from our consistent commitment to being a diversified and dependable provider of services.







In this year’s letter to our shareholders, I will discuss these and other topics, including our financial profile and the state of our businesses.

## Financial Profile

Given the challenging operating environment in the first half of 2016, we undertook steps and actions consistent with the difficult conditions.

For the first quarter of 2016, with net revenues down by 40 percent year over year, we accrued compensation and benefits expenses 40 percent lower year over year. We ended the year with net revenues and compensation and benefits expenses nine and eight percent lower than 2015, respectively.

We also completed an initiative that identified a reduction of approximately $900 million in annual run rate compensation during the year, in which we realized approximately $500 million, net of severance and other related costs, during 2016. Including these efforts, we have announced and completed $2.8 billion in savings initiatives since 2011. This demonstrates how our flexible cost base helps us navigate challenging operating environments.

The impact of our efforts can be seen by comparing our results in 2016 to 2011. 2011 was an instructive year — as it was a tough net revenues year, similar to 2016. In 2011, we had net revenues of approximately $29 billion with operating expenses of approximately $23 billion. Our compensation and benefits to net revenues ratio was more than 42 percent and our pre-tax margin was over 21 percent.

In 2016, despite higher net revenues, our operating expenses were down by 10 percent vs. 2011, our compensation and benefits to net revenues ratio was down by 400 basis points and our pre-tax margin was more than 12 percentage points higher. This reflects a lot of the firm’s work in cost discipline and provides significant operating leverage for the future.
Our cost savings efforts in 2016 were part of a broader focus on efficiencies. For example, over the past five years we have grown our head count in our Salt Lake City office by nearly 80 percent, making it our fourth-largest location globally.

In terms of our capital and liquidity, our balance sheet has never been more conservatively positioned as a result of adjustments we have made to adapt to new regulations since the financial crisis. By almost all measures, Goldman Sachs, and the broader financial system, is safer. For example, our Global Core Liquid Assets have increased by almost four times, our common shareholders' equity has nearly doubled and our gross leverage has been cut by more than one-half since the end of 2007.

Moreover, we have reduced our balance sheet size by seven percent over the past five years, while increasing our common shareholders' equity by 13 percent and our book value per common share by 40 percent. Over the same period, we have returned nearly $32 billion of capital to shareholders through buybacks and dividends, reducing our basic share count by more than 100 million shares, or approximately 20 percent, to the lowest ever.

Importantly, while these efforts helped us to strengthen our balance sheet, they did not detract us from remaining focused on sustaining and improving the quality of our client franchise.

## Investment Banking

Our investment banking franchise reflects deep relationships with more than 8,000 clients across a variety of industries in approximately 100 countries.

We ended the year ranked first in global announced and completed mergers and acquisitions, advising on many of the year’s most significant transactions. As has long been the case, our advisory franchise creates other opportunities across the firm, such as in debt underwriting, which is able to serve our clients with



best-in-class debt financing capabilities. Our financial advisory net revenues declined compared to a strong 2015, partially offset by record debt underwriting net revenues of $2.5 billion. In fact, we ended the year ranked in the top five in global debt and in the top three in global high-yield — areas where we traditionally have not had the same footprint as some of our larger competitors. We also continued to maintain a leading equity underwriting franchise, though net revenues declined significantly in 2016 as a result of the operating environment.

Nevertheless, we ended the year strong, as our investment banking transaction backlog grew in the fourth quarter.

## Institutional Client Services

With a leading, diversified global platform in Institutional Client Services (ICS), comprising our Fixed Income, Currency and Commodities Client Execution (FICC) and Equities franchises, we are one of the few firms that have remained committed to serving our clients' needs broadly across financial products, services and regions.

We did not extrapolate from the exceptional conditions of the past several years to draw hard and fast conclusions about the FICC franchise. These conditions included interest rates near or below zero, a flat yield curve and muted economic growth. That is why we put a premium on maintaining our commitment to businesses that we knew were important to our clients.

We have a diverse client franchise, and one area of particular strength has long been our standing with the hedge fund community. Our product diversity, global footprint, world-class prime brokerage capabilities, and engagement strategy based on content are of particular value to hedge fund clients.

Over the past few years, we also have made it a key priority to deepen relationships with more traditional asset managers. As an example of our progress, we have seen market share improvements in our U.S. cash credit businesses, where asset managers have historically been active.
Both hedge funds and active managers could face a much different and more attractive market environment in 2017. To the extent decreasing market correlations translate into a better backdrop for generating outsized performance, that should also support increasing levels of client activity.

Despite the headwinds that marked the start of 2016, ICS net revenues were down modestly compared to 2015. FICC net revenues increased slightly year over year, which is notable given market conditions in the first quarter. Equities client execution net revenues declined significantly year over year, driven by lower client activity levels.

## Investment Management

Our broad portfolio of solutions and consistent performance have enabled us to be one of the fastest-growing active investment managers in the world. Our product offerings range from asset and liability management for our private wealth clients, to tailored advisory solutions for our institutional clients, to fund products across all asset classes.

Net revenues declined year over year in 2016, due largely to lower incentive fees. However, even in a more challenging environment, we have continued to build our franchise. Over the past three years, we have grown our assets under supervision by $337 billion to a record of nearly $1.4 trillion. That growth would be akin to creating a top 30 U.S. asset manager in just three years, and includes $150 billion of organic active long-term net inflows. During this period, many active investment managers have seen net client outflows.

Despite such growth, we continue to see significant potential as investors consolidate assets with leading providers. There are bigger players within each of the product categories in which we compete, offering room to garner more market share. We will pursue that growth by providing clients with comprehensive advice, thought leadership and innovative products that will help them to better meet their investing needs.



## Investing & Lending

Investing & Lending is a collection of activities that is synergistic with other elements of our overall franchise, helping us to expand our client relationships. We continue to provide long-term capital by way of direct lending and equity investments, and remain focused on opportunities that provide strong risk-adjusted returns on capital over the long term.

## Growing Our Lending Footprint

In particular, we continue to see lending as a growth opportunity for the firm. Approximately one-third of our 2016 net revenues in Investing & Lending was generated by debt securities and loans, which included more than $1 billion in net interest income.

Over the past four years, we increased our funded loans 2.8 times to roughly $64 billion. Corporate loans, diversified across sectors and industries, make up 46 percent of the portfolio, followed by private wealth management loans at 32 percent and real estate loans at 17 percent. We continue to see increased demand from our investment banking and private wealth management clients, and we are intent on prudently increasing our lending portfolio.

This past fall, we launched Marcus: By Goldman Sachs — an online lending platform designed to provide consumer clients with an alternative to higher-interest-rate credit card debt. The growth in digital finance, combined with our historical strength in technology and risk management, led us to see an opportunity to add value to this attractive new market for Goldman Sachs.

By most measures, the opportunity is broad and deep. The unsecured consumer loan market in the U.S. is roughly $850 billion. We are focused on creditworthy consumers with $5,000 to $30,000 of credit card debt, the majority of whom are not aware of better debt management options. We have received encouraging feedback from our new clients as we have slowly built out the business, and continue to see potential for attractive risk-adjusted growth opportunities.

## Focus on Technology

Technology is central to every part of our business. Simply put, it is a core competitive advantage that drives long-term value in several ways — namely, through enhancing our clients' experience, driving efficiency and creating new opportunities, like Marcus.

Our investment in our Marquee platform, a collection of applications for our institutional clients, represents one such cutting-edge opportunity. Marquee allows clients to access some of the same analysis and risk management tools our market makers use.

More broadly, we are investing in infrastructure to improve our electronic execution capabilities, including for systematic investing clients who require speed and differentiated execution, and for straightforward processing.

We have also made successful investments in electronic execution platforms. Our global infrastructure, as a result of this and other investments, is now capable of executing equity and select FICC transactions in a much more efficient manner. Importantly, all of our clients — not just our clients with quantitative strategies — enjoy the benefits of better execution.

We have likewise integrated technology into our recruiting processes, in particular to facilitate first-round video interviews with the goal of widening and diversifying the pool of talent we evaluate. For 2017's intern class, so far we have conducted interviews with candidates from more than 900 schools, reaching 100 more schools than last year.

## Our People

Of course, our most important long-term competitive advantage is our people. Our commitment to attracting and retaining the most talented people in our industry — and beyond — is of vital importance to the firm and the perennial foundation of our success.

We must be diverse and representative of the countries and cultures in which we operate. Our people represent more than 160 different nationalities and speak over 100 different languages.



I am pleased to report that Goldman Sachs remains a highly attractive place to work. In 2016, our summer internship and full-time campus applicants rose by 11 percent. We had approximately 130,000 applicants for just 5,000 internship and full-time campus roles — approximately a four percent hiring rate. In addition, of those who received offers, approximately eight out of 10 accepted. And, in 2016, we were proud to be named as one of Fortune magazine’s “100 Best Companies to Work For.” Goldman Sachs is one of only five companies to be recognized every year that the Great Place to Work Institute has issued its list since 1984.

Given the growing significance of technology in how we operate our businesses, we have increasingly been focused on hiring individuals with backgrounds in science, technology, engineering and math (STEM). In 2016, 37 percent of new campus analysts who joined the firm came from these STEM majors. Today, approximately 9,000 people, or roughly one-quarter of the firm, work in various engineering-related roles.

More broadly, our people continue to see the value of a long-term career at Goldman Sachs. The median tenure of our partners and managing directors at the firm is 15 years, and nearly 60 percent of them joined the firm as an analyst or associate (our entry level positions).

To ensure that the talent we hire is the talent we keep over the long term, we invest hundreds of thousands of training hours in our new analysts, and provide thousands of classroom programs and digital resources for senior professionals.

## Executive Succession and Our Deep Leadership Bench

In 2016 and the early part of this year, we saw a number of movements in our leadership ranks, as well as a key addition to our Board of Directors. As chairman and chief executive officer, in consultation with our Board of Directors, one of my most important priorities is smooth and effective leadership transitions.
This past December, then–U.S. President-elect Donald Trump appointed Gary Cohn, then our president and chief operating officer, director of the National Economic Council. Gary was responsible for developing and leading many of the firm’s most important initiatives, and demonstrated a deep commitment to our clients, our people and the culture of Goldman Sachs. We thank him for having served as a trusted advisor, dedicated colleague and friend to so many at the firm, and wish him well.

David Solomon, our former co-head of the Investment Banking Division, and Harvey Schwartz, our chief financial officer, assumed new responsibilities as presidents and co-chief operating officers of the firm. In addition, Marty Chavez, chief information officer, was named deputy chief financial officer of Goldman Sachs and will become chief financial officer.

This past year was also marked by some senior retirements from the firm. Michael “Woody” Sherwood, vice chairman of the firm and co-chief executive officer of Goldman Sachs International, and Mark Schwartz, chairman of Goldman Sachs Asia Pacific and vice chairman of the firm, announced their retirements following decades of service. We wish both Woody and Mark all the best in the years ahead and thank them for their extraordinary contributions to Goldman Sachs.

Richard Gnodde, co-head of the Investment Banking Division and chief executive officer of Goldman Sachs International, and Pablo Salame, co-head of the Securities Division, were appointed vice chairmen of the firm. David, Harvey, Marty, Richard and Pablo have a long track record of distinction in their respective areas of expertise, spanning multiple businesses and geographies.

In December, we welcomed a new member to our Board of Directors. Ellen Kullman is an accomplished business leader who has held a variety of senior roles at E. I. du Pont de Nemours and Company, including as chairman and chief executive officer. We are confident that her deep experience in business and as a board member in both the public and nonprofit sectors will add great value to our Board of Directors.



## Our Tradition of Leadership and Public Service

Gary was not the first person from Goldman Sachs to join the government, and we hope and expect that he will not be the last. Five of my most recent predecessors went into government service, and that has not been by happenstance. One ethic that has long pervaded Goldman Sachs is a commitment to public service if one is given the opportunity to serve. And that has been true over time and in many of the geographies in which we operate.

We recruit people who are oriented to the larger world, and their jobs require them to be both outwardly and inwardly facing. In the process, they develop the skills to make a contribution in large, complex organizations and the expertise to help drive economic progress and job creation.

We have been criticized for the fact that some of our colleagues, after long careers at the firm, have moved to work in the public sector. The charge is that Goldman Sachs is able to extract certain advantages that others cannot. In fact, the opposite is true. Those in government bend over backward to avoid any perception of favoritism.

We are proud of our tradition of leadership and public service and believe it is a core part of our culture. That is why we will continue to encourage our people to contribute to government service if they are fortunate enough to be asked.

We also have contributed our expertise and knowledge to broader public policy issues, such as fiscal policy. And, when certain issues impact our people, we have not hesitated to speak up on their behalf. In the past, we have commented on marriage equality, and more recently, immigration policy, because they both affect our ability to hire and retain people from the broadest pool of talent. We will continue to express our views on policies that affect our people, our business and the long-term interests of economic growth.

## Our Commitment to Our Communities

Goldman Sachs has long embraced our responsibility to help address social and economic challenges around the world. Our approach goes far beyond the significant financial support we provide to a broad array of philanthropic endeavors; we also make meaningful contributions that harness our business expertise, relationships and knowledge to address critical needs in the communities in which we work and live — and sometimes far beyond.

## 10,000 Women

Since 2008, the Goldman Sachs 10,000 Women initiative has helped foster economic growth by providing women entrepreneurs in 56 countries with business education and access to capital. The initiative is now expanding to reach more than 10,000 women through a first-of-its-kind global finance facility launched in partnership with the International Finance Corporation to increase access to capital for women entrepreneurs to grow their businesses. By the end of 2016, the facility had committed more than $600 million to banks in 17 emerging markets, which will enable more than 30,000 women entrepreneurs to access capital.

## 10,000 Small Businesses

10,000 Small Businesses has served more than 7,300 small businesses at 31 sites across the United States and the United Kingdom by the end of 2016. This initiative has worked with more than 100 local and national lenders and other organizations to provide access to management training, capital and business support services. Independent evaluations of the program have shown that participants consistently increase revenues and create net new jobs at a pace that outperforms the broader economy.

## Goldman Sachs Gives

Through this donor-advised fund, partners at the firm recommend grants to nonprofit organizations around the



world. Since its launch in 2010, the fund has made more than 28,000 grants totaling nearly $1.2 billion through the end of 2016 to 5,600 organizations that further Goldman Sachs Gives' mission of fostering innovative ideas, and solving economic and social issues. Grants from Goldman Sachs Gives have recently supported the Middle East refugee crisis, STEM education for underserved youths globally, medical research across a variety of fields, and need-based financial aid at colleges and universities globally, to name a few key initiatives.

## Looking Ahead

We often say that no one has a crystal ball. Markets change course at a moment’s notice, and in response to factors no one can predict with any certainty. Cycles come and cycles go. But, if we manage our business with discipline and preserve our flexibility for upside, we can put ourselves in the best position to meet the needs of our clients and to grow our franchise.

We have long maintained that it is important to remain active and invested in our core businesses, despite cyclical pressures, both as we respond in the short term and orient ourselves for the horizon. In the past decade or so, some in our industry pulled back from sales and trading businesses that, to some, seemed to be permanently and negatively affected by market conditions, regulatory change and other factors.

We remained committed to the value we provide clients in those businesses across cycles. It is difficult to know how effective we have been at achieving the balance between cutting costs and investing in businesses until the cycle fully turns. Regardless of which way the future breaks, we do, however, see many reasons for optimism.

Putting aside one’s individual politics, the outcome of the U.S. election raises the possibility of more stimulative tax and regulatory policies, as well as plans for more infrastructure spending. This represents a substantial change in direction for the U.S., and offers many investors and companies a reason for optimism. Economic growth was showing signs of improvement, even before the election. U.S. interest rates are poised to rise, as policymakers digest improving economic indicators, while other global markets hold steady or even engage in stimulus, creating opportunities for investors in monetary policy divergence.

More durable market trends may yet emerge and spur healthier levels of client activity. Looking ahead to 2017, Goldman Sachs remains committed to working with our clients and leveraging the resources of the firm to help them achieve their objectives, while creating long-term value for shareholders.

I believe that our client franchise is as strong as it has ever been. We have transformed our balance sheet in ways that help us better weather challenging environments, while allowing us to pivot in times of higher client activity. We have prudently managed our operating expenses and capital, building significant operating leverage.

By staying true to our strategic focus, I am confident we can continue to generate industry-leading returns for shareholders and outperform over the long term.



Lloyd C. Blankfein

Chairman and Chief Executive Officer



# UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission File Number: 001-14965

# The Goldman Sachs Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

13-4019460
(I.R.S. Employer Identification No.)

200 West Street
New York, N.Y.
(Address of principal executive offices)

10282
(Zip Code)

(212) 902-1000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Name of each exchange on which registered:

Common stock, par value $0.01 per share
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative Preferred Stock, Series A
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.20%
Non-Cumulative Preferred Stock, Series B
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative Preferred Stock, Series C
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative Preferred Stock, Series D
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative Preferred Stock, Series I
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 5.50%
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series J
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.375%
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K
New York Stock Exchange
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.30%
Non-Cumulative Preferred Stock, Series N
New York Stock Exchange
See Exhibit 99.2 for debt and trust securities registered under Section 12(b) of the Act

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐ Yes ☑ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual Report on Form 10-K or any amendment to the Annual Report on Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

As of June 30, 2016, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $59.3 billion.

As of February 10, 2017, there were 398,377,814 shares of the registrant's common stock outstanding.

Documents incorporated by reference: Portions of The Goldman Sachs Group, Inc.'s Proxy Statement for its 2017 Annual Meeting of Shareholders are incorporated by reference in the Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.



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## INDEX

Form 10-K Item Number Page No.
PART I 1
Item 1
Business 1
Introduction 1
Our Business Segments and Segment Operating Results 1
Investment Banking 2
Institutional Client Services 2
Investing & Lending 4
Investment Management 4
Business Continuity and Information Security 5
Employees 6
Competition 6
Regulation 7
Available Information 23
Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995 24
Item 1A
Risk Factors 25
Item 1B
Unresolved Staff Comments 44
Item 2
Properties 44
Item 3
Legal Proceedings 45
Item 4
Mine Safety Disclosures 45
Executive Officers of The Goldman Sachs Group, Inc. 45
PART II 46
Item 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 46
Item 6
Selected Financial Data 46

Page No.
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations 47
Introduction 47
Executive Overview 48
Business Environment 49
Critical Accounting Policies 50
Recent Accounting Developments 53
Use of Estimates 53
Results of Operations 53
Balance Sheet and Funding Sources 66
Equity Capital Management and Regulatory Capital 71
Regulatory Developments 77
Off-Balance-Sheet Arrangements and Contractual Obligations 79
Risk Management 81
Overview and Structure of Risk Management 82
Liquidity Risk Management 87
Market Risk Management 94
Credit Risk Management 99
Operational Risk Management 105
Model Risk Management 107
Item 7A
Quantitative and Qualitative Disclosures About Market Risk 107



## INDEX

Page No.
Item 8
Financial Statements and Supplementary Data 108
Management's Report on Internal Control over Financial Reporting 108
Report of Independent Registered Public Accounting Firm 109
Consolidated Financial Statements 110
Consolidated Statements of Earnings 110
Consolidated Statements of Comprehensive Income 111
Consolidated Statements of Financial Condition 112
Consolidated Statements of Changes in Shareholders' Equity 113
Consolidated Statements of Cash Flows 114
Notes to Consolidated Financial Statements 115
Note 1. Description of Business 115
Note 2. Basis of Presentation 115
Note 3. Significant Accounting Policies 116
Note 4. Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value 122
Note 5. Fair Value Measurements 123
Note 6. Cash Instruments 124
Note 7. Derivatives and Hedging Activities 130
Note 8. Fair Value Option 141
Note 9. Loans Receivable 147
Note 10. Collateralized Agreements and Financings 151
Note 11. Securitization Activities 155
Note 12. Variable Interest Entities 157
Note 13. Other Assets 161
Note 14. Deposits 164
Note 15. Short-Term Borrowings 164
Note 16. Long-Term Borrowings 165
Note 17. Other Liabilities and Accrued Expenses 168
Note 18. Commitments, Contingencies and Guarantees 168
Note 19. Shareholders' Equity 172
Note 20. Regulation and Capital Adequacy 175
Note 21. Earnings Per Common Share 183
Note 22. Transactions with Affiliated Funds 184
Note 23. Interest Income and Interest Expense 184

Page No.
Note 24. Income Taxes 185
Note 25. Business Segments 187
Note 26. Credit Concentrations 189
Note 27. Legal Proceedings 190
Note 28. Employee Benefit Plans 196
Note 29. Employee Incentive Plans 197
Note 30. Parent Company 199
Supplemental Financial Information 201
Quarterly Results 201
Common Stock Price Range 201
Common Stock Performance 201
Selected Financial Data 202
Statistical Disclosures 202
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 208
Item 9A
Controls and Procedures 208
Item 9B
Other Information 208
PART III 208
Item 10
Directors, Executive Officers and Corporate Governance 208
Item 11
Executive Compensation 208
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 208
Item 13
Certain Relationships and Related Transactions, and Director Independence 209
Item 14
Principal Accounting Fees and Services 209
PART IV 209
Item 15
Exhibits, Financial Statement Schedules 209
SIGNATURES 214



## PART I

## Item 1. Business

## Introduction

Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and individuals.

When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, and its consolidated subsidiaries.

References to “this Form 10-K” are to our Annual Report on Form 10-K for the year ended December 31, 2016. References to “the 2015 Form 10-K” are to our Annual Report on Form 10-K for the year ended December 31, 2015. All references to 2016, 2015 and 2014 refer to our years ended, or the dates, as the context requires, December 31, 2016, December 31, 2015 and December 31, 2014, respectively.

Group Inc. is a bank holding company and a financial holding company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary, Goldman Sachs Bank USA (GS Bank USA), is a New York State-chartered bank.

As of December 2016, we had offices in over 30 countries and 47% of our total staff was based outside the Americas. Our clients are located worldwide and we are an active participant in financial markets around the world. In 2016, we generated 40% of our net revenues outside the Americas. For more information about our geographic results, see Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

## Our Business Segments and Segment Operating Results

We report our activities in four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management.

The chart below presents our four business segments.



The table below presents our segment operating results.

<table><tr><td rowspan="2">$ in millions</td><td colspan="3">Year Ended December</td><td rowspan="2">% of 2016 Net Revenues</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Investment Banking</td><td></td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$ 6,273</td><td>$ 7,027</td><td>$ 6,464</td><td>21%</td></tr><tr><td>Operating expenses</td><td>3,437</td><td>3,713</td><td>3,688</td><td></td></tr><tr><td>Pre-tax earnings</td><td>$ 2,836</td><td>$ 3,314</td><td>$ 2,776</td><td></td></tr><tr><td>Institutional Client Services</td><td></td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$14,467</td><td>$15,151</td><td>$15,197</td><td>47%</td></tr><tr><td>Operating expenses</td><td>9,713</td><td>13,938</td><td>10,880</td><td></td></tr><tr><td>Pre-tax earnings</td><td>$ 4,754</td><td>$ 1,213</td><td>$ 4,317</td><td></td></tr><tr><td>Investing &amp; Lending</td><td></td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$ 4,080</td><td>$ 5,436</td><td>$ 6,825</td><td>13%</td></tr><tr><td>Operating expenses</td><td>2,386</td><td>2,402</td><td>2,819</td><td></td></tr><tr><td>Pre-tax earnings</td><td>$ 1,694</td><td>$ 3,034</td><td>$ 4,006</td><td></td></tr><tr><td>Investment Management</td><td></td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$ 5,788</td><td>$ 6,206</td><td>$ 6,042</td><td>19%</td></tr><tr><td>Operating expenses</td><td>4,654</td><td>4,841</td><td>4,647</td><td></td></tr><tr><td>Pre-tax earnings</td><td>$ 1,134</td><td>$ 1,365</td><td>$ 1,395</td><td></td></tr><tr><td>Total net revenues</td><td>$30,608</td><td>$33,820</td><td>$34,528</td><td></td></tr><tr><td>Total operating expenses</td><td>20,304</td><td>25,042</td><td>22,171</td><td></td></tr><tr><td>Total pre-tax earnings</td><td>$10,304</td><td>$ 8,778</td><td>$12,357</td><td></td></tr></table>



In the table above:

• Financial information related to our business segments for 2016, 2015 and 2014 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data,” which are in Part II, Items 7 and 8, respectively, of this Form 10-K. See Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a summary of our total net revenues, pretax earnings and net earnings by geographic region.

• Operating expenses includes provisions of $3.37 billion recorded in Institutional Client Services during 2015 for the settlement agreement with the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force. See Note 27 to the consolidated financial statements in Part II, Item 8 of the 2015 Form 10-K for further information.

• All operating expenses have been allocated to our segments except for charitable contributions of $114 million for 2016, $148 million for 2015 and $137 million for 2014.

## Investment Banking

Investment Banking serves public and private sector clients around the world. We provide financial advisory services and help companies raise capital to strengthen and grow their businesses. We seek to develop and maintain long-term relationships with a diverse global group of institutional clients, including governments, states and municipalities. Our goal is to deliver to our institutional clients the entire resources of the firm in a seamless fashion, with investment banking serving as the main initial point of contact with Goldman Sachs.

Financial Advisory. Financial Advisory includes strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management. In particular, we help clients execute large, complex transactions for which we provide multiple services, including cross-border structuring expertise. Financial Advisory also includes revenues from derivative transactions directly related to these client advisory assignments. We also assist our clients in managing their asset and liability exposures and their capital.
Underwriting. The other core activity of Investment Banking is helping companies raise capital to fund their businesses. As a financial intermediary, our job is to match the capital of our investing clients, who aim to grow the savings of millions of people, with the needs of our public and private sector clients, who need financing to generate growth, create jobs and deliver products and services. Our underwriting activities include public offerings and private placements, including local and cross-border transactions and acquisition financing, of a wide range of securities and other financial instruments, including loans. Underwriting also includes revenues from derivative transactions entered into with public and private sector clients in connection with our underwriting activities.

Equity Underwriting. We underwrite common and preferred stock and convertible and exchangeable securities. We regularly receive mandates for large, complex transactions and have held a leading position in worldwide public common stock offerings and worldwide initial public offerings for many years.

Debt Underwriting. We underwrite and originate various types of debt instruments, including investment-grade and high-yield debt, bank loans and bridge loans, including in connection with acquisition financing, and emerging- and growth-market debt, which may be issued by, among others, corporate, sovereign, municipal and agency issuers. In addition, we underwrite and originate structured securities, which include mortgage-related securities and other asset-backed securities.

## Institutional Client Services

Institutional Client Services serves our clients who come to us to buy and sell financial products, raise funding and manage risk. We do this by acting as a market maker and offering market expertise on a global basis. Institutional Client Services makes markets and facilitates client transactions in fixed income, equity, currency and commodity products. In addition, we make markets in and clear client transactions on major stock, options and futures exchanges worldwide.

As a market maker, we provide prices to clients globally across thousands of products in all major asset classes and markets. At times we take the other side of transactions ourselves if a buyer or seller is not readily available and at other times we connect our clients to other parties who want to transact. Our willingness to make markets, commit capital and take risk in a broad range of products is crucial to our client relationships. Market makers provide liquidity and play a critical role in price discovery, which contributes to the overall efficiency of the capital markets.



Our clients are primarily institutions that are professional market participants, including investment entities whose ultimate customers include individual investors investing for their retirement, buying insurance or putting aside surplus cash in a deposit account.

Through our global sales force, we maintain relationships with our clients, receiving orders and distributing investment research, trading ideas, market information and analysis. Much of this connectivity between us and our clients is maintained on technology platforms and operates globally wherever and whenever markets are open for trading.

Institutional Client Services and our other businesses are supported by our Global Investment Research division, which, as of December 2016, provided fundamental research on more than 3,000 companies worldwide and more than 40 national economies, as well as on industries, currencies and commodities.

Institutional Client Services generates revenues in the following ways:

• In large, highly liquid markets (such as markets for U.S. Treasury bills, large capitalization S&P 500 stocks or certain mortgage pass-through securities), we execute a high volume of transactions for our clients;

• In less liquid markets (such as mid-cap corporate bonds, growth market currencies or certain non-agency mortgage-backed securities), we execute transactions for our clients for spreads and fees that are generally somewhat larger than those charged in more liquid markets;

• We also structure and execute transactions involving customized or tailor-made products that address our clients’ risk exposures, investment objectives or other complex needs (such as a jet fuel hedge for an airline); and

• We provide financing to our clients for their securities trading activities, as well as securities lending and other prime brokerage services.

In connection with our market-making activities, we maintain inventory, typically for a short period of time, in response to, or in anticipation of, client demand. We also hold inventory to actively manage our risk exposures that arise from these market-making activities.
Institutional Client Services activities are organized by asset class and include both “cash” and “derivative” instruments. “Cash” refers to trading the underlying instrument (such as a stock, bond or barrel of oil). “Derivative” refers to instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors (such as an option, which is the right or obligation to buy or sell a certain bond or stock index on a specified date in the future at a certain price, or an interest rate swap, which is the agreement to convert a fixed rate of interest into a floating rate or vice versa).

Fixed Income, Currency and Commodities Client Execution. Includes client execution activities related to making markets in both cash and derivative instruments for interest rate products, credit products, mortgages, currencies and commodities.

• Interest Rate Products. Government bonds (including inflation-linked securities) across maturities, other government-backed securities, repurchase agreements, and interest rate swaps, options and other derivatives.

• Credit Products. Investment-grade corporate securities, high-yield securities, credit derivatives, exchange-traded funds, bank and bridge loans, municipal securities, emerging market and distressed debt, and trade claims.

• Mortgages. Commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations and other securities and loans), and other asset-backed securities, loans and derivatives.

• Currencies. Currency options, spot/forwards and other derivatives on G-10 currencies and emerging-market products.

• Commodities. Commodity derivatives and, to a lesser extent, physical commodities, involving crude oil and petroleum products, natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products.



Equities. Includes equities client execution, commissions and fees, and securities services.

Equities Client Execution. We make markets in equity securities and equity-related products, including exchange-traded funds, convertible securities, options, futures and over-the-counter (OTC) derivative instruments, on a global basis. As a principal, we facilitate client transactions by providing liquidity to our clients, including with large blocks of stocks or derivatives, requiring the commitment of our capital.

We also structure and make markets in derivatives on indices, industry groups, financial measures and individual company stocks. We develop strategies and provide information about portfolio hedging and restructuring and asset allocation transactions for our clients. We also work with our clients to create specially tailored instruments to enable sophisticated investors to establish or liquidate investment positions or undertake hedging strategies. We are one of the leading participants in the trading and development of equity derivative instruments.

Our exchange-based market-making activities include making markets in stocks and exchange-traded funds, futures and options on major exchanges worldwide.

Commissions and Fees. We generate commissions and fees from executing and clearing institutional client transactions on major stock, options and futures exchanges worldwide, as well as OTC transactions. We provide our clients with access to a broad spectrum of equity execution services, including electronic “low-touch” access and more complex “high-touch” execution through both traditional and electronic platforms.

Securities Services. Includes financing, securities lending and other prime brokerage services.

• Financing Services. We provide financing to our clients for their securities trading activities through margin loans that are collateralized by securities, cash or other acceptable collateral. We earn a spread equal to the difference between the amount we pay for funds and the amount we receive from our client.

• Securities Lending Services. We provide services that principally involve borrowing and lending securities to cover institutional clients' short sales and borrowing securities to cover our short sales and otherwise to make deliveries into the market. In addition, we are an active participant in broker-to-broker securities lending and third-party agency lending activities.
• Other Prime Brokerage Services. We earn fees by providing clearing, settlement and custody services globally. In addition, we provide our hedge fund and other clients with a technology platform and reporting which enables them to monitor their security portfolios and manage risk exposures.

## Investing & Lending

Our investing and lending activities, which are typically longer-term, include our investing and relationship lending activities across various asset classes, primarily debt securities and loans, public and private equity securities, infrastructure and real estate. These activities include investing directly in publicly and privately traded securities and in loans, and also through certain investment funds that we manage and through funds managed by external parties. We also provide financing to corporate clients and individuals, including bank loans, personal loans and mortgages.

Equity Securities. We make corporate, real estate, infrastructure and other equity-related investments.

Debt Securities and Loans. We make corporate, real estate, infrastructure and other debt investments. In addition, we provide credit to corporate clients through loan facilities and to individuals primarily through secured loans. We also make unsecured loans to individuals through our online platform.

## Investment Management

Investment Management provides investment and wealth advisory services to help clients preserve and grow their financial assets. Our clients include institutions and high-net-worth individuals, as well as retail investors who primarily access our products through a network of third-party distributors around the world.

We manage client assets across a broad range of asset classes and investment strategies, including equity, fixed income and alternative investments. Alternative investments primarily include hedge funds, credit funds, private equity, real estate, currencies, commodities, and asset allocation strategies. Our investment offerings include those managed on a fiduciary basis by our portfolio managers as well as strategies managed by third-party managers. We offer our investments in a variety of structures, including separately managed accounts, mutual funds, private partnerships, and other commingled vehicles.



We also provide customized investment advisory solutions designed to address our clients' investment needs. These solutions begin with identifying clients' objectives and continue through portfolio construction, ongoing asset allocation and risk management and investment realization. We draw from a variety of third-party managers as well as our proprietary offerings to implement solutions for clients.

We supplement our investment advisory solutions for high-net-worth clients with wealth advisory services that include income and liability management, trust and estate planning, philanthropic giving and tax planning. We also use our global securities and derivatives market-making capabilities to address clients' specific investment needs.

Management and Other Fees. The majority of revenues in management and other fees is comprised of asset-based fees on client assets. The fees that we charge vary by asset class and distribution channel and are affected by investment performance as well as asset inflows and redemptions. Other fees we receive primarily include financial counseling fees generated through our wealth advisory services.

Assets under supervision include client assets where we earn a fee for managing assets on a discretionary basis. This includes net assets in our mutual funds, hedge funds, credit funds and private equity funds (including real estate funds), and separately managed accounts for institutional and individual investors. Assets under supervision also include client assets invested with third-party managers, bank deposits and advisory relationships where we earn a fee for advisory and other services, but do not have investment discretion. Assets under supervision do not include the self-directed brokerage assets of our clients. Long-term assets under supervision represent assets under supervision excluding liquidity products. Liquidity products represent money market and bank deposit assets.

Incentive Fees. In certain circumstances, we are also entitled to receive incentive fees based on a percentage of a fund’s or a separately managed account’s return, or when the return exceeds a specified benchmark or other performance targets. Such fees include overrides, which consist of the increased share of the income and gains derived primarily from our private equity and credit funds when the return on a fund’s investments over the life of the fund exceeds certain threshold returns. Incentive fees are recognized only when all material contingencies are resolved.
Transaction Revenues. We receive commissions and net spreads for facilitating transactional activity in high-net-worth client accounts. In addition, we earn net interest income primarily associated with client deposits and margin lending activity undertaken by such clients.

## Other Activities

We accept deposits directly from individuals through our online platform. Our online deposits are used to finance, among other things, our lending activity and other inventory.

## Business Continuity and Information Security

Business continuity and information security, including cyber security, are high priorities for Goldman Sachs. Their importance has been highlighted by numerous highly publicized events in recent years, including cyber attacks against financial institutions, large consumer-based companies and other organizations that resulted in the unauthorized disclosure of personal information of clients and customers and other sensitive or confidential information and the theft and destruction of corporate information, and extreme weather events, such as Hurricane Sandy.

Our Business Continuity Program has been developed to provide reasonable assurance of business continuity in the event of disruptions at our critical facilities or systems and to comply with regulatory requirements, including those of FINRA. Because we are a bank holding company, our Business Continuity Program is also subject to review by the Federal Reserve Board. The key elements of the program are crisis planning and management, people recovery, business recovery, systems and data recovery, and process improvement. In the area of information security, we have developed and implemented a framework of principles, policies and technology designed to protect the information provided to us by our clients and that of the firm from cyber attacks and other misappropriation, corruption or loss. Safeguards are designed to maintain the confidentiality, integrity and availability of information.



## Employees

Management believes that a major strength and principal reason for the success of Goldman Sachs is the quality and dedication of our people and the shared sense of being part of a team. We strive to maintain a work environment that fosters professionalism, excellence, diversity, cooperation among our employees worldwide and high standards of business ethics.

Instilling the Goldman Sachs culture in all employees is a continuous process, in which training plays an important part. All employees are offered the opportunity to participate in education and periodic seminars that we sponsor at various locations throughout the world. Another important part of instilling the Goldman Sachs culture is our employee review process. Employees are reviewed by supervisors, co-workers and employees they supervise in a 360-degree review process that is integral to our team approach, and includes an evaluation of an employee's performance with respect to risk management, compliance and diversity. As of December 2016, we had 34,400 total staff.

## Competition

The financial services industry and all of our businesses are intensely competitive, and we expect them to remain so. Our competitors are other entities that provide investment banking, securities and investment management services, as well as those entities that make investments in securities, commodities, derivatives, real estate, loans and other financial assets. These entities include brokers and dealers, investment banking firms, commercial banks, insurance companies, investment advisers, mutual funds, hedge funds, private equity funds and merchant banks. We compete with some entities globally and with others on a regional, product or niche basis. Our competition is based on a number of factors, including transaction execution, products and services, innovation, reputation and price.

There has been substantial consolidation and convergence among companies in the financial services industry. Moreover, we have faced, and expect to continue to face, pressure to retain market share by committing capital to businesses or transactions on terms that offer returns that may not be commensurate with their risks. In particular, corporate clients seek such commitments (such as agreements to participate in their loan facilities) from financial services firms in connection with investment banking and other assignments.
Consolidation and convergence have significantly increased the capital base and geographic reach of some of our competitors, and have also hastened the globalization of the securities and other financial services markets. As a result, we have had to commit capital to support our international operations and to execute large global transactions. To take advantage of some of our most significant opportunities, we will have to compete successfully with financial institutions that are larger and have more capital and that may have a stronger local presence and longer operating history outside the U.S. We also compete with smaller institutions that offer more targeted services, such as independent advisory firms. Some clients may perceive these firms to be less susceptible to potential conflicts of interest than we are, and, as described below, our ability to effectively compete with them could be affected by regulations and limitations on activities that apply to us but may not apply to them.

A number of our businesses are subject to intense price competition. Efforts by our competitors to gain market share have resulted in pricing pressure in our investment banking and client execution businesses and could result in pricing pressure in other of our businesses. For example, the increasing volume of trades executed electronically, through the internet and through alternative trading systems, has increased the pressure on trading commissions, in that commissions for electronic trading are generally lower than for non-electronic trading. It appears that this trend toward low-commission trading will continue. In addition, we believe that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by further reducing prices, and as we enter into or expand our presence in markets that may rely more heavily on electronic trading and execution.

The provisions of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the requirements promulgated by the Basel Committee on Banking Supervision (Basel Committee) and other financial regulation could affect our competitive position to the extent that limitations on activities, increased fees and compliance costs or other regulatory requirements do not apply, or do not apply equally, to all of our competitors or are not implemented uniformly across different jurisdictions. For example, the provisions of the Dodd-Frank Act that prohibit proprietary trading and restrict investments in certain hedge and private equity funds differentiate between U.S.-based and non-U.S.-based banking organizations and give non-U.S.-based banking organizations greater flexibility to trade outside of the U.S. and to form and invest in funds outside the U.S.



Likewise, the obligations with respect to derivative transactions under Title VII of the Dodd-Frank Act depend, in part, on the location of the counterparties to the transaction. The impact of the Dodd-Frank Act and other regulatory developments on our competitive position will depend to a large extent on the manner in which the required rulemaking and regulatory guidance evolve, the extent of international convergence, and the development of market practice and structures under the new regulatory regimes as described further under “Regulation” below.

We also face intense competition in attracting and retaining qualified employees. Our ability to continue to compete effectively will depend upon our ability to attract new employees, retain and motivate our existing employees and to continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of large financial institutions. Our pay practices and those of certain of our competitors are subject to review by, and the standards of, the Federal Reserve Board and other regulators inside and outside the U.S., including the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in the U.K. We also compete for employees with institutions whose pay practices are not subject to regulatory oversight. See “Regulation — Compensation Practices” below and “Risk Factors — Our businesses may be adversely affected if we are unable to hire and retain qualified employees” in Part I, Item 1A of this Form 10-K for more information about the regulation of our compensation practices.

## Regulation

As a participant in the global financial services industry, we are subject to extensive regulation worldwide. Our businesses have been subject to increasing regulation and supervision in the U.S. and other countries.

In particular, the Dodd-Frank Act, and the rules thereunder, significantly altered the financial regulatory regime within which we operate. The capital, liquidity and leverage ratios based on the Basel Committee’s final capital framework for strengthening international capital standards (Basel III), as implemented by the Federal Reserve Board, the PRA and FCA and other national regulators, have also had a significant impact on our businesses. The Basel Committee is the primary global standard setter for prudential bank regulation, and its member jurisdictions implement regulations based on its standards and guidelines.
The implications of such regulations for our businesses continue to depend to a large extent on their implementation by the relevant regulators globally, as well as the development of market practices and structures under the regime established by such regulations.

Other reforms have been adopted or are being considered by regulators and policy makers worldwide, as described further throughout this section. Recent political developments, including the new presidential administration in the U.S., have added additional uncertainty to the implementation, scope and timing of regulatory reforms, including potential deregulation in some areas. On February 3, 2017, the President of the U.S. issued an executive order identifying “core principles” for the administration’s financial services regulatory policy and directing the Secretary of the Treasury, in consultation with the heads of other financial regulatory agencies, to evaluate how the current regulatory framework promotes or inhibits the principles and what actions have been, and are being, taken to promote the principles.

Goldman Sachs International (GSI) and Goldman Sachs International Bank (GSIB), our principal E.U. operating subsidiaries, are incorporated and headquartered in the U.K. and, as such, are subject to E.U. legal and regulatory requirements, based on directly binding regulations of the E.U. and the implementation of E.U. directives by the U.K. Both currently benefit from non-discriminatory access to E.U. clients and infrastructure based on E.U. treaties and E.U. legislation, including cross-border “passporting” arrangements and specific arrangements for the establishment of E.U. branches. There is considerable uncertainty as to the regulatory regime that will be applicable in the U.K. following the U.K. referendum vote to leave the European Union (Brexit) and the regulatory framework that will govern transactions and business undertaken by our U.K. subsidiaries in the remaining E.U. countries.

## Banking Supervision and Regulation

Group Inc. is a bank holding company under the U.S. Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under amendments to the BHC Act effected by the U.S. Gramm-Leach-Bliley Act of 1999 (GLB Act), and is subject to supervision and examination by the Federal Reserve Board.



Under the system of “functional regulation” established under the BHC Act, the Federal Reserve Board serves as the primary regulator of our consolidated organization. The primary regulators of our U.S. non-bank subsidiaries directly regulate the activities of those subsidiaries, with the Federal Reserve Board exercising a supervisory role. Such “functionally regulated” U.S. non-bank subsidiaries include broker-dealers registered with the SEC, such as our principal U.S. broker-dealer, Goldman, Sachs & Co. (GS&Co.), entities registered with or regulated by the CFTC with respect to futures-related and swaps-related activities and investment advisers registered with the SEC with respect to their investment advisory activities.

Various of our subsidiaries are regulated by the banking and securities regulatory authorities of the countries in which they operate.

Our principal U.S. bank subsidiary, GS Bank USA, is supervised and regulated by the Federal Reserve Board, the FDIC, the New York State Department of Financial Services (NYDFS) and the U.S. Consumer Financial Protection Bureau. A number of our activities are conducted partially or entirely through GS Bank USA and its subsidiaries, including: origination of bank loans; personal loans and mortgages; interest rate, credit, currency and other derivatives; leveraged finance; structured finance; deposit-taking; and agency lending. Our consumer-oriented activities are subject to extensive regulation and supervision by federal and state regulators with regard to consumer protection laws, including laws relating to fair lending and other practices in connection with marketing and providing consumer financial products.

GSI, our regulated U.K. broker-dealer subsidiary, which is designated as an investment firm, and GSIB, our regulated U.K. bank and principal non-U.S. bank subsidiary, are supervised and regulated by the PRA and the FCA. GSI provides broker-dealer services in and from the U.K., and GSIB acts as a primary dealer for European government bonds and is involved in market making in European government bonds, lending (including securities lending) and deposit-taking activities.

GSI, GSIB and other regulated entities in the E.U. are subject to directly binding regulations of the E.U. and national implementation of E.U. directives, where applicable.
Capital, Leverage and Liquidity Requirements. We are subject to consolidated regulatory capital and leverage requirements set forth by the Federal Reserve Board. GS Bank USA is subject to capital and leverage requirements that are calculated in substantially the same manner as those applicable to Group Inc., also set forth by the Federal Reserve Board. GSI is subject to capital requirements prescribed in the E.U. Capital Requirements Regulation (CRR) and the E.U. Fourth Capital Requirements Directive (CRD IV).

Under the Federal Reserve Board’s capital adequacy requirements, Group Inc. and GS Bank USA must meet specific regulatory capital requirements that involve quantitative measures of assets, liabilities and certain off-balance-sheet items. The sufficiency of our capital levels is also subject to qualitative judgments by regulators. Group Inc. and GS Bank USA are also subject to liquidity requirements established by the U.S. federal bank regulatory agencies, and GSI is subject to similar requirements established by U.K. regulatory authorities.

Capital Ratios. We are subject to the Federal Reserve Board’s revised risk-based capital and leverage regulations, inclusive of certain transitional provisions (Revised Capital Framework). The Revised Capital Framework is largely based on Basel III and also implements certain provisions of the Dodd-Frank Act. Under the Revised Capital Framework, we are an “Advanced approach” banking organization and have been designated as a global systemically important bank (G-SIB).

The Revised Capital Framework provides for three additional capital ratio requirements that phase in over time: (i) for capital conservation (capital conservation buffer), (ii) as a consequence of our designation as a G-SIB (G-SIB buffer) and (iii) for counter-cyclicality (counter-cyclical buffer). These additional capital ratio requirements must be satisfied entirely with capital that qualifies as Common Equity Tier 1 (CET1).

The capital conservation buffer 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 risk-weighted assets (RWAs) on January 1, 2019. The G-SIB buffer also began to phase in on January 1, 2016 and will continue to do so through January 1, 2019.



The counter-cyclical buffer, of up to 2.5%, is designed to counteract systemic vulnerabilities and applies only to “Advanced approach” banking organizations. The countercyclical buffer is currently set at zero percent. Several other national supervisors have also started to require countercyclical buffers. The G-SIB and counter-cyclical buffers applicable to us could change in the future and, as a result, the minimum capital ratios we are subject to could increase.

GS Bank USA also computes its capital ratios in accordance with the Revised Capital Framework as an “Advanced approach” banking organization.

The Basel Committee has published final guidelines for calculating incremental capital ratio requirements for banking institutions that are systemically significant from a domestic but not global perspective (D-SIBs). If these guidelines are implemented by national regulators, they will apply to, among others, certain subsidiaries of G-SIBs. These guidelines are in addition to the framework for G-SIBs, but are more principles-based. CRD IV and the CRR provide that institutions that are systemically important at the E.U. or member state level, known as other systemically important institutions (O-SIIs), may be subject to additional capital ratio requirements of up to 2% of CET1, according to their degree of systemic importance (O-SII buffers). O-SIIs are identified annually, along with their applicable buffers. During 2016, the PRA identified Goldman Sachs Group UK Limited (GSG UK), the parent company of GSI and GSIB, as an O-SII. GSG UK’s O-SII buffer is currently set at zero percent.

The Basel Committee has issued a series of updates that propose other changes to capital regulations. In particular, in January 2016, the Basel Committee finalized a revised framework for calculating minimum capital requirements for market risk, which is expected to increase market risk capital requirements for most banking organizations. The Basel Committee has set an effective date for reporting under the revised framework for market risk capital of December 31, 2019. The U.S. federal bank regulatory agencies have not yet proposed rules implementing these revisions for U.S. banking organizations. In November 2016, the European Commission proposed amendments to the CRR to implement these revisions for certain E.U. financial institutions, including GSI.

## The Basel Committee has also:

• Finalized a revised standard approach for calculating RWAs for counterparty credit risk on derivatives exposures (“Standardized Approach for measuring Counterparty Credit Risk exposures,” known as “SACCR”);

• Published guidelines for measuring and controlling large exposures (“Supervisory Framework for measuring and controlling Large Exposures”); and

• Issued consultation papers on, among other matters, a “Review of the Credit Valuation Adjustment Risk Framework,” revisions to the Basel Standardized and model-based approaches for credit risk and operational risk capital and the design of a capital floor framework based on the revised Standardized approach.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Capital Management and Regulatory Capital” in Part II, Item 7 of this Form 10-K and Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about our, GS Bank USA’s and GSI’s capital ratios and minimum required ratios.

As described under “Other Restrictions” below, in September 2016, the Federal Reserve Board issued a proposed rule that would, among other things, require financial holding companies to hold additional capital in connection with covered physical commodity activities.



Leverage Ratios. Under the Revised Capital Framework, we and GS Bank USA are subject to Tier 1 leverage requirements established by the Federal Reserve Board. The Revised Capital Framework also introduced a supplementary leverage ratio for “Advanced approach” banking organizations effective January 1, 2018 which implements the Basel III leverage ratio framework.

In November 2016, the European Commission proposed amendments to the CRR to implement a 3% minimum leverage ratio requirement for certain E.U. financial institutions, including GSI, which would implement the Basel III leverage ratio framework.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Capital Management and Regulatory Capital” in Part II, Item 7 of this Form 10-K and Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about our and GS Bank USA’s Tier 1 leverage ratios and supplementary leverage ratios and GSI’s leverage ratio.

Liquidity Ratios. The Basel Committee’s international framework for liquidity risk measurement, standards and monitoring requires banking organizations to measure their liquidity against two specific liquidity tests.

The liquidity coverage ratio (LCR) applicable to both Group Inc. and GS Bank USA is generally consistent with the Basel Committee’s framework and is designed to ensure that a banking organization maintains an adequate level of unencumbered high-quality liquid assets equal to or greater than the expected net cash outflows under an acute short-term liquidity stress scenario.

In December 2016, the Federal Reserve Board issued a final rule that requires bank holding companies to disclose, on a quarterly basis beginning with the second quarter of 2017, LCR averages over the quarter, quantitative and qualitative information on certain components of the LCR calculation and projected net cash outflows.
The LCR rule issued by the European Commission became effective in the U.K. on October 1, 2015, with a phase-in period whereby certain financial institutions, including GSI, must have a 90% and 100% minimum ratio commencing on January 1, 2017 and January 1, 2018, respectively.

The net stable funding ratio (NSFR) is designed to promote medium- and long-term stable funding of the assets and off-balance-sheet activities of banking organizations over a one-year time horizon. The Basel Committee’s NSFR framework requires banking organizations to maintain a minimum NSFR of 100%, and will be effective on January 1, 2018. In May 2016, the U.S. federal bank regulatory agencies issued a proposed rule that would implement an NSFR for large U.S. banking organizations, including Group Inc. The proposal would require banking organizations to ensure they have stable funding over a one-year time horizon. The proposed NSFR requirement has an effective date of January 1, 2018, including a requirement for quarterly public disclosure of the ratio, as well as a description of the banking organization’s stable funding sources.

In November 2016, the European Commission proposed amendments to the CRR to implement the NSFR for certain E.U. financial institutions, including GSI.

The enhanced prudential standards implemented by the Federal Reserve Board under the Dodd-Frank Act require bank holding companies with $50 billion or more in total consolidated assets (covered BHCs) to comply with enhanced liquidity and overall risk management standards, including a level of highly liquid assets based on projected funding needs for 30 days, and increased involvement by boards of directors in liquidity and overall risk management. Although the liquidity requirement under these rules has some similarities to the LCR, it is a separate requirement.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Overview and Structure of Risk Management” and “— Liquidity Risk Management” in Part II, Item 7 of this Form 10-K for information about the LCR and NSFR, as well as our risk management practices and liquidity.



Stress Tests. Covered BHCs, including Group Inc., are subject to Dodd-Frank Act annual supervisory stress tests conducted by the Federal Reserve Board and semi-annual company-run stress tests. The stress test rules require increased involvement by boards of directors in stress testing and public disclosure of the results of both the Federal Reserve Board’s annual stress tests and a bank holding company’s annual supervisory stress tests, and semi-annual internal stress tests.

We publish summaries of our annual and mid-cycle stress tests results on our website as described under “Available Information” below. Our annual Dodd-Frank Act stress test submission is incorporated into the annual capital plans that we submit to the Federal Reserve Board as part of the Comprehensive Capital Analysis and Review (CCAR). The purpose of CCAR is to ensure that large bank holding companies have robust, forward-looking capital planning processes that account for each institution’s unique risks and that permit continued operations during times of economic and financial stress. As part of CCAR, the Federal Reserve Board evaluates an institution’s plan to make capital distributions, such as repurchasing or redeeming stock or increasing dividend payments, across a range of macroeconomic and firm-specific assumptions.

GS Bank USA is also required to conduct stress tests on an annual basis, to submit the results to the Federal Reserve Board, and to make a summary of those results public. The rules require that the board of directors of GS Bank USA, among other things, consider the results of the stress tests in the normal course of the bank’s business, including, but not limited to, its capital planning, assessment of capital adequacy and risk management practices. GSI also has its own capital planning and stress testing process, which incorporates internally designed stress tests and those required under the PRA’s Internal Capital Adequacy Assessment Process.

Dividends and Stock Repurchases. Dividend payments by Group Inc. to its shareholders and stock repurchases by Group Inc. are subject to the oversight of the Federal Reserve Board. The dividend and share repurchase policies of large bank holding companies, such as Group Inc., are reviewed by the Federal Reserve Board through the CCAR process, based on capital plans and stress tests submitted by the bank holding company, and are assessed against, among other things, the bank holding company’s ability to meet and exceed minimum regulatory capital ratios under stressed scenarios, its expected sources and uses of capital over the planning horizon under baseline and stressed scenarios, and any potential impact of changes to its business plan and activities on its capital adequacy and liquidity.
The Federal Reserve Board’s capital plan rule includes a limitation on capital distributions to the extent that actual capital issuances are less than the amount indicated in the capital plan submission.

U.S. federal and state laws impose limitations on the payment of dividends by U.S. depository institutions, such as GS Bank USA. In general, 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. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by the entity in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, unless the entity obtains prior regulatory approval. Under the undivided profits test, a dividend may not be paid in excess of the entity’s “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus).

The applicable U.S. banking regulators have authority to prohibit or limit the payment of dividends if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. The BHC Act prohibits the Federal Reserve Board from requiring a payment by a holding company subsidiary to a depository institution if the functional regulator of that subsidiary objects to such payment. In such a case, the Federal Reserve Board could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.

Source of Strength. The Dodd-Frank Act requires bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. This support may be required by the Federal Reserve Board at times when we might otherwise determine not to provide it. Capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In addition, if a bank holding company commits to a U.S. federal banking agency that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve Board’s invoking its source-of-strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee for the holding company and the bank will be entitled to priority payment in respect of that commitment, ahead of other creditors of the bank holding company.



Transactions between Affiliates. Transactions between GS Bank USA or its subsidiaries, on the one hand, and Group Inc. or its other subsidiaries and affiliates, on the other hand, are regulated by the Federal Reserve Board. These regulations generally limit the types and amounts of transactions (including credit extensions from GS Bank USA or its subsidiaries to Group Inc. or its other subsidiaries and affiliates) that may take place and generally require those transactions to be on market terms or better to GS Bank USA or its subsidiaries. These regulations generally do not apply to transactions between GS Bank USA and its subsidiaries. The Dodd-Frank Act expanded the coverage and scope of these regulations, including by applying them to the credit exposure arising under derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions.

Resolution and Recovery. Group Inc. is required by the Federal Reserve Board and the FDIC to provide a periodic plan for its rapid and orderly resolution in the event of material financial distress or failure (resolution plan). Our resolution plan must, among other things, demonstrate that GS Bank USA is adequately protected from risks arising from our other entities. The regulators' joint rule sets specific standards for the resolution plans, including requiring a detailed resolution strategy and analyses of the company's material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. If the regulators jointly determine that an institution has failed to cure identified shortcomings in its resolution plan and that its resolution plan, after any permitted resubmission, is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the regulators may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations or may jointly order the institutions to divest assets or operations in order to facilitate orderly resolution in the event of failure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Capital Management and Regulatory Capital — Resolution and Recovery Plans” in Part II, Item 7 of this Form 10-K for information about our resolution plan.

We are also required by the Federal Reserve Board to submit, and have submitted, on a periodic basis, a global recovery plan that outlines the steps that management could take to reduce risk, maintain sufficient liquidity, and conserve capital in times of prolonged stress.
The FDIC has issued a rule requiring each insured depository institution with $50 billion or more in assets, such as GS Bank USA, to provide a resolution plan. Our resolution plan for GS Bank USA must, among other things, demonstrate that it is adequately protected from risks arising from our other entities.

The E.U. Bank Recovery and Resolution Directive (BRRD) establishes a framework for the recovery and resolution of financial institutions in the E.U., such as GSI. The BRRD provides national supervisory authorities with tools and powers to pre-emptively address potential financial crises in order to promote financial stability and minimize taxpayers' exposure to losses. The BRRD requires E.U. member states to grant "bail-in" powers to E.U. resolution authorities to recapitalize a failing entity by writing down its unsecured debt or converting its unsecured debt into equity. Financial institutions in the E.U. (including GSI) must provide that new contracts enable such actions and also amend pre-existing contracts governed by non-E.U. law to enable such actions, if the financial institutions could incur liabilities under such pre-existing contracts.

The BRRD also subjects financial institutions to a minimum requirement for own funds and eligible liabilities (MREL) so that they can be resolved without causing financial instability and without recourse to public funds in the event of a failure. The Bank of England’s rules on MREL are described below under “Total Loss-Absorbing Capacity.”

In May 2016, the Federal Reserve Board released a proposal that would impose restrictions on qualified financial contracts (QFCs) of G-SIBs. This proposal is intended to facilitate the orderly resolution of a failed G-SIB by limiting the ability of the G-SIB to transact with QFC counterparties unless such counterparties waive rights to terminate such contracts immediately upon the entry of the G-SIB or one of its affiliates into resolution. The effective date is proposed to be approximately one year after the proposal is finalized.



Total Loss-Absorbing Capacity. In December 2016, the Federal Reserve Board adopted a final rule establishing loss-absorbency and related requirements for U.S. G-SIBs such as Group Inc. The rule will be effective in January 2019 with no phase-in period. The rule addresses U.S. implementation of the Financial Stability Board’s (FSB) total loss-absorbing capacity (TLAC) principles and term sheet on minimum TLAC requirements for G-SIBs. The rule (i) establishes minimum TLAC requirements, (ii) establishes minimum “eligible long-term debt” (i.e., debt that is unsecured, has a maturity greater than one year from issuance and satisfies certain additional criteria) requirements, (iii) prohibits certain holding company transactions and (iv) caps the amount of G-SIB liabilities that are not eligible long-term debt.

The rule also prohibits a U.S. G-SIB from (i) guaranteeing liabilities of subsidiaries that are subject to early termination provisions if the parent company of a U.S. G-SIB enters into an insolvency or receivership proceeding, subject to an exception for guarantees permitted by rules of the U.S. federal banking agencies imposing restrictions on QFCs, which have not yet been adopted; (ii) incurring liabilities guaranteed by subsidiaries; (iii) issuing short-term debt; or (iv) entering into derivatives and certain other financial contracts with external counterparties.

Additionally, the rule caps, at 5% of the value of the U.S. G-SIB’s eligible TLAC, the amount of unsecured non-contingent third-party liabilities that are not eligible long-term debt that could rank equally with or junior to eligible long-term debt.

In October 2016, the Basel Committee issued a final standard to implement capital deductions for banking organizations relating to TLAC holdings of other G-SIBs. This standard will inform how the deductions are implemented by national regulators.

The FSB, an international body that sets standards and coordinates the work of national financial authorities and international standard-setting bodies, issued a final TLAC standard requiring certain material subsidiaries of a G-SIB organized outside of the G-SIB’s home country, such as GSI, to maintain amounts of TLAC to facilitate the transfer of losses from operating subsidiaries to the parent company. In December 2016, the FSB issued a consultative document that presents a set of guiding principles on the implementation of the TLAC requirements applicable to material subsidiaries. As an obligation of membership, the FSB’s members, including the U.S., commit to implement international financial standards, including those of the FSB.
The BRRD subjects institutions to MREL, which is generally consistent with the FSB’s TLAC standard. In November 2016, the Bank of England published its policy on setting MREL under which certain U.K. financial institutions will be required to maintain equity and liabilities sufficient to credibly bear losses in resolution. The Bank of England has not yet published its final policy on the calibration of MREL for entities that are parts of groups, such as GSI.

In November 2016, the European Commission proposed amendments to the CRR and BRRD that are designed to implement the FSB’s minimum TLAC requirement for G-SIBs commencing January 1, 2019. The proposal would require subsidiaries of a non-E.U. G-SIB that account for more than 5% of our RWAs, operating income or leverage exposure, such as GSI, to meet 90% of the requirement applicable to E.U. G-SIBs.

In November 2016, the European Commission also proposed an amendment to CRD IV that would require a non-E.U. G-SIB, such as Group Inc., to establish an E.U. intermediate holding company (E.U. IHC) if the firm has two or more of certain types of E.U. financial institution subsidiaries, including broker-dealers and banks, such as GSI and GSIB. This proposal is subject to adoption at the E.U. level and implementing rulemakings by E.U. member states. The European Commission also proposed amendments to the CRR that would require E.U. IHCs to satisfy MREL requirements and certain other prudential requirements.

Insolvency of an Insured Depository Institution or a Bank Holding Company. Under the Federal Deposit Insurance Act of 1950, if the FDIC is appointed as conservator or receiver for an insured depository institution such as GS Bank USA, upon its insolvency or in certain other events, the FDIC has broad powers, including the power:

• To transfer any of the depository institution’s assets and liabilities to a new obligor, including a newly formed “bridge” bank, without the approval of the depository institution’s creditors;

• To enforce the depository institution’s contracts pursuant to their terms without regard to any provisions triggered by the appointment of the FDIC in that capacity; or

• To repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.



In addition, the claims of holders of domestic deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded a priority over other general unsecured claims, including deposits at non-U.S. branches and claims of debtholders of the institution, in the “liquidation or other resolution” of such an institution by any receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of GS Bank USA, the debtholders (other than depositors) would be treated differently from, and could receive, if anything, substantially less than, the depositors of GS Bank USA.

The Dodd-Frank Act created a new resolution regime (known as “orderly liquidation authority (OLA)”) for bank holding companies and their affiliates that are systemically important and certain non-bank financial companies. Under OLA, the FDIC may be appointed as receiver for the systemically important institution and its failed non-bank subsidiaries if, upon the recommendation of applicable regulators, the U.S. Secretary of the Treasury determines, among other things, that the institution is in default or in danger of default, that the institution’s failure would have serious adverse effects on the U.S. financial system and that resolution under OLA would avoid or mitigate those effects.

If the FDIC is appointed as receiver under OLA, then the powers of the receiver, and the rights and obligations of creditors and other parties who have dealt with the institution, would be determined under OLA, and not under the bankruptcy or insolvency law that would otherwise apply. The powers of the receiver under OLA were generally based on the powers of the FDIC as receiver for depository institutions under the Federal Deposit Insurance Act.

Substantial differences in the rights of creditors exist between OLA and the U.S. Bankruptcy Code, including the right of the FDIC under OLA to disregard the strict priority of creditor claims in some circumstances, the use of an administrative claims procedure to determine creditors' claims (as opposed to the judicial procedure utilized in bankruptcy proceedings), and the right of the FDIC to transfer claims to a "bridge" entity. In addition, OLA limits the ability of creditors to enforce certain contractual cross-defaults against affiliates of the institution in receivership.
The OLA provisions of the Dodd-Frank Act became effective upon enactment. The FDIC has completed several rulemakings and taken other actions under OLA, including the issuance of a notice describing some elements of its “single point of entry” or “SPOE” strategy pursuant to the OLA provisions of the Dodd-Frank Act. Under this strategy, the FDIC would, among other things, resolve a failed financial holding company by transferring its assets to a “bridge” holding company.

We, along with a number of other major global banking organizations, adhere to the International Swaps and Derivatives Association Resolution Stay Protocol (the ISDA Protocol) that was developed and updated in coordination with the FSB. The ISDA Protocol imposes a stay on certain cross-default and early termination rights within standard ISDA derivatives contracts and securities financing transactions between adhering parties in the event that one of them is subject to resolution in its home jurisdiction, including a resolution under OLA in the U.S. The ISDA Protocol is expected to be adopted more broadly in the future, following the adoption of regulations by banking regulators (including the Federal Reserve Board’s proposal on QFCs described above), and expanded to include instances where a U.S. financial holding company becomes subject to proceedings under the U.S. Bankruptcy Code.

FDIC Insurance. GS Bank USA accepts deposits, and those deposits have the benefit of FDIC insurance up to the applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, such as GS Bank USA. The amounts of these assessments for larger depository institutions (generally those that have $10 billion in assets or more), such as GS Bank USA, are currently based on the average total consolidated assets less the average tangible equity of the insured depository institution during the assessment period, the supervisory ratings of the insured depository institution and specified forward-looking financial measures used to calculate the assessment rate. The assessment rate is subject to adjustment by the FDIC.

In March 2016, the FDIC adopted a final rule increasing the reserve ratio for the Deposit Insurance Fund to 1.35% of total insured deposits. The rule imposes a surcharge on the assessments of larger depository institutions, that began in the third quarter of 2016 and continues through the earlier of the quarter that the reserve ratio first reaches or exceeds 1.35% and December 31, 2018. Under the rule, if the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall assessment on larger depository institutions, including GS Bank USA.



Prompt Corrective Action. The U.S. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” in respect of depository institutions that do not meet specified capital requirements. FDICIA establishes five capital categories for FDIC-insured banks: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, as the capital category of an institution declines. Failure to meet the capital requirements could also require a depository institution to raise capital. Ultimately, critically undercapitalized institutions are subject to the appointment of a receiver or conservator, as described under “Insolvency of an Insured Depository Institution or a Bank Holding Company” above.

The prompt corrective action regulations apply only to depository institutions and not to bank holding companies such as Group Inc. However, the Federal Reserve Board is authorized to take appropriate action at the holding company level, based upon the undercapitalized status of the holding company’s depository institution subsidiaries. In certain instances relating to an undercapitalized depository institution subsidiary, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiary’s capital restoration plan and might be liable for civil money damages for failure to fulfill its commitments on that guarantee. Furthermore, in the event of the bankruptcy of the holding company, the guarantee would take priority over the holding company’s general unsecured creditors, as described under “Source of Strength” above.

Activities. The Dodd-Frank Act and the BHC Act generally restrict bank holding companies from engaging in business activities other than the business of banking and certain closely related activities.
Volcker Rule. The provisions of the Dodd-Frank Act referred to as the “Volcker Rule” became effective in July 2015. The Volcker Rule prohibits “proprietary trading,” but permits activities such as underwriting, market making and risk-mitigation hedging, requires an extensive compliance program and includes additional reporting and record-keeping requirements. The reporting requirements include calculating daily quantitative metrics on covered trading activities (as defined in the rule) and providing these metrics to regulators on a monthly basis.

In addition, the Volcker Rule limits the sponsorship of, and investment in, “covered funds” (as defined in the rule) by banking entities, including Group Inc. and its subsidiaries. It also limits certain types of transactions between us and our sponsored funds, similar to the limitations on transactions between depository institutions and their affiliates. Covered funds include our private equity funds, certain of our credit and real estate funds, our hedge funds and certain other investment structures. The limitation on investments in covered funds requires us to reduce our investment in each such fund to 3% or less of the fund’s net asset value, and to reduce our aggregate investment in all such funds to 3% or less of our Tier 1 capital.

In July 2016, the Federal Reserve Board extended the conformance period through July 2017 for investments in, and relationships with, covered funds that were in place prior to December 31, 2013. In December 2016, the Federal Reserve Board released guidance regarding the extended conformance period available for legacy “illiquid funds” (as defined in the Volcker Rule) and the process for banking entities to request an extension of the conformance period for those funds of up to an additional five years beyond the expiration of the general conformance period in July 2017. See “Risk Factors” in Part I, Item 1A of this Form 10-K and Note 6 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about our investments in covered funds.



Other Restrictions. Financial holding companies generally can engage in a broader range of financial and related activities than are otherwise permissible for bank holding companies as long as they continue to meet the eligibility requirements for financial holding companies. The broader range of permissible activities for financial holding companies includes underwriting, dealing and making markets in securities and making investments in non-financial companies (merchant banking activities). In addition, certain financial holding companies are permitted under the GLB Act to engage in certain commodities activities in the U.S. that may otherwise be impermissible for bank holding companies, so long as the assets held pursuant to these activities do not equal 5% or more of their consolidated assets.

The Federal Reserve Board, however, has the authority to limit a financial holding company’s ability to conduct activities that would otherwise be permissible, and will likely do so if the financial holding company does not satisfactorily meet certain requirements of the Federal Reserve Board. For example, if a financial holding company or any of its U.S. depository institution subsidiaries ceases to maintain its status as well-capitalized or well-managed, the Federal Reserve Board may impose corrective capital and/or managerial requirements, as well as additional limitations or conditions. If the deficiencies persist, the financial holding company may be required to divest its U.S. depository institution subsidiaries or to cease engaging in activities other than the business of banking and certain closely related activities.

If any insured depository institution subsidiary of a financial holding company fails to maintain at least a “satisfactory” rating under the Community Reinvestment Act, the financial holding company would be subject to similar restrictions on activities.

In addition, we are required to obtain prior Federal Reserve Board approval before engaging in certain banking and other financial activities both within and outside the U.S.
In September 2016, the Federal Reserve Board issued a proposed rule which, if adopted, would impose new requirements on the physical commodity activities and certain merchant banking activities of financial holding companies. The proposed rule would, among other things, (i) require companies to hold additional capital in connection with covered physical commodity activities, including merchant banking investments in companies engaged in physical commodity activities; (ii) tighten the quantitative limits on permissible physical trading activity; and (iii) establish new public reporting requirements on the nature and extent of firms' physical commodity holdings and activities. In addition, in a September 2016 report, the Federal Reserve Board recommended that Congress repeal (i) the authority of financial holding companies to engage in merchant banking activities; and (ii) the authority described above for certain financial holding companies to engage in certain otherwise permissible commodities activities.

In March 2016, the Federal Reserve Board issued a revised proposal regarding single counterparty credit limits, which would impose more stringent requirements for credit exposures among major financial institutions. Such limits (together with other provisions incorporated into the Basel III capital rules) may affect our ability to transact or hedge with other financial institutions. In addition, the Federal Reserve Board has proposed early remediation requirements, which are modeled on the prompt corrective action regime, described under “Prompt Corrective Action” above, but are designed to require action to begin in earlier stages of a company’s financial distress, based on a range of triggers, including capital and leverage, stress test results, liquidity and risk management.

In addition, New York State banking law imposes lending limits (which take into account credit exposure from derivative transactions) and other requirements that could impact the manner and scope of GS Bank USA’s activities.

The U.S. federal bank regulatory agencies have issued guidance that focuses on transaction structures and risk management frameworks and that outlines high-level principles for safe-and-sound leveraged lending, including underwriting standards, valuation and stress testing. This guidance has, among other things, limited the percentage amount of debt that can be included in certain transactions.



## Broker-Dealer and Securities Regulation

Our broker-dealer subsidiaries are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices, use and safekeeping of clients' funds and securities, capital structure, recordkeeping, the financing of clients' purchases, and the conduct of directors, officers and employees. In the U.S., the SEC is the federal agency responsible for the administration of the federal securities laws. GS&Co. is registered as a broker-dealer, a municipal advisor and an investment adviser with the SEC and as a broker-dealer in all 50 states and the District of Columbia. U.S. self-regulatory organizations, such as FINRA and the NYSE, adopt rules that apply to, and examine, broker-dealers such as GS&Co.

In addition, U.S. state securities and other U.S. regulators also have regulatory or oversight authority over GS&Co. Similarly, our businesses are also subject to regulation by various non-U.S. governmental and regulatory bodies and self-regulatory authorities in virtually all countries where we have offices, as described further below, as well as under “Other Regulation.” For a description of net capital requirements applicable to GS&Co., see Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

In Europe, we provide broker-dealer services that are subject to oversight by national regulators. These services are regulated in accordance with national laws, many of which implement E.U. directives, and, increasingly, by directly applicable E.U. regulations. These national and E.U. laws require, among other things, compliance with certain capital adequacy standards, customer protection requirements and market conduct and trade reporting rules.

Goldman Sachs Japan Co., Ltd. (GSJCL), our regulated Japanese broker-dealer, is subject to capital requirements imposed by Japan’s Financial Services Agency. GSJCL is also regulated by the Tokyo Stock Exchange, the Osaka Exchange, the Tokyo Financial Exchange, the Japan Securities Dealers Association, the Tokyo Commodity Exchange, Securities and Exchange Surveillance Commission, Bank of Japan, the Ministry of Finance and the Ministry of Economy, Trade and Industry, among others.
Also, the Securities and Futures Commission in Hong Kong, the Monetary Authority of Singapore, the China Securities Regulatory Commission, the Korean Financial Supervisory Service, the Reserve Bank of India, the Securities and Exchange Board of India, the Australian Securities and Investments Commission and the Australian Securities Exchange, among others, regulate various of our subsidiaries and also have capital standards and other requirements comparable to the rules of the SEC. Various of our other subsidiaries are regulated by the banking and regulatory authorities in jurisdictions in which we operate, including, among others, Brazil and Dubai.

Our exchange-based market-making activities are subject to extensive regulation by a number of securities exchanges. As a market maker on exchanges, we are required to maintain orderly markets in the securities to which we are assigned.

The Dodd-Frank Act will result in additional regulation by the SEC, the CFTC and other regulators of our broker-dealer and regulated subsidiaries in a number of respects. The law calls for the imposition of expanded standards of care by market participants in dealing with clients and customers, including by providing the SEC with authority to adopt rules establishing fiduciary duties for broker-dealers and directing the SEC to examine and improve sales practices and disclosure by broker-dealers and investment advisers.

In addition, in April 2016, the U.S. Department of Labor issued final rules expanding the circumstances in which a person would be treated as a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) by reason of providing investment advice to retirement plans and individual retirement accounts, as well as final exemptions. These rules and exemptions are scheduled to become effective on April 10, 2017. On February 3, 2017, the President of the U.S. directed the Secretary of Labor to prepare an updated analysis of the likely impact of the rules and to consider whether to propose to rescind or revise the rules.



Our U.S. broker-dealer and other U.S. subsidiaries are also subject to rules adopted by U.S. federal agencies pursuant to the Dodd-Frank Act that require any person who organizes or initiates an asset-backed security transaction to retain a portion (generally, at least five percent) of any credit risk that the person conveys to a third party. Securitizations would also be affected by rules proposed by the SEC to implement the Dodd-Frank Act's prohibition against securitization participants engaging in any transaction that would involve or result in any material conflict of interest with an investor in a securitization transaction. The proposed rules would exempt bona fide market-making activities and risk-mitigating hedging activities in connection with securitization activities from the general prohibition.

The SEC, FINRA and regulators in various non-U.S. jurisdictions have imposed both conduct-based and disclosure-based requirements with respect to research reports and research analysts and may impose additional regulations.

Swaps, Derivatives and Commodities Regulation
The commodity futures, commodity options and swaps industry in the U.S. is subject to regulation under the U.S. Commodity Exchange Act (CEA). The CFTC is the U.S. federal agency charged with the administration of the CEA. In addition, the SEC is the U.S. federal agency charged with the regulation of security-based swaps. GS&Co. is registered with the CFTC as a futures commission merchant, and several of our subsidiaries, including GS&Co., are registered with the CFTC and act as commodity pool operators, commodity trading advisors and/or swap dealers, and are subject to CFTC regulations. The rules and regulations of various self-regulatory organizations, such as the Chicago Board of Trade and the Chicago Mercantile Exchange, other futures exchanges and the National Futures Association, also govern the commodity futures, commodity options and swaps activities of these entities. In addition, Goldman Sachs Financial Markets, L.P. is registered with the SEC as an OTC derivatives dealer and conducts certain OTC derivatives activities.
The Dodd-Frank Act provides for significantly increased regulation of, and restrictions on, derivative markets and transactions. In particular, the Dodd-Frank Act imposes the following requirements relating to swaps and security-based swaps:

• Real-time public and regulatory reporting of trade information for swaps and security-based swaps and large trader reporting for swaps;

• Registration of swap dealers and major swap participants with the CFTC and of security-based swap dealers and major security-based swap participants with the SEC;

• Position limits, aggregated generally across commonly controlled accounts and commonly controlled affiliates, that cap exposure to derivatives on certain physical commodities;

• Mandated clearing through central counterparties and execution through regulated exchanges or electronic facilities for certain swaps and security-based swaps;

• New business conduct standards and other requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants, covering their relationships with counterparties, internal oversight and compliance structures, conflict of interest rules, internal information barriers, general and trade-specific record-keeping and risk management;

• Margin requirements for trades that are not cleared through a central counterparty; and

• Entity-level capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants.

The terms “swaps” and “security-based swaps” are generally defined broadly for purposes of these requirements, and can include a wide variety of derivative instruments in addition to those conventionally called swaps. The definition includes certain forward contracts, options, certain loan participations and guarantees of swaps, subject to certain exceptions, and relates to a wide variety of underlying assets or obligations, including currencies, commodities, interest or other monetary rates, yields, indices, securities, credit events, loans and other financial obligations.



In general, the CFTC is responsible for issuing rules relating to swaps, swap dealers and major swap participants, and the SEC is responsible for issuing rules relating to security-based swaps, security-based swap dealers and major security-based swap participants. The U.S. federal bank regulatory agencies (acting jointly) are responsible for issuing margin rules for uncleared swaps and security-based swaps for swap dealers, security-based swap dealers, major swap participants and major security-based swap participants subject to their oversight. In September 2016, the final margin rules issued by the U.S. federal bank regulatory agencies and the CFTC for uncleared swaps became effective. These rules will phase in through March 2017 for variation margin requirements and through September 2020 for initial margin requirements depending on the level of swaps, security-based swaps and/or exempt foreign exchange derivative transaction activity of the swap dealer and the relevant counterparty. The final rules of the U.S. federal bank regulatory agencies generally apply to inter-affiliate transactions, with limited relief available from initial margin requirements for affiliates. Under the CFTC final rules, inter-affiliate transactions are exempt from initial margin requirements with certain exceptions but variation margin requirements still apply.

In December 2016, the CFTC proposed revised capital regulations for swap dealers and major swap participants that are not subject to the capital rules of a prudential regulator, such as the Federal Reserve Board, as well as a liquidity requirement for those swap dealers. However, many other requirements, including registration of swap dealers, mandatory clearing and execution of certain swaps, business conduct standards and real-time public trade reporting, have taken effect already under CFTC rules, and the SEC and the CFTC have finalized the definitions of a number of key terms. Finally, the CFTC has begun to decide which swaps must be cleared through central counterparties and executed on swap execution facilities or exchanges. In particular, certain interest rate swaps and credit default swaps are now subject to these clearing and trade-execution requirements. The CFTC is expected to continue to make such determinations during 2017.
The SEC has adopted rules relating to trade reporting and real-time reporting requirements for security-based swap dealers and major security-based swap participants. The SEC has also adopted final rules relating to the registration of, and application of business conduct standards to, security-based swap dealers and major security-based swap participants, but compliance with such rules is not currently required. The SEC has proposed, but not yet finalized, rules to impose margin, capital and segregation requirements for security-based swap dealers and major security-based swap participants. The SEC has also proposed rules that would govern the design of new trading venues for security-based swaps and establish the process for determining which products must be traded on these venues.

We have registered certain subsidiaries as “swap dealers” under the CFTC rules, including GS&Co., GS Bank USA, GSI and J. Aron & Company. We also expect to register certain subsidiaries as security-based swap dealers.

Similar regulations have been proposed or adopted in jurisdictions outside the U.S., including the adoption of standardized execution and clearing, margining and reporting requirements for OTC derivatives. For instance, the E.U. has established regulatory requirements for OTC derivatives activities under the European Market Infrastructure Regulation, including requirements relating to portfolio reconciliation and reporting, clearing certain OTC derivatives and margining for uncleared derivatives.

The CFTC and SEC have issued guidance and rules relating to swap activities. The CFTC has provided guidance and timing on the cross-border regulation of swaps and announced that it had reached an understanding with the European Commission regarding the cross-border regulation of derivatives and the common goals underlying their respective regulations. The CFTC also approved certain comparability determinations that would permit substituted compliance with non-U.S. regulatory regimes for certain swap regulations related to certain business conduct requirements, including chief compliance officer duties, conflict of interest rules, monitoring of position limits, record-keeping and risk management.



The SEC issued rules and guidance on cross-border security-based swap activities and the CFTC issued rules that determine the circumstances under which registered swap dealers are subject to the CFTC’s rules regarding margin in connection with uncleared swaps in cross-border transactions. In particular, certain non-U.S. swap dealers are generally required to comply with the CFTC’s rules but, with respect to the requirement to post margin, these non-U.S. swap dealers are permitted to comply with comparable margin requirements in a foreign jurisdiction, subject to the CFTC’s approval of the particular jurisdiction. Substituted compliance is also available with respect to the collection of margin in certain circumstances. The CFTC’s rules are only applicable to those swap dealers that are not subject to the margin requirements of a prudential regulator.

In October 2016, the CFTC proposed rules addressing the extent to which swap dealers and major swap participants would be required to comply with the CFTC’s business conduct standards in cross-border transactions. The proposal also would determine the circumstances under which U.S. and non-U.S. persons would be required to include their cross-border swap dealing transactions or swap positions in their calculations of the level of activity subject to CFTC jurisdiction for purposes of determining whether they are required to register as either a swap dealer or major swap participant.

The application of new derivatives rules across different national and regulatory jurisdictions has not yet been fully established and specific determinations of the extent to which regulators in each of the relevant jurisdictions will defer to regulations in other jurisdictions have not yet been completed. The full impact of the various U.S. and non-U.S. regulatory developments in this area will not be known with certainty until all the rules are finalized and implemented and market practices and structures develop under the final rules.

J. Aron & Company is authorized by the U.S. Federal Energy Regulatory Commission (FERC) to sell wholesale physical power at market-based rates. As a FERC-authorized power marketer, J. Aron & Company is subject to regulation under the U.S. Federal Power Act and FERC regulations and to the oversight of FERC. As a result of our investing activities, Group Inc. is also an “exempt holding company” under the U.S. Public Utility Holding Company Act of 2005 and applicable FERC rules.
In addition, as a result of our power-related and commodities activities, we are subject to energy, environmental and other governmental laws and regulations, as described under “Risk Factors — Our commodities activities, particularly our physical commodities activities, subject us to extensive regulation and involve certain potential risks, including environmental, reputational and other risks that may expose us to significant liabilities and costs” in Part I, Item 1A of this Form 10-K.

## Investment Management Regulation

Our investment management business is subject to significant regulation in numerous jurisdictions around the world relating to, among other things, the safeguarding of client assets, offerings of funds, marketing activities, transactions among affiliates and our management of client funds.

Certain of our subsidiaries are registered with, and subject to oversight by, the SEC as investment advisers. The SEC has adopted amendments to the rules that govern SEC-registered money market mutual funds. The amended rules require institutional prime money market funds to value their portfolio securities using market-based factors and to sell and redeem their shares based on a floating net asset value. In addition, the rules allow, in certain circumstances, for the board of directors of money market mutual funds to impose liquidity fees and redemption gates and also require additional disclosure, reporting and stress testing.

In October 2016, the SEC also adopted rules relating to liquidity risk management that, among others, require registered open-end funds to adopt and implement liquidity risk management programs, establish a minimum percentage of their net assets that will be invested in highly liquid investments and adopt policies and procedures to address shortfalls in meeting that minimum (applicable only to funds that do not primarily hold assets that are highly liquid), and classify and review the liquidity of their portfolio assets. The rules also permit funds to employ “swing pricing,” under which the net asset value of a fund’s shares may be adjusted in order to pass the cost of trading in such shares to purchasing or redeeming shareholders. In addition, the rules require funds to make disclosures relating to their liquidity risk management program and swing pricing policies.



In December 2015, the SEC also proposed a rule regulating the use of derivatives by registered funds. Under the proposed rule, a registered fund would be required to, among other things, comply with one of two alternative portfolio limitations designed to impose a limit on the total amount of leverage the fund can obtain through derivatives transactions; maintain a minimum amount of “qualifying coverage assets” (generally limited to cash and cash equivalents) to support payment obligations for each derivative transaction; establish a derivatives risk management program if derivative use meets specified thresholds; and comply with new record-keeping, disclosure and reporting requirements related to its use of derivatives.

Certain of our European subsidiaries are subject to the Alternative Investment Fund Managers Directive and related regulations, which govern the approval, organizational, marketing and reporting requirements of E.U.-based alternative investment managers and the ability of alternative investment fund managers located outside the E.U. to access the E.U. market.

The E.U. legislative institutions have reached provisional agreement on an E.U. regulation relating to money market funds, including provisions prescribing minimum levels of daily and weekly liquidity, clear labeling of money market funds and internal credit risk assessments. This E.U. regulation is currently expected to be published in the second quarter of 2017 and is expected to apply from early 2018 (subject to transitional provisions).

## Compensation Practices

Our compensation practices are subject to oversight by the Federal Reserve Board and, with respect to some of our subsidiaries and employees, by other financial regulatory bodies worldwide. The scope and content of compensation regulation in the financial industry are continuing to develop, and we expect that these regulations and resulting market practices will evolve over a number of years. The U.S. federal bank regulatory agencies have provided guidance designed to ensure that incentive compensation arrangements at banking organizations take into account risk and are consistent with safe and sound practices. The guidance sets forth the following three key principles with respect to incentive compensation arrangements: (i) the arrangements should provide employees with incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) the arrangements should be compatible with effective controls and risk management; and (iii) the arrangements should be supported by strong corporate governance. The guidance provides that supervisory findings with respect to incentive compensation will be incorporated, as appropriate, into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance also provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk management, control or governance processes pose a risk to the organization’s safety and soundness.

The FSB has released standards for local regulators to implement certain compensation principles for banks and other financial companies designed to encourage sound compensation practices. In the E.U., the CRR and CRD IV include compensation provisions designed to implement the FSB’s compensation standards. These rules have been implemented by E.U. member states and, among other things, limit the ratio of variable to fixed compensation of certain employees, including those identified as having a material impact on the risk profile of E.U.-regulated entities, including GSI.

The E.U. has also introduced rules regulating compensation for certain persons providing services to certain investment funds. These requirements are in addition to the guidance issued by U.S. financial regulators described above and the Dodd-Frank Act provision described below.

During the second quarter of 2016, the U.S. financial regulators, including the Federal Reserve Board and the SEC, proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (including Group Inc. and some of its depository institution, broker-dealer and investment adviser subsidiaries).



The proposed revised rules would establish general qualitative requirements applicable to all covered entities, additional specific requirements for entities with total consolidated assets of at least $50 billion and further, more stringent requirements for those with total consolidated assets of at least $250 billion. The general qualitative requirements include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping.

For larger financial institutions, the proposed revised rules would also introduce additional requirements applicable only to “senior executive officers” and “significant risk-takers” (as defined in the proposed rules), including (i) limits on performance measures and leverage relating to performance targets; (ii) minimum deferral periods; and (iii) subjecting incentive compensation to possible downward adjustment, forfeiture and clawback.

In October 2016, the NYDFS issued guidance emphasizing that its regulated banking institutions, including GS Bank USA, must ensure that any incentive compensation arrangements tied to employee performance indicators are subject to effective risk management, oversight and control.

## Anti-Money Laundering and Anti-Bribery Rules and Regulations

The U.S. Bank Secrecy Act (BSA), as amended by the USA PATRIOT Act of 2001 (PATRIOT Act), contains anti-money laundering and financial transparency laws and mandated the implementation of various regulations applicable to all financial institutions, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. Through these and other provisions, the BSA and the PATRIOT Act seek to promote the identification of parties that may be involved in terrorism, money laundering or other suspicious activities. Anti-money laundering laws outside the U.S. contain some similar provisions.
In addition, we are subject to laws and regulations worldwide, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to corrupt and illegal payments to, and hiring practices with regard to, government officials and others. The scope of the types of payments or other benefits covered by these laws is very broad and regulators are frequently using enforcement proceedings to define the scope of these laws. The obligation of financial institutions, including Goldman Sachs, to identify their clients, to monitor for and report suspicious transactions, to monitor direct and indirect payments to government officials, to respond to requests for information by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls.

## Privacy and Cyber Security Regulation

Certain of our businesses are subject to laws and regulations enacted by U.S. federal and state governments, the E.U. or other non-U.S. jurisdictions and/or enacted by various regulatory organizations or exchanges relating to the privacy of the information of clients, employees or others, including the GLB Act, the E.U. Data Protection Directive, the Japanese Personal Information Protection Act, the Hong Kong Personal Data (Privacy) Ordinance, the Australian Privacy Act and the Brazilian Bank Secrecy Law.

In February 2017, the NYDFS adopted regulations that will, beginning March 1, 2017, require financial institutions regulated by the NYDFS, including GS Bank USA, to, among other things, (i) establish and maintain a cyber security program designed to ensure the confidentiality, integrity and availability of their information systems; (ii) implement and maintain a written cyber security policy setting forth policies and procedures for the protection of their information systems and nonpublic information; and (iii) designate a Chief Information Security Officer. In addition, in October 2016, the U.S. federal bank regulatory agencies issued an advance notice of proposed rulemaking on potential enhanced cyber risk management standards for large financial institutions.



## Other Regulation

U.S. and non-U.S. government agencies, regulatory bodies and self-regulatory organizations, as well as state securities commissions and other state regulators in the U.S., are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders, or the suspension or expulsion of a regulated entity or its directors, officers or employees. In addition, a number of our other activities require us to obtain licenses, adhere to applicable regulations and be subject to the oversight of various regulators in the jurisdictions in which we conduct these activities.

The E.U. is finalizing implementing measures under the Markets in Financial Instruments Regulation and under a revision of the Markets in Financial Instruments Directive (collectively, MiFID II). MiFID II will become effective on January 3, 2018. Although the implementing rules and technical standards were largely finalized by the European Commission and the European Securities and Markets Authority (ESMA) in the second half of 2016, significant legal uncertainty still remains in terms of commodities position limits and several market structure rules. In addition, legal uncertainty will remain until member states finalize their rules transposing MiFID II into their law, which they are required to do by July 2017.

MiFID II includes extensive market structure reforms, such as the establishment of new trading venue categories for the purposes of discharging the obligation to trade OTC derivatives on a trading platform and enhanced pre- and post-trade transparency covering a wider range of financial instruments. In equities, MiFID II introduces volume caps on non-transparent liquidity trading for trading venues, limits the use of broker-dealer crossing networks and creates a new regime for systematic internalizers, which execute client transactions outside a trading venue.

Additional controls will be introduced for algorithmic trading, high frequency trading and direct electronic access. Commodities trading firms will be required to calculate their positions and adhere to specific limits. Other reforms introduce enhanced transaction reporting, the publication of best execution data by investment firms and trading venues, transparency on costs and charges of service to investors, changes to the way investment managers can pay for the receipt of investment research and mandatory unbundling for broker-dealers between execution and other major services.
The E.U. and national financial legislators and regulators in the E.U. have proposed or adopted numerous further market reforms that may impact our businesses, including heightened corporate governance standards for financial institutions, rules on key information documents for packaged retail and insurance-based investment products and rules on indices that are used as benchmarks for financial instruments or funds. In addition, the European Commission, ESMA and the European Banking Authority have announced or are formulating regulatory standards and other measures which will impact our European operations. Certain of our European subsidiaries are also regulated by the securities, derivatives and commodities exchanges of which they are members.

The European Commission has published a proposal for a common system of financial transactions tax which would be implemented in certain E.U. member states willing to engage in enhanced cooperation in this area. The proposed financial transactions tax is broad in scope and would apply to transactions in a wide variety of financial instruments and derivatives. The European Commission has also published a draft proposal for structural reform of E.U. banks, which would prohibit certain banks from proprietary trading and would require separating certain trading activities from deposit-taking entities.

As described above, many of our subsidiaries are subject to regulatory capital requirements in jurisdictions throughout the world. Subsidiaries not subject to separate regulation may hold capital to satisfy local tax guidelines, rating agency requirements or internal policies, including policies concerning the minimum amount of capital a subsidiary should hold based upon its underlying risk.

## Available Information

Our internet address is www.gs.com and the investor relations section of our website is located at www.gs.com/shareholders. We make available free of charge through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934 (Exchange Act), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.



Also posted on our website, and available in print upon request of any shareholder to our Investor Relations Department, are our certificate of incorporation and bylaws, charters for our Audit Committee, Risk Committee, Compensation Committee, Corporate Governance and Nominating Committee, and Public Responsibilities Committee, our Policy Regarding Director Independence Determinations, our Policy on Reporting of Concerns Regarding Accounting and Other Matters, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the SEC, we will post on our website any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior financial officer. In addition, our website includes information concerning:

• Purchases and sales of our equity securities by our executive officers and directors;

• Disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by other means from time to time;

• Dodd-Frank Act stress test results;

• The public portion of our resolution plan submission; and

• Our risk management practices and regulatory capital ratios, as required under the disclosure-related provisions of the Revised Capital Framework, which are based on the third pillar of Basel III.

Our Investor Relations Department can be contacted at The Goldman Sachs Group, Inc., 200 West Street, 29th Floor, New York, New York 10282, Attn: Investor Relations, telephone: 212-902-0300, e-mail: gs-investor-relations@gs.com.

From time to time, we use our website, our Twitter account (twitter.com/GoldmanSachs) and other social media channels as additional means of disclosing public information to investors, the media and others interested in Goldman Sachs. It is possible that certain information we post on our website and on social media could be deemed to be material information, and we encourage investors, the media and others interested in Goldman Sachs to review the business and financial information we post on our website and on the social media channels identified above. The information on our website and our social media channels is not incorporated by reference into this Form 10-K.

## Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995

We have included or incorporated by reference in this Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, and may also include statements about the effect of changes to the capital, leverage, liquidity, long-term debt and total loss-absorbing capacity rules applicable to banks and bank holding companies, the impact of the Dodd-Frank Act on our businesses and operations, and various legal proceedings, governmental investigations or mortgage-related contingencies as set forth in Notes 27 and 18, respectively, to the consolidated financial statements in Part II, Item 8 of this Form 10-K, as well as statements about the results of our Dodd-Frank Act and firm stress tests, statements about the objectives and effectiveness of our business continuity plan, information security program, risk management and liquidity policies, statements about our resolution plan and resolution strategy and their implications for our debtholders and other stakeholders, statements about trends in or growth opportunities for our businesses, statements about our future status, activities or reporting under U.S. or non-U.S. banking and financial regulation and statements about our investment banking transaction backlog.

By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those described below and in “Risk Factors” in Part I, Item 1A of this Form 10-K.



Statements about our investment banking transaction backlog are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues, if any, that we actually earn from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline or continued weakness in general economic conditions, outbreak of hostilities, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an inability to obtain adequate financing, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. For information about other important factors that could adversely affect our investment banking transactions, see “Risk Factors” in Part I, Item 1A of this Form 10-K.

We have provided in this filing information regarding the firm’s capital, liquidity and leverage ratios, including the CET1 ratios under the Advanced and Standardized approaches on a fully phased-in basis, as well as the LCR and the NSFR for the firm and the supplementary leverage ratios for the firm and GS Bank USA. The statements with respect to these ratios are forward-looking statements, based on our current interpretation, expectations and understandings of the relevant regulatory rules, guidance and proposals, and reflect significant assumptions concerning the treatment of various assets and liabilities and the manner in which the ratios are calculated. As a result, the methods used to calculate these ratios may differ, possibly materially, from those used in calculating the firm’s capital, liquidity and leverage ratios for any future disclosures. The ultimate methods of calculating the ratios will depend on, among other things, implementation guidance or further rulemaking from the U.S. federal bank regulatory agencies and the development of market practices and standards.

## Item 1A. Risk Factors

We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal, regulatory and reputational risks. The following are some of the more important factors that could affect our businesses.

Our businesses have been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally.

Our businesses, by their nature, do not produce predictable earnings, and all of our businesses are materially affected by conditions in the global financial markets and economic conditions generally, both directly and through their impact on client activity levels. These conditions can change suddenly and negatively.

Our financial performance is highly dependent on the environment in which our businesses operate. A favorable business environment is generally characterized by, among other factors, high global gross domestic product growth, regulatory and market conditions which result in transparent, liquid and efficient capital markets, low inflation, high business and investor confidence, stable geopolitical conditions, clear regulations and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: concerns about sovereign defaults; uncertainty in U.S. federal fiscal or monetary policy, the U.S. federal debt ceiling and the continued funding of the U.S. government; the extent of and uncertainty about the timing and nature of regulatory reforms; declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; illiquid markets; increases in inflation, interest rates, exchange rate or basic commodity price volatility or default rates; outbreaks of hostilities or other geopolitical instability or uncertainty, such as Brexit; corporate, political or other scandals that reduce investor confidence in capital markets; extreme weather events or other natural disasters or pandemics; or a combination of these or other factors.



The financial services industry and the securities markets have been materially and adversely affected in the past by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. In addition, concerns about European sovereign debt risk and its impact on the European banking system, about the impact of Brexit, and about changes in interest rates and other market conditions or actual changes in interest rates and other market conditions, including market conditions in China, have resulted, at times, in significant volatility while negatively impacting the levels of client activity.

General uncertainty about economic, political and market activities, and the scope, timing and final implementation of regulatory reform, as well as weak consumer, investor and CEO confidence resulting in large part from such uncertainty, continues to negatively impact client activity, which adversely affects many of our businesses. Periods of low volatility and periods of high volatility combined with a lack of liquidity, have at times had an unfavorable impact on our market-making businesses.

Our revenues and profitability and those of our competitors have been and will continue to be impacted by requirements relating to capital, additional loss-absorbing capacity, leverage, minimum liquidity and long-term funding levels, requirements related to resolution and recovery planning, derivatives clearing and margin rules and levels of regulatory oversight, as well as limitations on which and, if permitted, how certain business activities may be carried out by financial institutions. Although interest rates are at or near historically low levels, financial institution returns have also been negatively impacted by increased funding costs due in part to the withdrawal of perceived government support of such institutions in the event of future financial crises. In addition, liquidity in the financial markets has also been negatively impacted as market participants and market practices and structures adjust to new regulations.

The degree to which these and other changes resulting from the financial crisis will have a long-term impact on the profitability of financial institutions will depend on the final interpretation and implementation of new regulations, the manner in which markets, market participants and financial institutions adapt to the new landscape, and the prevailing economic and financial market conditions. However, there is a significant risk that such changes will, at least in the near term, continue to negatively impact the absolute level of revenues, profitability and return on equity at our firm and at other financial institutions.

## Our businesses and those of our clients are subject to extensive and pervasive regulation around the world.

As a participant in the financial services industry and a systemically important financial institution, we are subject to extensive regulation in jurisdictions around the world. We face the risk of significant intervention by regulatory and taxing authorities in all jurisdictions in which we conduct our businesses. In many cases, our activities may be subject to overlapping and divergent regulation in different jurisdictions. Among other things, as a result of regulators or private parties challenging our compliance with existing laws and regulations, we could be fined, prohibited from engaging in some of our business activities, subject to limitations or conditions on our business activities, including higher capital requirements, or subjected to new or substantially higher taxes or other governmental charges in connection with the conduct of our businesses or with respect to our employees. Such limitations or conditions may limit our business activities and negatively impact our profitability.

Separate and apart from the impact on the scope and profitability of our business activities, day-to-day compliance with existing laws and regulations, in particular those laws and regulations adopted since 2008, has involved and will, except to the extent that some of such regulations are eventually modified or otherwise repealed, continue to involve significant amounts of time, including that of our senior leaders and that of an increasing number of dedicated compliance and other reporting and operational personnel, all of which may negatively impact our profitability.

If there are new laws or regulations or changes in the enforcement of existing laws or regulations applicable to our businesses or those of our clients, including capital, liquidity, leverage, long-term debt, total loss-absorbing capacity and margin requirements, restrictions on leveraged lending or other business practices, reporting requirements, requirements relating to recovery and resolution planning, tax burdens and compensation restrictions, that are imposed on a limited subset of financial institutions (either based on size, activities, geography or other criteria), compliance with these new laws or regulations, or changes in the enforcement of existing laws or regulations, could adversely affect our ability to compete effectively with other institutions that are not affected in the same way. In addition, regulation imposed on financial institutions or market participants generally, such as taxes on financial transactions, could adversely impact levels of market activity more broadly, and thus impact our businesses.



These developments could impact our profitability in the affected jurisdictions, or even make it uneconomic for us to continue to conduct all or certain of our businesses in such jurisdictions, or could cause us to incur significant costs associated with changing our business practices, restructuring our businesses, moving all or certain of our businesses and our employees to other locations or complying with applicable capital requirements, including liquidating assets or raising capital in a manner that adversely increases our funding costs or otherwise adversely affects our shareholders and creditors.

U.S. and non-U.S. regulatory developments, in particular the Dodd-Frank Act and Basel III, have significantly altered the regulatory framework within which we operate and may adversely affect our competitive position and profitability.

Among the aspects of the Dodd-Frank Act that have affected or may in the future affect our businesses are: increased capital, liquidity and reporting requirements; limitations on activities in which we may engage; increased regulation of and restrictions on OTC derivatives markets and transactions; limitations on incentive compensation; limitations on affiliate transactions; requirements to reorganize or limit activities in connection with recovery and resolution planning; increased deposit insurance assessments; and increased standards of care for broker-dealers and investment advisers in dealing with clients. The implementation of higher capital requirements, the LCR, the NSFR, requirements relating to long-term debt and total loss-absorbing capacity and the prohibition on proprietary trading and the sponsorship of, or investment in, covered funds by the Volcker Rule may adversely affect our profitability and competitive position, particularly if these requirements do not apply equally to our competitors or are not implemented uniformly across jurisdictions.

As described under “Business — Regulation — Capital and Liquidity Requirements — Payment of Dividends and Stock Repurchases” in Part I, Item 1 of this Form 10-K, Group Inc.’s proposed capital actions and capital plan are reviewed by the Federal Reserve Board as part of the CCAR process. If the Federal Reserve Board objects to our proposed capital actions in our capital plan, Group Inc. could be prohibited from taking some or all of the proposed capital actions, including increasing or paying dividends on common or preferred stock or repurchasing common stock or other capital securities. Our inability to carry out our proposed capital actions could, among other things, prevent us from returning capital to our shareholders and impact our return on equity.
We are also subject to laws and regulations relating to the privacy of the information of clients, employees or others, and any failure to comply with these regulations could expose us to liability and/or reputational damage. In addition, our businesses are increasingly subject to laws and regulations relating to surveillance, encryption and data on-shoring in the jurisdictions in which we operate. Compliance with these laws and regulations may require us to change our policies, procedures and technology for information security, which could, among other things, make us more vulnerable to cyber attacks and misappropriation, corruption or loss of information or technology.

Increasingly, regulators and courts have sought to hold financial institutions liable for the misconduct of their clients where such regulators and courts have determined that the financial institution should have detected that the client was engaged in wrongdoing, even though the financial institution had no direct knowledge of the activities engaged in by its client. Regulators and courts have also increasingly found liability as a “control person” for activities of entities in which financial institutions or funds controlled by financial institutions have an investment, but which they do not actively manage. In addition, regulators and courts continue to seek to establish “fiduciary” obligations to counterparties to which no such duty had been assumed to exist. To the extent that such efforts are successful, the cost of, and liabilities associated with, engaging in brokerage, clearing, market-making, prime brokerage, investing and other similar activities could increase significantly. To the extent that we have fiduciary obligations in connection with acting as a financial adviser, investment adviser or in other roles for individual, institutional, sovereign or investment fund clients, any breach, or even an alleged breach, of such obligations could have materially negative legal, regulatory and reputational consequences.

For information about the extensive regulation to which our businesses are subject, see “Business — Regulation” in Part I, Item 1 of this Form 10-K.



Our businesses have been and may be adversely affected by declining asset values. This is particularly true for those businesses in which we have net “long” positions, receive fees based on the value of assets managed, or receive or post collateral.

Many of our businesses have net “long” positions in debt securities, loans, derivatives, mortgages, equities (including private equity and real estate) and most other asset classes. These include positions we take when we act as a principal to facilitate our clients’ activities, including our exchange-based market-making activities, or commit large amounts of capital to maintain positions in interest rate and credit products, as well as through our currencies, commodities, equities and mortgage-related activities. Because substantially all of these investing, lending and market-making positions are marked-to-market on a daily basis, declines in asset values directly and immediately impact our earnings, unless we have effectively “hedged” our exposures to such declines.

In certain circumstances (particularly in the case of credit products, including leveraged loans, and private equities or other securities that are not freely tradable or lack established and liquid trading markets), it may not be possible or economic to hedge such exposures and to the extent that we do so the hedge may be ineffective or may greatly reduce our ability to profit from increases in the values of the assets. Sudden declines and significant volatility in the prices of assets may substantially curtail or eliminate the trading markets for certain assets, which may make it difficult to sell, hedge or value such assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions and the difficulty in valuing assets may negatively affect our capital, liquidity or leverage ratios, increase our funding costs and generally require us to maintain additional capital.

In our exchange-based market-making activities, we are obligated by stock exchange rules to maintain an orderly market, including by purchasing securities in a declining market. In markets where asset values are declining and in volatile markets, this results in losses and an increased need for liquidity.
We receive asset-based management fees based on the value of our clients' portfolios or investment in funds managed by us and, in some cases, we also receive incentive fees based on increases in the value of such investments. Declines in asset values reduce the value of our clients' portfolios or fund assets, which in turn reduce the fees we earn for managing such assets.

We post collateral to support our obligations and receive collateral to support the obligations of our clients and counterparties in connection with our client execution businesses. When the value of the assets posted as collateral or the credit ratings of the party posting collateral decline, the party posting the collateral may need to provide additional collateral or, if possible, reduce its trading position. An example of such a situation is a “margin call” in connection with a brokerage account. Therefore, declines in the value of asset classes used as collateral mean that either the cost of funding positions is increased or the size of positions is decreased.

If we are the party providing collateral, this can increase our costs and reduce our profitability and if we are the party receiving collateral, this can also reduce our profitability by reducing the level of business done with our clients and counterparties. In addition, volatile or less liquid markets increase the difficulty of valuing assets which can lead to costly and time-consuming disputes over asset values and the level of required collateral, as well as increased credit risk to the recipient of the collateral due to delays in receiving adequate collateral. In cases where we foreclose on collateral, we have been, and may in the future be, subject to claims that the foreclosure was not permitted under the legal documents, was conducted in an improper manner or caused a client or counterparty to go out of business.



Our businesses have been and may be adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs of obtaining credit.

Widening credit spreads, as well as significant declines in the availability of credit, have in the past adversely affected our ability to borrow on a secured and unsecured basis and may do so in the future. We fund ourselves on an unsecured basis by issuing long-term debt, by accepting deposits at our bank subsidiaries, by issuing hybrid financial instruments, or by obtaining bank loans or lines of credit. We seek to finance many of our assets on a secured basis. Any disruptions in the credit markets may make it harder and more expensive to obtain funding for our businesses. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability, particularly in our businesses that involve investing, lending and market making.

Our clients engaging in mergers and acquisitions often rely on access to the secured and unsecured credit markets to finance their transactions. A lack of available credit or an increased cost of credit can adversely affect the size, volume and timing of our clients' merger and acquisition transactions, particularly large transactions, and adversely affect our financial advisory and underwriting businesses.

Our credit businesses have been and may in the future be negatively affected by a lack of liquidity in credit markets. A lack of liquidity reduces price transparency, increases price volatility and decreases transaction volumes and size, all of which can increase transaction risk or decrease the profitability of such businesses.

## Our market-making activities have been and may be affected by changes in the levels of market volatility.

Certain of our market-making activities depend on market volatility to provide trading and arbitrage opportunities to our clients, and decreases in volatility may reduce these opportunities and adversely affect the results of these activities. On the other hand, increased volatility, while it can increase trading volumes and spreads, also increases risk as measured by Value-at-Risk (VaR) and may expose us to increased risks in connection with our market-making activities or cause us to reduce our market-making inventory in order to avoid increasing our VaR. Limiting the size of our market-making positions can adversely affect our profitability. In periods when volatility is increasing, but asset values are declining significantly, it may not be possible to sell assets at all or it may only be possible to do so at steep discounts. In such circumstances we may be forced to either take on additional risk or to realize losses in order to decrease our VaR. In addition, increases in volatility increase the level of our RWAs, which increases our capital requirements.

Our investment banking, client execution and investment management businesses have been adversely affected and may in the future be adversely affected by market uncertainty or lack of confidence among investors and CEOs due to general declines in economic activity and other unfavorable economic, geopolitical or market conditions.

Our investment banking business has been and may continue to be adversely affected by market conditions. Poor economic conditions and other adverse geopolitical conditions can adversely affect and have in the past adversely affected investor and CEO confidence, resulting in significant industry-wide declines in the size and number of underwriting and of financial advisory transactions, which could have an adverse effect on our revenues and our profit margins. In particular, because a significant portion of our investment banking revenues is derived from our participation in large transactions, a decline in the number of large transactions would adversely affect our investment banking business.

In certain circumstances, market uncertainty or general declines in market or economic activity may affect our client execution businesses by decreasing levels of overall activity or by decreasing volatility, but at other times market uncertainty and even declining economic activity may result in higher trading volumes or higher spreads or both.



Market uncertainty, volatility and adverse economic conditions, as well as declines in asset values, may cause our clients to transfer their assets out of our funds or other products or their brokerage accounts and result in reduced net revenues, principally in our investment management business. To the extent that clients do not withdraw their funds, they may invest them in products that generate less fee income.

Our investment management business may be affected by the poor investment performance of our investment products or a client preference for products other than those which we offer.

Poor investment returns in our investment management business, due to either general market conditions or underperformance (relative to our competitors or to benchmarks) by funds or accounts that we manage or investment products that we design or sell, affects our ability to retain existing assets and to attract new clients or additional assets from existing clients. This could affect the management and incentive fees that we earn on assets under supervision or the commissions and net spreads that we earn for selling other investment products, such as structured notes or derivatives. To the extent that our clients choose to invest in products that we do not currently offer, we will suffer outflows and a loss of management fees.

## We may incur losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. Our risk management process seeks to balance our ability to profit from market-making, investing or lending positions, and underwriting activities, with our exposure to potential losses. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Thus, we may, in the course of our activities, incur losses. Market conditions in recent years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.
The models that we use to assess and control our risk exposures reflect assumptions about the degrees of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, such as those that occurred during 2008 and early 2009, and to some extent since 2011, previously uncorrelated indicators may become correlated, or conversely previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets.

In addition, the use of models in connection with risk management and numerous other critical activities presents risks that such models may be ineffective, either because of poor design or ineffective testing, improper or flawed inputs, as well as unpermitted access to such models resulting in unapproved or malicious changes to the model or its inputs.

To the extent that we have positions through our market-making or origination activities or we make investments directly through our investing activities, including private equity, that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions. In addition, to the extent permitted by applicable law and regulation, we invest our own capital in private equity, credit, real estate and hedge funds that we manage and limitations on our ability to withdraw some or all of our investments in these funds, whether for legal, reputational or other reasons, may make it more difficult for us to control the risk exposures relating to these investments.

Prudent risk management, as well as regulatory restrictions, may cause us to limit our exposure to counterparties, geographic areas or markets, which may limit our business opportunities and increase the cost of our funding or hedging activities.

For further information about our risk management policies and procedures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management” in Part II, Item 7 of this Form 10-K.



Our liquidity, profitability and businesses may be adversely affected by an inability to access the debt capital markets or to sell assets or by a reduction in our credit ratings or by an increase in our credit spreads.

Liquidity is essential to our businesses. Our liquidity may be impaired by an inability to access secured and/or unsecured debt markets, an inability to access funds from our subsidiaries or otherwise allocate liquidity optimally across our firm, an inability to sell assets or redeem our investments, or unforeseen outflows of cash or collateral. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us, or even by the perception among market participants that we, or other market participants, are experiencing greater liquidity risk.

We employ structured products to benefit our clients and hedge our own risks. The financial instruments that we hold and the contracts to which we are a party are often complex, and these complex structured products often do not have readily available markets to access in times of liquidity stress. Our investing and lending activities may lead to situations where the holdings from these activities represent a significant portion of specific markets, which could restrict liquidity for our positions.

Further, our ability to sell assets may be impaired if there is not generally a liquid market for such assets, as well as in circumstances where other market participants are seeking to sell similar otherwise generally liquid assets at the same time, as is likely to occur in a liquidity or other market crisis or in response to changes to rules or regulations. For example, under the Volcker Rule, we are currently required to sell our interests in “illiquid funds” by July 2017. If our request for an extension is not granted, we will be required to sell such interests by July 2017 and we will likely receive significantly less than our carrying value for those assets. In addition, financial institutions with which we interact may exercise set-off rights or the right to require additional collateral, including in difficult market conditions, which could further impair our liquidity.
Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger our obligations under certain provisions in some of our trading and collateralized financing contracts. Under these provisions, counterparties could be permitted to terminate contracts with us or require us to post additional collateral. Termination of our trading and collateralized financing contracts could cause us to sustain losses and impair our liquidity by requiring us to find other sources of financing or to make significant cash payments or securities movements.

As of December 2016, in the event of a one-notch and two-notch downgrade of our credit ratings our counterparties could have called for additional collateral or termination payments related to our net derivative liabilities under bilateral agreements in an aggregate amount of $677 million and $2.22 billion, respectively. A downgrade by any one rating agency, depending on the agency’s relative ratings of us at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. For further information about our credit ratings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Liquidity Risk Management — Credit Ratings” in Part II, Item 7 of this Form 10-K.

Our cost of obtaining long-term unsecured funding is directly related to our credit spreads (the amount in excess of the interest rate of U.S. Treasury securities (or other benchmark securities) of the same maturity that we need to pay to our debt investors). Increases in our credit spreads can significantly increase our cost of this funding. Changes in credit spreads are continuous, market-driven, and subject at times to unpredictable and highly volatile movements. Our credit spreads are also influenced by market perceptions of our creditworthiness. In addition, our credit spreads may be influenced by movements in the costs to purchasers of credit default swaps referenced to our long-term debt. The market for credit default swaps has proven to be extremely volatile and at times has lacked a high degree of transparency or liquidity.



Regulatory changes relating to liquidity may also negatively impact our results of operations and competitive position. Recently, numerous regulations have been adopted or proposed, and additional regulations are under consideration, to introduce more stringent liquidity requirements for large financial institutions. These regulations and others being considered address, among other matters, liquidity stress testing, minimum liquidity requirements, wholesale funding, limitations on the issuance of short-term debt and structured notes and prohibitions on parent guarantees that are subject to cross-defaults. These may overlap with, and be impacted by, other regulatory changes, including new rules relating to minimum long-term debt requirements and TLAC, guidance on the treatment of brokered deposits and the capital, leverage and resolution and recovery frameworks applicable to large financial institutions. Given the overlap and complex interactions among these new and prospective regulations, they may have unintended cumulative effects, and their full impact will remain uncertain until implementation of post-financial crisis regulatory reform is complete.

## A failure to appropriately identify and address potential conflicts of interest could adversely affect our businesses.

Due to the broad scope of our businesses and our client base, we regularly address potential conflicts of interest, including situations where our services to a particular client or our own investments or other interests conflict, or are perceived to conflict, with the interests of another client, as well as situations where one or more of our businesses have access to material non-public information that may not be shared with other businesses within the firm and situations where we may be a creditor of an entity with which we also have an advisory or other relationship.

In addition, our status as a bank holding company subjects us to heightened regulation and increased regulatory scrutiny by the Federal Reserve Board with respect to transactions between GS Bank USA and entities that are or could be viewed as affiliates of ours and, under the Volcker Rule, transactions between Goldman Sachs and certain covered funds.
We have extensive procedures and controls that are designed to identify and address conflicts of interest, including those designed to prevent the improper sharing of information among our businesses. However, appropriately identifying and dealing with conflicts of interest is complex and difficult, and our reputation, which is one of our most important assets, could be damaged and the willingness of clients to enter into transactions with us may be affected if we fail, or appear to fail, to identify, disclose and deal appropriately with conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or regulatory enforcement actions.

A failure in our operational systems or infrastructure, or those of third parties, as well as human error, could impair our liquidity, disrupt our businesses, result in the disclosure of confidential information, damage our reputation and cause losses.

Our businesses are highly dependent on our ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex and occur at high volumes and frequencies, across numerous and diverse markets in many currencies. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards.

Many rules and regulations worldwide govern our obligations to report transactions and other information to regulators, exchanges and investors. Compliance with these legal and reporting requirements can be challenging, and the firm and other financial institutions have been subject to regulatory fines and penalties for failing to report timely, accurate and complete information. As reporting requirements expand, compliance with these rules and regulations has become more challenging.

As our client base and our geographical reach expand and the volume, speed, frequency and complexity of transactions, especially electronic transactions (as well as the requirements to report such transactions on a real-time basis to clients, regulators and exchanges) increase, developing and maintaining our operational systems and infrastructure becomes more challenging, and the risk of systems or human error in connection with such transactions increases, as well as the potential consequences of such errors due to the speed and volume of transactions involved and the potential difficulty associated with discovering such errors quickly enough to limit the resulting consequences.



Our financial, accounting, data processing or other operational systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, adversely affecting our ability to process these transactions or provide these services. We must continuously update these systems to support our operations and growth and to respond to changes in regulations and markets, and invest heavily in systemic controls and training to ensure that such transactions do not violate applicable rules and regulations or, due to errors in processing such transactions, adversely affect markets, our clients and counterparties or the firm.

Systems enhancements and updates, as well as the requisite training, including in connection with the integration of new businesses, entail significant costs and create risks associated with implementing new systems and integrating them with existing ones.

Notwithstanding the proliferation of technology and technology-based risk and control systems, our businesses ultimately rely on people as our greatest resource, and, from time-to-time, they make mistakes that are not always caught immediately by our technological processes or by our other procedures which are intended to prevent and detect such errors. These can include calculation errors, mistakes in addressing emails, errors in software or model development or implementation, or simple errors in judgment. We strive to eliminate such human errors through training, supervision, technology and by redundant processes and controls. Human errors, even if promptly discovered and remediated, can result in material losses and liabilities for the firm.

In addition, we face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities and derivatives transactions, and as our interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients' systems.
In recent years, there has been significant consolidation among clearing agents, exchanges and clearing houses and an increasing number of derivative transactions are now or in the near future will be cleared on exchanges, which has increased our exposure to operational failure, termination or capacity constraints of the particular financial intermediaries that we use and could affect our ability to find adequate and cost-effective alternatives in the event of any such failure, termination or constraint. Industry consolidation, whether among market participants or financial intermediaries, increases the risk of operational failure as disparate complex systems need to be integrated, often on an accelerated basis.

Furthermore, the interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses, and the increased centrality of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Any such failure, termination or constraint could adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses or result in financial loss or liability to our clients, impairment of our liquidity, disruption of our businesses, regulatory intervention or reputational damage.

Despite the resiliency plans and facilities we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption involving electrical, satellite, undersea cable or other communications, internet, transportation or other services facilities used by us or third parties with which we conduct business, including cloud service providers. These disruptions may occur as a result of events that affect only our buildings or systems or those of such third parties, or as a result of events with a broader impact globally, regionally or in the cities where those buildings or systems are located, including, but not limited to, natural disasters, war, civil unrest, terrorism, economic or political developments, pandemics and weather events.



Nearly all of our employees in our primary locations, including the New York metropolitan area, London, Bengaluru, Hong Kong, Tokyo and Salt Lake City, work in close proximity to one another, in one or more buildings. Notwithstanding our efforts to maintain business continuity, given that our headquarters and the largest concentration of our employees are in the New York metropolitan area, and our two principal office buildings in the New York area both are located on the waterfront of the Hudson River, depending on the intensity and longevity of the event, a catastrophic event impacting our New York metropolitan area offices, including a terrorist attack, extreme weather event or other hostile or catastrophic event, could negatively affect our business. If a disruption occurs in one location and our employees in that location are unable to occupy our offices or communicate with or travel to other locations, our ability to service and interact with our clients may suffer, and we may not be able to successfully implement contingency plans that depend on communication or travel.

A failure to protect our computer systems, networks and information, and our clients' information, against cyber attacks and similar threats could impair our ability to conduct our businesses, result in the disclosure, theft or destruction of confidential information, damage our reputation and cause losses.

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. There have been several highly publicized cases involving financial services companies, consumer-based companies and other organizations reporting the unauthorized disclosure of client, customer or other confidential information in recent years, as well as cyber attacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties, including actions by foreign governments. There have also been several highly publicized cases where hackers have requested “ransom” payments in exchange for not disclosing customer information.
We are regularly the target of attempted cyber attacks, including denial-of-service attacks, and must continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. We may face an increasing number of attempted cyber attacks as we expand our mobile- and other internet-based products and services, as well as our usage of mobile and cloud technologies and as we provide more of these services to a greater number of retail clients. In addition, due to our interconnectivity with third-party vendors, central agents, exchanges, clearing houses and other financial institutions, we could be adversely impacted if any of them is subject to a successful cyber attack or other information security event.

Despite our efforts to ensure the integrity of our systems and information, we may not be able to anticipate, detect or implement effective preventive measures against all cyber threats, especially because the techniques used are increasingly sophisticated, change frequently and are often not recognized until launched. Cyber attacks can originate from a variety of sources, including third parties who are affiliated with foreign governments or are involved with organized crime or terrorist organizations. Third parties may also attempt to place individuals within the firm or induce employees, clients or other users of our systems to disclose sensitive information or provide access to our data or that of our clients, and these types of risks may be difficult to detect or prevent.

Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. Due to the complexity and interconnectedness of our systems, the process of enhancing our protective measures can itself create a risk of systems disruptions and security issues.

If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations, which could impact their ability to transact with us or otherwise result in significant losses or reputational damage.



The increased use of mobile and cloud technologies can heighten these and other operational risks. We expect to expend significant additional resources on an ongoing basis to modify our protective measures and to investigate and remediate vulnerabilities or other exposures, but these measures may be ineffective and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. Certain aspects of the security of such technologies are unpredictable or beyond our control, and the failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber attacks could disrupt our operations and result in misappropriation, corruption or loss of confidential and other information. In addition, there is a risk that encryption and other protective measures, despite their sophistication, may be defeated, particularly to the extent that new computing technologies vastly increase the speed and computing power available.

We routinely transmit and receive personal, confidential and proprietary information by email and other electronic means. We have discussed and worked with clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against cyber attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties and other third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a client, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and reputational harm.

## Group Inc. is a holding company and is dependent for liquidity on payments from its subsidiaries, many of which are subject to restrictions.

Group Inc. is a holding company and, therefore, depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments and to fund all payments on its obligations, including debt obligations. Many of our subsidiaries, including our broker-dealer and bank subsidiaries, are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Group Inc.
In addition, our broker-dealer and bank subsidiaries are subject to restrictions on their ability to lend or transact with affiliates and to minimum regulatory capital and other requirements, as well as restrictions on their ability to use funds deposited with them in brokerage or bank accounts to fund their businesses. Additional restrictions on related-party transactions, increased capital and liquidity requirements and additional limitations on the use of funds on deposit in bank or brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet the obligations of Group Inc., including under the Federal Reserve Board’s source of strength policy, and even require Group Inc. to provide additional funding to such subsidiaries. Restrictions or regulatory action of that kind could impede access to funds that Group Inc. needs to make payments on its obligations, including debt obligations, or dividend payments. In addition, Group Inc.’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

There has been a trend towards increased regulation and supervision of our subsidiaries by the governments and regulators in the countries in which those subsidiaries are located or do business. Concerns about protecting clients and creditors of financial institutions that are controlled by persons or entities located outside of the country in which such entities are located or do business have caused or may cause a number of governments and regulators to take additional steps to “ring fence” or maintain internal total loss-absorbing capacity at such entities in order to protect clients and creditors of such entities in the event of financial difficulties involving such entities. The result has been and may continue to be additional limitations on our ability to efficiently move capital and liquidity among our affiliated entities, thereby increasing the overall level of capital and liquidity required by us on a consolidated basis.

Furthermore, Group Inc. has guaranteed the payment obligations of certain of its subsidiaries, including GS&Co. and GS Bank USA, subject to certain exceptions. In addition, Group Inc. guarantees many of the obligations of its other consolidated subsidiaries on a transaction-by-transaction basis, as negotiated with counterparties. These guarantees may require Group Inc. to provide substantial funds or assets to its subsidiaries or their creditors or counterparties at a time when Group Inc. is in need of liquidity to fund its own obligations.



The requirements for Group Inc. and GS Bank USA to develop and submit recovery and resolution plans to regulators, and the incorporation of feedback received from regulators, may require us to increase capital or liquidity levels or issue additional long-term debt at Group Inc. or particular subsidiaries or otherwise incur additional or duplicative operational or other costs at multiple entities, and may reduce our ability to provide Group Inc. guarantees of the obligations of our subsidiaries or raise debt at Group Inc. Resolution planning may also impair our ability to structure our intercompany and external activities in a manner that we may otherwise deem most operationally efficient. Furthermore, arrangements to facilitate our resolution planning may cause us to be subject to additional taxes. Any such limitations or requirements would be in addition to the legal and regulatory restrictions described above on our ability to engage in capital actions or make intercompany dividends or payments.

See “Business — Regulation” in Part I, Item 1 of this Form 10-K for further information about regulatory restrictions.

The application of regulatory strategies and requirements in the U.S. and non-U.S. jurisdictions to facilitate the orderly resolution of large financial institutions could create greater risk of loss for Group Inc.'s security holders.

As described under “Business — Regulation — Banking Supervision and Regulation — Insolvency of an Insured Depository Institution or a Bank Holding Company,” if the FDIC is appointed as receiver under OLA, the rights of Group Inc.’s creditors would be determined under OLA, and substantial differences exist in the rights of creditors between OLA and the U.S. Bankruptcy Code, including the right of the FDIC under OLA to disregard the strict priority of creditor claims in some circumstances, which could have a material adverse effect on debtholders.
The FDIC has announced that a single point of entry strategy may be a desirable strategy under OLA to resolve a large financial institution such as Group Inc. in a manner that would, among other things, impose losses on shareholders, debtholders and other creditors of the top-tier holding company (in our case, Group Inc.), while the holding company’s subsidiaries may continue to operate. It is possible that the application of the single point of entry strategy under OLA, in which Group Inc. would be the only legal entity to enter resolution proceedings (and its material broker-dealer, bank and other operating entities would not enter resolution proceedings), would result in greater losses to Group Inc.’s security holders (including holders of our fixed rate, floating rate and indexed debt securities), than the losses that would result from the application of a bankruptcy proceeding or a different resolution strategy, such as a multiple point of entry resolution strategy for Group Inc. and certain of its material subsidiaries.

Assuming Group Inc. entered resolution proceedings and that support from Group Inc. to its subsidiaries was sufficient to enable the subsidiaries to remain solvent, losses at the subsidiary level would be transferred to Group Inc. and ultimately borne by Group Inc.'s security holders, third-party creditors of Group Inc.'s subsidiaries would receive full recoveries on their claims, and Group Inc.'s security holders (including our shareholders, debtholders and other unsecured creditors) could face significant losses. In that case, Group Inc.'s security holders would face losses while the third-party creditors of Group Inc.'s subsidiaries would incur no losses because the subsidiaries would continue to operate and would not enter resolution or bankruptcy proceedings. In addition, holders of Group Inc.'s eligible long-term debt and holders of Group Inc.'s other debt securities could face losses ahead of its other similarly situated creditors in a resolution under OLA if the FDIC exercised its right, described above, to disregard the strict priority of creditor claims.

OLA also provides the FDIC with authority to cause creditors and shareholders of the financial company such as Group Inc. in receivership to bear losses before taxpayers are exposed to such losses, and amounts owed to the U.S. government would generally receive a statutory payment priority over the claims of private creditors, including senior creditors.



In addition, under OLA, claims of creditors (including debtholders) could be satisfied through the issuance of equity or other securities in a bridge entity to which Group Inc.'s assets are transferred. If such a securities-for-claims exchange were implemented, there can be no assurance that the value of the securities of the bridge entity would be sufficient to repay or satisfy all or any part of the creditor claims for which the securities were exchanged. While the FDIC has issued regulations to implement OLA, not all aspects of how the FDIC might exercise this authority are known and additional rulemaking is likely.

In addition, certain jurisdictions, including the U.K. and the E.U., have implemented, or are considering, changes to resolution regimes to provide resolution authorities with the ability to recapitalize a failing entity by writing down its unsecured debt or converting its unsecured debt into equity. Such “bail-in” powers are intended to enable the recapitalization of a failing institution by allocating losses to its shareholders and unsecured debtholders. U.S. and non-U.S. regulators are also considering requirements that certain subsidiaries of large financial institutions maintain minimum amounts of total loss-absorbing capacity that would pass losses up from the subsidiaries to the top-tier holding company and, ultimately, to security holders of the top-tier holding company in the event of failure.

The application of Group Inc.'s proposed resolution strategy could result in greater losses for Group Inc.'s security holders, and failure to address shortcomings in our resolution plan could subject us to increased regulatory requirements.

In our resolution plan, Group Inc. would be resolved under the U.S. Bankruptcy Code. The strategy described in our resolution plan is a variant of the single point of entry strategy: Group Inc. would recapitalize and provide liquidity to certain major subsidiaries, including through the forgiveness of intercompany indebtedness, the extension of the maturities of intercompany indebtedness and the extension of additional intercompany loans. If this strategy were successful, creditors of some or all of Group Inc.'s major subsidiaries would receive full recoveries on their claims, while Group Inc.'s security holders could face significant losses.
In that case, Group Inc.'s security holders could face losses while the third-party creditors of Group Inc.'s major subsidiaries would incur no losses because those subsidiaries would continue to operate and not enter resolution or bankruptcy proceedings. As part of the strategy, Group Inc. could also seek to elevate the priority of its guarantee obligations relating to its major subsidiaries' derivatives contracts so that cross-default and early termination rights would be stayed under the ISDA Protocol, which would result in holders of Group Inc.'s eligible long-term debt and holders of Group Inc.'s other debt securities incurring losses ahead of the beneficiaries of those guarantee obligations.

It is also possible that holders of Group Inc.'s eligible long-term debt and other debt securities could incur losses ahead of other similarly situated creditors. If Group Inc.'s proposed resolution strategy were not successful, Group Inc.'s financial condition would be adversely impacted and Group Inc.'s security holders, including debtholders, may as a consequence be in a worse position than if the strategy had not been implemented. In all cases, any payments to debtholders are dependent on our ability to make such payments and are therefore subject to our credit risk.

In April 2016, the Federal Reserve Board and the FDIC provided feedback on the 2015 resolution plans of eight systemically important domestic banking institutions and provided guidance related to the 2017 resolution plan submissions. While our plan was not jointly found to be deficient (i.e., non-credible or to not facilitate an orderly resolution under the U.S. Bankruptcy Code), the FDIC identified certain deficiencies and both the FDIC and Federal Reserve Board also identified certain shortcomings. In response to the feedback received, in September 2016, we submitted a status report on our actions to address these shortcomings and a separate public section that explains these actions at a high level, which is available on our website as described under “Available Information” in Part I, Item 1 of this Form 10-K.

Our 2017 resolution plan, which is due by July 1, 2017, is also required to address the shortcomings and take into account the additional guidance. If it is determined that Group Inc. did not effectively address the shortcomings and additional guidance, the Federal Reserve Board and the FDIC could, after any permitted resubmission, find our resolution plan not credible and require us to hold more capital, change our business structure or dispose of businesses, which could have a negative impact on our ability to return capital to shareholders, financial condition, results of operations or competitive position.



As a result of our recovery and resolution planning processes, including incorporating feedback from our regulators, we may incur increased operational, funding or other costs and face limitations on our ability to structure our internal organization or engage in internal or external activities in a manner that we may otherwise deem most operationally efficient.

Our businesses, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold.

We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. A failure of a significant market participant, or even concerns about a default by such an institution, could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us.

We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. In addition, deterioration in the credit quality of third parties whose securities or obligations we hold, including a deterioration in the value of collateral posted by third parties to secure their obligations to us under derivatives contracts and loan agreements, could result in losses and/or adversely affect our ability to rehypothecate or otherwise use those securities or obligations for liquidity purposes.

A significant downgrade in the credit ratings of our counterparties could also have a negative impact on our results. While in many cases we are permitted to require additional collateral from counterparties that experience financial difficulty, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of our rights. Default rates, downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress and illiquidity.

As part of our clearing and prime brokerage activities, we finance our clients' positions, and we could be held responsible for the defaults or misconduct of our clients. Although we regularly review credit exposures to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee.
Concentration of risk increases the potential for significant losses in our market-making, underwriting, investing and lending activities.

Concentration of risk increases the potential for significant losses in our market-making, underwriting, investing and lending activities. The number and size of such transactions may affect our results of operations in a given period. Moreover, because of concentration of risk, we may suffer losses even when economic and market conditions are generally favorable for our competitors. Disruptions in the credit markets can make it difficult to hedge these credit exposures effectively or economically. In addition, we extend large commitments as part of our credit origination activities.

Rules adopted under the Dodd-Frank Act require issuers of asset-backed securities and any person who organizes and initiates an asset-backed securities transaction to retain economic exposure to the asset, which is likely to significantly increase the cost to us of engaging in securitization activities. Our inability to reduce our credit risk by selling, syndicating or securitizing these positions, including during periods of market stress, could negatively affect our results of operations due to a decrease in the fair value of the positions, including due to the insolvency or bankruptcy of the borrower, as well as the loss of revenues associated with selling such securities or loans.

In the ordinary course of business, we may be subject to a concentration of credit risk to a particular counterparty, borrower, issuer, including sovereign issuers, or geographic area or group of related countries, such as the E.U., and a failure or downgrade of, or default by, such entity could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have anticipated. Provisions of the Dodd-Frank Act have led to increased centralization of trading activity through particular clearing houses, central agents or exchanges, which has significantly increased our concentration of risk with respect to these entities. While our activities expose us to many different industries, counterparties and countries, we routinely execute a high volume of transactions with counterparties engaged in financial services activities, including brokers and dealers, commercial banks, clearing houses, exchanges and investment funds. This has resulted in significant credit concentration with respect to these counterparties.



## The financial services industry is both highly competitive and interrelated.

The financial services industry and all of our businesses are intensely competitive, and we expect them to remain so. We compete on the basis of a number of factors, including transaction execution, our products and services, innovation, reputation, creditworthiness and price. There has been substantial consolidation and convergence among companies in the financial services industry. This consolidation and convergence has hastened the globalization of the securities and other financial services markets.

As a result, we have had to commit capital to support our international operations and to execute large global transactions. To the extent we expand into new business areas and new geographic regions, we will face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to expand. Governments and regulators have recently adopted regulations, imposed taxes, adopted compensation restrictions or otherwise put forward various proposals that have or may impact our ability to conduct certain of our businesses in a cost-effective manner or at all in certain or all jurisdictions, including proposals relating to restrictions on the type of activities in which financial institutions are permitted to engage. These or other similar rules, many of which do not apply to all our U.S. or non-U.S. competitors, could impact our ability to compete effectively.

Pricing and other competitive pressures in our businesses have continued to increase, particularly in situations where some of our competitors may seek to increase market share by reducing prices. For example, in connection with investment banking and other assignments, we have experienced pressure to extend and price credit at levels that may not always fully compensate us for the risks we take.

The financial services industry is highly interrelated in that a significant volume of transactions occur among a limited number of members of that industry. Many transactions are syndicated to other financial institutions and financial institutions are often counterparties in transactions. This has led to claims by other market participants and regulators that such institutions have colluded in order to manipulate markets or market prices, including allegations that antitrust laws have been violated. While we have extensive procedures and controls that are designed to identify and prevent such activities, allegations of such activities, particularly by regulators, can have a negative reputational impact and can subject us to large fines and settlements, and potentially significant penalties, including treble damages.
We face enhanced risks as new business initiatives lead us to transact with a broader array of clients and counterparties and expose us to new asset classes and new markets.

A number of our recent and planned business initiatives and expansions of existing businesses may bring us into contact, directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and expose us to new asset classes and new markets. For example, we continue to transact business and invest in new regions, including a wide range of emerging and growth markets. Furthermore, in a number of our businesses, including where we make markets, invest and lend, we directly or indirectly own interests in, or otherwise become affiliated with the ownership and operation of public services, such as airports, toll roads and shipping ports, as well as physical commodities and commodities infrastructure components, both within and outside the U.S.

We have recently increased and intend to further increase our consumer-oriented deposit-taking and lending activities. To the extent we engage in such activities or similar consumer-oriented activities, we could face additional compliance, legal and regulatory risk, increased reputational risk and increased operational risk due to, among other things, higher transaction volumes and significantly increased retention and transmission of customer and client information.

New business initiatives expose us to new and enhanced risks, including risks associated with dealing with governmental entities, reputational concerns arising from dealing with less sophisticated clients, counterparties and investors, greater regulatory scrutiny of these activities, increased credit-related, market, sovereign and operational risks, risks arising from accidents or acts of terrorism, and reputational concerns with the manner in which these assets are being operated or held or in which we interact with these counterparties.



## Derivative transactions and delayed settlements may expose us to unexpected risk and potential losses.

We are party to a large number of derivative transactions, including credit derivatives. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling positions difficult. Many credit derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold the underlying security, loan or other obligation and may not be able to obtain the underlying security, loan or other obligation. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to the firm.

Derivative transactions may also involve the risk that documentation has not been properly executed, that executed agreements may not be enforceable against the counterparty, or that obligations under such agreements may not be able to be “netted” against other obligations with such counterparty. In addition, counterparties may claim that such transactions were not appropriate or authorized.

As a signatory to the ISDA Protocol, we may not be able to exercise remedies against counterparties and, as this new regime has not yet been tested, we may suffer risks or losses that we would not have expected to suffer if we could immediately close out transactions upon a termination event. Various U.S. and non-U.S. regulators have proposed or adopted implementing regulations contemplated by the ISDA Protocol, and those implementing regulations may result in additional limitations on our ability to exercise remedies against counterparties. The ISDA Protocol’s impact will depend on, among other things, how it is implemented and the development of market practice and structures under the implementing regulations.

Derivative contracts and other transactions, including secondary bank loan purchases and sales, entered into with third parties are not always confirmed by the counterparties or settled on a timely basis. While the transaction remains unconfirmed or during any delay in settlement, we are subject to heightened credit and operational risk and in the event of a default may find it more difficult to enforce our rights.
In addition, as new complex derivative products are created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying contracts could arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs. The provisions of the Dodd-Frank Act requiring central clearing of credit derivatives and other OTC derivatives, or a market shift toward standardized derivatives, could reduce the risk associated with such transactions, but under certain circumstances could also limit our ability to develop derivatives that best suit the needs of our clients and to hedge our own risks, and could adversely affect our profitability and increase our credit exposure to such platform.

## Our businesses may be adversely affected if we are unable to hire and retain qualified employees.

Our performance is largely dependent on the talents and efforts of highly skilled people; therefore, our continued ability to compete effectively in our businesses, to manage our businesses effectively and to expand into new businesses and geographic areas depends on our ability to attract new talented and diverse employees and to retain and motivate our existing employees. Factors that affect our ability to attract and retain such employees include our compensation and benefits, and our reputation as a successful business with a culture of fairly hiring, training and promoting qualified employees. As a significant portion of the compensation that we pay to our employees is in the form of year-end discretionary compensation, a significant portion of which is in the form of deferred equity-related awards, declines in our profitability, or in the outlook for our future profitability, as well as regulatory limitations on compensation levels and terms, can negatively impact our ability to hire and retain highly qualified employees.

Competition from within the financial services industry and from businesses outside the financial services industry for qualified employees has often been intense. Recently, we have experienced increased competition in hiring and retaining employees to address the demands of new regulatory requirements. This is also the case in emerging and growth markets, where we are often competing for qualified employees with entities that have a significantly greater presence or more extensive experience in the region.



Changes in law or regulation in jurisdictions in which our operations are located that affect taxes on our employees' income, or the amount or composition of compensation, may also adversely affect our ability to hire and retain qualified employees in those jurisdictions.

As described further in “Business — Regulation — Compensation Practices” in Part I, Item 1 of this Form 10-K, our compensation practices are subject to review by, and the standards of, the Federal Reserve Board. As a large global financial and banking institution, we are subject to limitations on compensation practices (which may or may not affect our competitors) by the Federal Reserve Board, the PRA, the FCA, the FDIC and other regulators worldwide. These limitations, including any imposed by or as a result of future legislation or regulation, may require us to alter our compensation practices in ways that could adversely affect our ability to attract and retain talented employees.

## We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.

Governmental scrutiny from regulators, legislative bodies and law enforcement agencies with respect to matters relating to compensation, our business practices, our past actions and other matters has increased dramatically in the past several years. The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or other government officials. Press coverage and other public statements that assert some form of wrongdoing (including, in some cases, press coverage and public statements that do not directly involve us) often result in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits.

Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, is time-consuming and expensive and can divert the time and effort of our senior management from our business. Penalties and fines sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.
Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause us significant reputational harm, which in turn could seriously harm our business prospects.

We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. See Note 27 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about certain legal and regulatory proceedings and investigations in which we are involved and Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information regarding certain mortgage-related contingencies. Our experience has been that legal claims by customers and clients increase in a market downturn and that employment-related claims increase following periods in which we have reduced our staff. Additionally, governmental entities have been and are plaintiffs in certain of the legal proceedings in which we are involved, and we may face future actions or claims by the same or other governmental entities, as well as follow-on civil litigation that is often commenced after regulatory settlements.

Recently, significant settlements by several large financial institutions, including, in some cases, us, with governmental entities have been publicly announced. The trend of large settlements with governmental entities may adversely affect the outcomes for other financial institutions in similar actions, especially where governmental officials have announced that the large settlements will be used as the basis or a template for other settlements. The uncertain regulatory enforcement environment makes it difficult to estimate probable losses, which can lead to substantial disparities between legal reserves and subsequent actual settlements or penalties.

Certain enforcement authorities have recently required admissions of wrongdoing, and, in some cases, criminal pleas, as part of the resolutions of matters brought by them against financial institutions. Any such resolution of a matter involving the firm could lead to increased exposure to civil litigation, could adversely affect our reputation, could result in penalties or limitations on our ability to do business in certain jurisdictions and could have other negative effects.



In addition, the U.S. Department of Justice has announced a policy of requiring companies to provide investigators with all relevant facts relating to the individuals responsible for the alleged misconduct in order to qualify for any cooperation credit in civil and criminal investigations of corporate wrongdoing, which may result in our incurring increased fines and penalties if the Department of Justice determines that we have not provided sufficient information about applicable individuals in connection with an investigation, as well as increased costs in responding to Department of Justice investigations. It is possible that other governmental authorities will adopt similar policies.

## The growth of electronic trading and the introduction of new trading technology may adversely affect our business and may increase competition.

Technology is fundamental to our business and our industry. The growth of electronic trading and the introduction of new technologies is changing our businesses and presenting us with new challenges. Securities, futures and options transactions are increasingly occurring electronically, both on our own systems and through other alternative trading systems, and it appears that the trend toward alternative trading systems will continue. Some of these alternative trading systems compete with us, particularly our exchange-based market-making activities, and we may experience continued competitive pressures in these and other areas. In addition, the increased use by our clients of low-cost electronic trading systems and direct electronic access to trading markets could cause a reduction in commissions and spreads. As our clients increasingly use our systems to trade directly in the markets, we may incur liabilities as a result of their use of our order routing and execution infrastructure. We have invested significant resources into the development of electronic trading systems and expect to continue to do so, but there is no assurance that the revenues generated by these systems will yield an adequate return on our investment, particularly given the generally lower commissions arising from electronic trades.
Our commodities activities, particularly our physical commodities activities, subject us to extensive regulation and involve certain potential risks, including environmental, reputational and other risks that may expose us to significant liabilities and costs.

As part of our commodities business, we purchase and sell certain physical commodities, arrange for their storage and transport, and engage in market making of commodities. The commodities involved in these activities may include crude oil, oil refined products, natural gas, liquefied natural gas, electric power, agricultural products, metals (base and precious), minerals (including unenriched uranium), emission credits, coal, freight and related products and indices.

In our investing and lending businesses, we make investments in and finance entities that engage in the production, storage and transportation of numerous commodities, including many of the commodities referenced above.

These activities subject us and/or the entities in which we invest to extensive and evolving federal, state and local energy, environmental, antitrust and other governmental laws and regulations worldwide, including environmental laws and regulations relating to, among others, air quality, water quality, waste management, transportation of hazardous substances, natural resources, site remediation and health and safety. Additionally, rising climate change concerns may lead to additional regulation that could increase the operating costs and profitability of our investments.

There may be substantial costs in complying with current or future laws and regulations relating to our commodities-related activities and investments. Compliance with these laws and regulations could require significant commitments of capital toward environmental monitoring, renovation of storage facilities or transport vessels, payment of emission fees and carbon or other taxes, and application for, and holding of, permits and licenses.



Commodities involved in our intermediation activities and investments are also subject to the risk of unforeseen or catastrophic events, which are likely to be outside of our control, including those arising from the breakdown or failure of transport vessels, storage facilities or other equipment or processes or other mechanical malfunctions, fires, leaks, spills or release of hazardous substances, performance below expected levels of output or efficiency, terrorist attacks, extreme weather events or other natural disasters or other hostile or catastrophic events. In addition, we rely on third-party suppliers or service providers to perform their contractual obligations and any failure on their part, including the failure to obtain raw materials at reasonable prices or to safely transport or store commodities, could expose us to costs or losses. Also, while we seek to insure against potential risks, we may not be able to obtain insurance to cover some of these risks and the insurance that we have may be inadequate to cover our losses.

The occurrence of any of such events may prevent us from performing under our agreements with clients, may impair our operations or financial results and may result in litigation, regulatory action, negative publicity or other reputational harm.

We may also be required to divest or discontinue certain of these activities for regulatory or legal reasons. For example, the Federal Reserve Board recently proposed regulations that could impose significant additional capital requirements on certain commodity-related activities. If that occurs, we may receive a value that is less than the then carrying value, as we may be unable to exit these activities in an orderly transaction.
In conducting our businesses around the world, we are subject to political, economic, legal, operational and other risks that are inherent in operating in many countries.

In conducting our businesses and maintaining and supporting our global operations, we are subject to risks of possible nationalization, expropriation, price controls, capital controls, exchange controls and other restrictive governmental actions, as well as the outbreak of hostilities or acts of terrorism. For example, there has been significant conflict between Russia and Ukraine in recent years, and sanctions have been imposed by the U.S. and the E.U. on certain individuals and companies in Russia. In many countries, the laws and regulations applicable to the securities and financial services industries and many of the transactions in which we are involved are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market. Any determination by local regulators that we have not acted in compliance with the application of local laws in a particular market or our failure to develop effective working relationships with local regulators could have a significant and negative effect not only on our businesses in that market but also on our reputation generally. Further, in some jurisdictions a failure to comply with laws and regulations may subject the firm and its personnel not only to civil actions but also criminal actions. We are also subject to the enhanced risk that transactions we structure might not be legally enforceable in all cases.

In June 2016, a referendum was passed for the U.K. to exit the E.U. (Brexit). The exit of the U.K. from the E.U. will likely change the arrangements by which U.K. firms are able to provide services into the E.U., which may materially adversely affect the manner in which we operate certain of our businesses in Europe and could require us to restructure certain of our operations. The outcome of the negotiations between the U.K. and the E.U. in connection with Brexit is highly uncertain. Such uncertainty has resulted in, and may continue to result in, market volatility and may negatively impact the confidence of investors and clients.



Our businesses and operations are increasingly expanding throughout the world, including in emerging and growth markets, and we expect this trend to continue. Various emerging and growth market countries have experienced severe economic and financial disruptions, including significant devaluations of their currencies, defaults or threatened defaults on sovereign debt, capital and currency exchange controls, and low or negative growth rates in their economies, as well as military activity, civil unrest or acts of terrorism. The possible effects of any of these conditions include an adverse impact on our businesses and increased volatility in financial markets generally.

While business and other practices throughout the world differ, our principal legal entities are subject in their operations worldwide to rules and regulations relating to corrupt and illegal payments, hiring practices and money laundering, as well as laws relating to doing business with certain individuals, groups and countries, such as the U.S. Foreign Corrupt Practices Act, the USA PATRIOT Act and U.K. Bribery Act. While we have invested and continue to invest significant resources in training and in compliance monitoring, the geographical diversity of our operations, employees, clients and customers, as well as the vendors and other third parties that we deal with, greatly increases the risk that we may be found in violation of such rules or regulations and any such violation could subject us to significant penalties or adversely affect our reputation.

In addition, there have been a number of highly publicized cases around the world, involving actual or alleged fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur. This misconduct has included and may include in the future the theft of proprietary information, including proprietary software. It is not always possible to deter or prevent employee misconduct and the precautions we take to prevent and detect this activity have not been and may not be effective in all cases.

## We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.

The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as the Ebola or Zika viruses, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, could create economic and financial disruptions, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses.

## Item 1B. Unresolved Staff Comments

There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.

## Item 2. Properties

Our principal executive offices are located at 200 West Street, New York, New York and comprise approximately 2.1 million square feet. The building is located on a parcel leased from Battery Park City Authority pursuant to a ground lease. Under the lease, Battery Park City Authority holds title to all improvements, including the office building, subject to Goldman Sachs' right of exclusive possession and use until June 2069, the expiration date of the lease. Under the terms of the ground lease, we made a lump sum ground rent payment in June 2007 of $161 million for rent through the term of the lease. We have offices at 30 Hudson Street in Jersey City, New Jersey, which we own and which include approximately 1.6 million square feet of office space. We have additional offices and commercial space in the U.S. and elsewhere in the Americas, which together comprise approximately 2.6 million square feet of leased and owned space.

In Europe, the Middle East and Africa, we have offices that total approximately 1.6 million square feet of leased and owned space. Our European headquarters is located in London at Peterborough Court, pursuant to a lease that we can terminate in 2021. In total, we have offices with approximately 1.2 million square feet in London, relating to various properties. We are currently constructing a 1.1 million square foot office in London. We expect initial occupancy during 2019.

In Asia, Australia and New Zealand, we have offices with approximately 1.9 million square feet. Our headquarters in this region are in Tokyo, at the Roppongi Hills Mori Tower, and in Hong Kong, at the Cheung Kong Center. In Japan, we currently have offices with approximately 219,000 square feet, the majority of which have leases that will expire in 2018. In Hong Kong, we currently have offices with approximately 315,000 square feet, the majority of which have leases that will expire in 2023.

In the preceding paragraphs, square footage figures are provided only for properties that are used in the operation of our businesses.



See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance-Sheet Arrangements and Contractual Obligations — Contractual Obligations” in Part II, Item 7 of this Form 10-K for information about exit costs we may incur in the future to the extent we (i) reduce our space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate and, consequently, dispose of existing space that had been held for potential growth.

## Item 3. Legal Proceedings

We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses. Many of these proceedings are in early stages, and many of these cases seek an indeterminate amount of damages. However, we believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but may be material to our operating results for any particular period, depending, in part, upon the operating results for such period. Given the range of litigation and investigations presently under way, our litigation expenses can be expected to remain high. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of Estimates” in Part II, Item 7 of this Form 10-K. See Notes 18 and 27 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about certain judicial, regulatory and legal proceedings.

## Item 4. Mine Safety Disclosures

Not applicable.

## Executive Officers of The Goldman Sachs Group, Inc.

Set forth below are the name, age, present title, principal occupation and certain biographical information for our executive officers. Our executive officers have been appointed by and serve at the pleasure of our board of directors.

## Lloyd C. Blankfein, 62

Mr. Blankfein has been our Chairman and Chief Executive Officer since June 2006, and a director since April 2003.

## Alan M. Cohen, 66

Mr. Cohen has been an Executive Vice President of Goldman Sachs and Global Head of Compliance since February 2004.

## Edith W. Cooper, 55

Ms. Cooper has been an Executive Vice President of Goldman Sachs since April 2011 and Global Head of Human Capital Management since March 2008.

## Richard J. Gnodde, 56

Mr. Gnodde has been a Vice Chairman of Goldman Sachs since January 2017, Chief Executive Officer or co-Chief Executive Officer of Goldman Sachs International since 2006 and co-head of the Investment Banking Division since 2011.

## Gregory K. Palm, 68

Mr. Palm has been an Executive Vice President of Goldman Sachs since May 1999, and General Counsel and head or co-head of the Legal Department since May 1992.

## John F.W. Rogers, 60

Mr. Rogers has been an Executive Vice President of Goldman Sachs since April 2011 and Chief of Staff and Secretary to the Board of Directors of Goldman Sachs since December 2001.

## Pablo J. Salame, 51

Mr. Salame has been a Vice Chairman of Goldman Sachs since January 2017 and global co-head of the Securities Division since 2008.

## Harvey M. Schwartz, 52

Mr. Schwartz has been President and co-Chief Operating Officer of Goldman Sachs since January 2017. Additionally, he will continue in his role as Chief Financial Officer (which he assumed in January 2013) through April 2017. From February 2008 to January 2013, Mr. Schwartz was global co-head of the Securities Division.

## David M. Solomon, 55

Mr. Solomon has been President and co-Chief Operating Officer of Goldman Sachs since January 2017. He had previously served as co-head of the Investment Banking Division since July 2006.



## PART II

## Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The principal market on which our common stock is traded is the NYSE. Information relating to the high and low sales prices per share of our common stock, as reported by the Consolidated Tape Association, for each full quarterly period during 2014, 2015 and 2016 is set forth under the heading “Supplemental Financial Information — Common Stock Price Range” in Part II, Item 8 of this Form 10-K. As of February 10, 2017, there were 8,177 holders of record of our common stock.

The table below presents dividends declared by Group Inc. during 2016 and 2015.

<table><tr><td></td><td>Date of Declaration</td><td>Dividend Declared Per Common Share</td></tr><tr><td>2016</td><td></td><td></td></tr><tr><td>First Quarter</td><td>January 19, 2016</td><td>$0.65</td></tr><tr><td>Second Quarter</td><td>April 18, 2016</td><td>$0.65</td></tr><tr><td>Third Quarter</td><td>July 18, 2016</td><td>$0.65</td></tr><tr><td>Fourth Quarter</td><td>October 17, 2016</td><td>$0.65</td></tr><tr><td>2015</td><td></td><td></td></tr><tr><td>First Quarter</td><td>January 15, 2015</td><td>$0.60</td></tr><tr><td>Second Quarter</td><td>April 15, 2015</td><td>$0.65</td></tr><tr><td>Third Quarter</td><td>July 15, 2015</td><td>$0.65</td></tr><tr><td>Fourth Quarter</td><td>October 14, 2015</td><td>$0.65</td></tr></table>

The declaration of dividends by Group Inc. is subject to the discretion of the Board of Directors of Group Inc. (Board). Our Board will take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us, the effect on our debt ratings and such other factors as our Board may deem relevant. The holders of our common stock share proportionately on a per share basis in all dividends and other distributions on common stock declared by our Board. See “Business — Regulation” in Part I, Item 1 of this Form 10-K for information about potential regulatory limitations on our receipt of funds from our regulated subsidiaries and our payment of dividends to shareholders of Group Inc. Prior to the payment of dividends, we must receive confirmation that the Federal Reserve Board does not object to such payment.
The table below presents purchases made by or on behalf of Group Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the fourth quarter of 2016. Information relating to compensation plans under which our equity securities are authorized for issuance is presented in Part III, Item 12 of this Form 10-K.

<table><tr><td></td><td>Total Shares Purchased</td><td>Average Price Paid Per Share</td><td>Total Shares Purchased as Part of a Publicly Announced Program</td><td>Maximum Shares That May Yet Be Purchased Under the Program</td></tr><tr><td>October 2016</td><td>2,650,628</td><td>$172.13</td><td>2,650,628</td><td>31,545,097</td></tr><tr><td>November 2016</td><td>3,164,013</td><td>$198.20</td><td>3,164,013</td><td>28,381,084</td></tr><tr><td>December 2016</td><td>1,768,622</td><td>$235.57</td><td>1,768,622</td><td>26,612,462</td></tr><tr><td>Total</td><td>7,583,263</td><td></td><td>7,583,263</td><td></td></tr></table>

Since March 2000, our Board has approved a repurchase program authorizing repurchases of up to 505 million shares of our common stock. The repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), the amounts and timing of which are determined primarily by our current and projected capital position, but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock. The repurchase program has no set expiration or termination date. Prior to repurchasing common stock, we must receive confirmation that the Board of Governors of the Federal Reserve System does not object to such capital actions.

## Item 6. Selected Financial Data

The Selected Financial Data table is set forth under Part II, Item 8 of this Form 10-K.



## Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

## Introduction

The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

We report our activities in four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. See “Results of Operations” below for further information about our business segments.

When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” and “our,” we mean Group Inc. and its consolidated subsidiaries.

References to “this Form 10-K” are to our Annual Report on Form 10-K for the year ended December 31, 2016. References to “the 2015 Form 10-K” are to our Annual Report on Form 10-K for the year ended December 31, 2015. All references to “the consolidated financial statements” or “Supplemental Financial Information” are to Part II, Item 8 of this Form 10-K. All references to 2016, 2015 and 2014 refer to our years ended, or the dates, as the context requires, December 31, 2016, December 31, 2015 and December 31, 2014, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.
In this discussion and analysis of our financial condition and results of operations, we have included information that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, and may also include statements about the effect of changes to the capital, leverage, liquidity, long-term debt and total loss-absorbing capacity rules applicable to banks and bank holding companies, the impact of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on our businesses and operations, and various legal proceedings, governmental investigations or mortgage-related contingencies as set forth in Notes 27 and 18, respectively, to the consolidated financial statements, as well as statements about the results of our Dodd-Frank Act and firm stress tests, statements about the objectives and effectiveness of our business continuity plan, information security program, risk management and liquidity policies, statements about our resolution plan and resolution strategy and their implications for our debtholders and other stakeholders, statements about trends in or growth opportunities for our businesses, statements about our future status, activities or reporting under U.S. or non-U.S. banking and financial regulation, statements about the possible effects of the U.K. referendum vote to leave the European Union (E.U.), and statements about our investment banking transaction backlog.

By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in these forward-looking statements include, among others, those described in “Risk Factors” in Part I, Item 1A of this Form 10-K and “Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995” in Part I, Item 1 of this Form 10-K.



## Executive Overview

2016 versus 2015. We generated net earnings of $7.40 billion and diluted earnings per common share of $16.29 for 2016, an increase of 22% and 34%, respectively, compared with $6.08 billion and $12.14 per share for 2015. Return on average common shareholders' equity (ROE) was 9.4% for 2016, compared with 7.4% for 2015. Book value per common share was $182.47 as of December 2016, 6.7% higher compared with the end of 2015.

Net revenues were $30.61 billion for 2016, 9% lower than 2015, due to significantly lower net revenues in Investing & Lending and lower net revenues in Investment Banking, Institutional Client Services and Investment Management. These results reflected the impact of a challenging operating environment during the first half of the year, particularly during the first quarter, although the environment improved during the second half of the year.

Operating expenses were $20.30 billion for 2016, 19% lower than 2015, primarily due to significantly lower non-compensation expenses, primarily reflecting significantly lower net provisions for mortgage-related litigation and regulatory matters, as the prior year included provisions for the settlement agreement with the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (RMBS Working Group), as well as lower market development expenses and professional fees, reflecting expense savings initiatives. Compensation and benefits expenses were also lower, reflecting a decrease in net revenues and the impact of expense savings initiatives.

We continued to maintain strong capital ratios and liquidity, while returning $7.20 billion of capital to shareholders during 2016. During the year, we repurchased 36.6 million shares of our common stock for a total cost of $6.07 billion and paid common stock dividends of $1.13 billion. Our Common Equity Tier 1 ratio as calculated in accordance with the Standardized approach and the Basel III Advanced approach, in each case reflecting the applicable transitional provisions, was 14.5% and 13.1%, respectively, and our global core liquid assets were $226 billion, all as of December 2016. See Note 20 to the consolidated financial statements for further information about our capital ratios. See “Risk Management — Liquidity Risk Management” below for further information about our global core liquid assets.
In the context of the challenging environment during the first half of 2016, we completed an initiative that identified areas where we can operate more efficiently, resulting in a reduction of approximately $900 million in annual run rate compensation. For 2016, net savings from this initiative, after severance and other related costs, were approximately $500 million.

2015 versus 2014. We generated net earnings of $6.08 billion and diluted earnings per common share of $12.14 for 2015, a decrease of 28% and 29%, respectively, compared with $8.48 billion and $17.07 per share for 2014. ROE was 7.4% for 2015, compared with 11.2% for 2014. During 2015, we recorded provisions for the settlement agreement with the RMBS Working Group of $3.37 billion ($2.99 billion after-tax), which reduced diluted earnings per common share by $6.53 and ROE by 3.8 percentage points. See Note 27 to the consolidated financial statements in Part II, Item 8 of the 2015 Form 10-K for further information.

Book value per common share was $171.03 as of December 2015, 4.9% higher compared with the end of 2014. During 2015, we repurchased 22.1 million shares of our common stock for a total cost of $4.20 billion.

Net revenues were $33.82 billion for 2015, 2% lower than 2014, as significantly lower net revenues in Investing & Lending were largely offset by higher net revenues in Investment Banking and slightly higher net revenues in Investment Management. Net revenues in Institutional Client Services were essentially unchanged compared with 2014.

Operating expenses were $25.04 billion for 2015, 13% higher than 2014, due to significantly higher non-compensation expenses, primarily reflecting significantly higher net provisions for mortgage-related litigation and regulatory matters. Compensation and benefits expenses were essentially unchanged compared with the prior year.

As of December 2015, our Common Equity Tier 1 ratio as calculated in accordance with the Standardized approach and the Basel III Advanced approach, in each case reflecting the applicable transitional provisions, was 13.6% and 12.4%, respectively. In addition, our global core liquid assets were $199 billion as of December 2015.



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

## Business Environment

## Global

During 2016, real gross domestic product (GDP) growth appeared to slow in advanced economies and appeared mixed in emerging market economies compared with 2015. In advanced economies, growth was lower in the U.S., the Euro area, the U.K. and Japan. In emerging markets, growth slowed in China and appeared to slow in India, while real GDP appeared to contract less in Brazil and Russia than in 2015. Monetary policy divergence continued in 2016, as the U.S. Federal Reserve increased its target interest rate again, while monetary policy remained accommodative in Europe and Japan. In June, a referendum was passed for the U.K. to exit the E.U., and in November, the U.S. held its presidential election. The market reaction to the outcomes of both events was generally more positive than expectations. The price of crude oil (WTI) increased by 45% in 2016 and, in the fourth quarter, OPEC members announced an agreement to reduce oil production. In investment banking, industry-wide mergers and acquisitions activity remained strong for 2016, but declined compared with the level of activity in 2015. Industry-wide volumes in equity underwriting declined compared with a strong 2015, while industry-wide debt underwriting volumes increased compared with the prior year.

## United States

In the U.S., real GDP increased by 1.6% in 2016, compared with an increase of 2.6% in 2015, as growth in total fixed investment and consumer expenditures declined. Measures of consumer confidence were mixed on average compared with the prior year, but increased significantly in the fourth quarter. The unemployment rate declined to 4.7% at the end of 2016, and labor market indicators suggest the U.S. economy is close to full employment. Housing starts, sales, and prices increased compared with 2015, while measures of inflation also increased. The U.S. Federal Reserve raised its target rate for the federal funds rate at the December meeting to a range of 0.50% to 0.75%. The yield on the 10-year U.S. Treasury note increased by 18 basis points during 2016 to 2.45%. In equity markets, the Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ Composite Index increased by 13%, 10% and 8%, respectively, during 2016.

## Europe

In the Euro area, real GDP increased by 1.7% in 2016, compared with an increase of 1.9% in 2015. Growth in consumer spending declined, while growth in fixed investment and government consumption increased. Measures of inflation remained subdued, prompting the European Central Bank (ECB) to announce multiple easing measures in the first quarter, cutting the deposit rate by 10 basis points to (0.40)% and lowering the main refinancing operations rate by 5 basis points to 0.00%, as well as launching a new series of targeted longer-term refinancing operations, increasing the volume of monthly purchases of bonds, and adding investment grade, non-financial corporate bonds to the list of bonds purchased under its asset purchase program. In December, the ECB announced an extension of its asset purchase program through at least the end of 2017, although the pace of purchases will be lower. The Euro depreciated by 3% against the U.S. dollar. In the U.K., real GDP increased by 1.8% in 2016, compared with an increase of 2.2% in 2015. Following the passage of the U.K. referendum, the Bank of England announced a monetary easing package comprised of a 25 basis points cut to the official bank rate, £70 billion of asset purchases, and a Term Funding Scheme. The British pound depreciated by 16% against the U.S. dollar during 2016, reaching its lowest level against the U.S. dollar in over 30 years. Yields on 10-year government bonds in the region generally decreased during the year. In equity markets, the FTSE 100 Index, DAX Index, CAC 40 Index and Euro Stoxx 50 Index increased by 14%, 7%, 5% and 1%, respectively, during 2016.



## Asia

In Japan, real GDP increased by 1.0% in 2016, compared with an increase of 1.2% in 2015. In 2016, the Bank of Japan introduced a negative interest rate policy during the first quarter and altered the framework for its Quantitative and Qualitative Easing program during the third quarter, shifting from purchasing set quantities of assets to targeting a 0% yield on 10-year Japanese government bonds. The yield on 10-year Japanese government bonds declined into negative territory for most of the year, the U.S. dollar depreciated by 3% against the Japanese yen and the Nikkei 225 Index ended the year essentially unchanged. In China, real GDP increased by 6.7% in 2016, compared with an increase of 6.9% in 2015. During 2016, the People's Bank of China announced cuts to its reserve requirement ratio. Measures of inflation increased and the U.S. dollar appreciated by 7% against the Chinese yuan. In equity markets, the Shanghai Composite Index decreased by 12% during 2016, while the Hang Seng Index ended the year essentially unchanged. In India, real GDP appeared to increase by 6.8% in 2016, compared with an increase of 7.2% in 2015, and the rate of inflation was essentially unchanged from 2015. The U.S. dollar appreciated by 3% against the Indian rupee and the BSE Sensex Index increased by 2% during 2016.

## Other Markets

In Brazil, real GDP appeared to contract by 3.4% in 2016, compared with a contraction of 3.8% in 2015. The U.S. dollar depreciated by 18% against the Brazilian real and the Bovespa Index increased by 39%. In Russia, real GDP appeared to contract by 0.2% in 2016, compared with a contraction of 2.8% in 2015. The U.S. dollar depreciated by 16% against the Russian ruble and the MICEX Index increased by 27% during 2016.

## Critical Accounting Policies

## Fair Value

Fair Value Hierarchy. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value (i.e., inventory), as well as certain other financial assets and financial liabilities, are reflected in our consolidated statements of financial condition at fair value (i.e., marked-to-market), with related gains or losses generally recognized in our consolidated statements of earnings. The use of fair value to measure financial instruments is fundamental to our risk management practices and is our most critical accounting policy.

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. We measure certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks). In determining fair value, the hierarchy under U.S. generally accepted accounting principles (U.S. GAAP) gives (i) the highest priority to unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities (level 1 inputs), (ii) the next priority to inputs other than level 1 inputs that are observable, either directly or indirectly (level 2 inputs), and (iii) the lowest priority to inputs that cannot be observed in market activity (level 3 inputs). In evaluating the significance of a valuation input, we consider, among other factors, a portfolio’s net risk exposure to that input. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

The fair values for substantially all of our financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and our credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads.



Instruments categorized within level 3 of the fair value hierarchy are those which require one or more significant inputs that are not observable. As of December 2016 and December 2015, level 3 financial assets represented 2.7% and 2.8%, respectively, of our total assets. See Notes 5 through 8 to the consolidated financial statements for further information about level 3 financial assets, including changes in level 3 financial assets and related fair value measurements. Absent evidence to the contrary, instruments classified within level 3 of the fair value hierarchy are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the transaction date, we use other methodologies to determine fair value, which vary based on the type of instrument. Estimating the fair value of level 3 financial instruments requires judgments to be made. These judgments include:

• Determining the appropriate valuation methodology and/or model for each type of level 3 financial instrument;

• Determining model inputs based on an evaluation of all relevant empirical market data, including prices evidenced by market transactions, interest rates, credit spreads, volatilities and correlations; and

• Determining appropriate valuation adjustments, including those related to illiquidity or counterparty credit quality.

Regardless of the methodology, valuation inputs and assumptions are only changed when corroborated by substantive evidence.

Controls Over Valuation of Financial Instruments. Market makers and investment professionals in our revenue-producing units are responsible for pricing our financial instruments. Our control infrastructure is independent of the revenue-producing units and is fundamental to ensuring that all of our financial instruments are appropriately valued at market-clearing levels. In the event that there is a difference of opinion in situations where estimating the fair value of financial instruments requires judgment (e.g., calibration to market comparables or trade comparison, as described below), the final valuation decision is made by senior managers in control and support functions. This independent price verification is critical to ensuring that our financial instruments are properly valued.
Price Verification. All financial instruments at fair value in levels 1, 2 and 3 of the fair value hierarchy are subject to our independent price verification process. The objective of price verification is to have an informed and independent opinion with regard to the valuation of financial instruments under review. Instruments that have one or more significant inputs which cannot be corroborated by external market data are classified within level 3 of the fair value hierarchy. Price verification strategies utilized by our independent control and support functions include:

• Trade Comparison. Analysis of trade data (both internal and external where available) is used to determine the most relevant pricing inputs and valuations.

• External Price Comparison. Valuations and prices are compared to pricing data obtained from third parties (e.g., brokers or dealers, Markit, Bloomberg, IDC, TRACE). Data obtained from various sources is compared to ensure consistency and validity. When broker or dealer quotations or third-party pricing vendors are used for valuation or price verification, greater priority is generally given to executable quotations.

• Calibration to Market Comparables. Market-based transactions are used to corroborate the valuation of positions with similar characteristics, risks and components.

• Relative Value Analyses. Market-based transactions are analyzed to determine the similarity, measured in terms of risk, liquidity and return, of one instrument relative to another or, for a given instrument, of one maturity relative to another.

• Collateral Analyses. Margin calls on derivatives are analyzed to determine implied values which are used to corroborate our valuations.

• Execution of Trades. Where appropriate, trading desks are instructed to execute trades in order to provide evidence of market-clearing levels.

• Backtesting. Valuations are corroborated by comparison to values realized upon sales.

See Notes 5 through 8 to the consolidated financial statements for further information about fair value measurements.

Review of Net Revenues. Independent control and support functions ensure adherence to our pricing policy through a combination of daily procedures, including the explanation and attribution of net revenues based on the underlying factors. Through this process we independently validate net revenues, identify and resolve potential fair value or trade booking issues on a timely basis and seek to ensure that risks are being properly categorized and quantified.



Review of Valuation Models. Our independent model risk management group (Model Risk Management), consisting of quantitative professionals who are separate from model developers, performs an independent model review and validation process of our valuation models. New or changed models are reviewed and approved prior to being put into use. Models are evaluated and re-approved annually to assess the impact of any changes in the product or market and any market developments in pricing theories. See “Risk Management — Model Risk Management” for further information about the review and validation of our valuation models.

## Goodwill and Identifiable Intangible Assets

Goodwill. Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events occur or circumstances change that indicate an impairment may exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed by comparing the estimated fair value of each reporting unit with its estimated net book value.

During the fourth quarter of 2016, we assessed goodwill for impairment using a qualitative assessment. The qualitative assessment required management to make judgments and to evaluate several factors, which included, but were not limited to, performance indicators, firm and industry events, macroeconomic indicators and fair value indicators. Based on our evaluation of these factors, we determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount.

Notwithstanding the results of the qualitative assessment, since the 2015 quantitative goodwill test determined that the estimated fair value of the Fixed Income, Currency and Commodities Client Execution reporting unit was not substantially in excess of its carrying value, we also performed a quantitative test on this reporting unit during the fourth quarter of 2016. In the quantitative test, the estimated fair value of the Fixed Income, Currency and Commodities Client Execution reporting unit substantially exceeded its carrying value.

Therefore, we determined that goodwill for all reporting units was not impaired.
Estimating the fair value of our reporting units requires management to make judgments. Critical inputs to the fair value estimates include projected earnings and attributed equity. There is inherent uncertainty in the projected earnings. The net book value of each reporting unit reflects an allocation of total shareholders' equity and represents the estimated amount of total shareholders' equity required to support the activities of the reporting unit under currently applicable regulatory capital requirements. See "Equity Capital Management and Regulatory Capital" for further information about our capital requirements.

If we experience a prolonged or severe period of weakness in the business environment or financial markets, or additional increases in capital requirements, our goodwill could be impaired in the future. In addition, significant changes to other inputs of the quantitative goodwill test could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future.

See Note 13 to the consolidated financial statements for further information about our goodwill.

Identifiable Intangible Assets. We amortize our identifiable intangible assets over their estimated useful lives generally using the straight-line method. Identifiable intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable.

A prolonged or severe period of market weakness, or significant changes in regulation, could adversely impact our businesses and impair the value of our identifiable intangible assets. In addition, certain events could indicate a potential impairment of our identifiable intangible assets, including weaker business performance resulting in a decrease in our customer base and decreases in revenues from customer contracts and relationships. Management judgment is required to evaluate whether indications of potential impairment have occurred, and to test intangible assets for impairment if required.

An impairment, generally calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the total of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

See Note 13 to the consolidated financial statements for further information about our identifiable intangible assets.



## Recent Accounting Developments

See Note 3 to the consolidated financial statements for information about Recent Accounting Developments.

## Use of Estimates

The use of generally accepted accounting principles requires management to make certain estimates and assumptions. In addition to the estimates we make in connection with fair value measurements and the accounting for goodwill and identifiable intangible assets, the use of estimates and assumptions is also important in determining provisions for losses that may arise from litigation, regulatory proceedings (including governmental investigations) and tax audits, and the allowance for losses on loans and lending commitments held for investment.

We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. In addition, we estimate the upper end of the range of reasonably possible aggregate loss in excess of the related reserves for litigation and regulatory proceedings where we believe the risk of loss is more than slight. See Notes 18 and 27 to the consolidated financial statements for information about certain judicial, litigation and regulatory proceedings.

Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case, proceeding or investigation, our experience and the experience of others in similar cases, proceedings or investigations, and the opinions and views of legal counsel.

In accounting for income taxes, we recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. See Note 24 to the consolidated financial statements for further information about accounting for income taxes.

We also estimate and record an allowance for credit losses related to our loans receivable and lending commitments held for investment. Management’s estimate of loan losses entails judgment about loan collectability at the reporting dates, and there are uncertainties inherent in those judgments. See Note 9 to the consolidated financial statements for further information about the allowance for losses on loans and lending commitments held for investment.

## Results of Operations

The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. See “Risk Factors” in Part I, Item 1A of this Form 10-K for further information about the impact of economic and market conditions on our results of operations.

## Financial Overview

The table below presents an overview of our financial results and selected financial ratios.

<table><tr><td rowspan="2">$ in \text{millions, except per share amounts} \)</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Net revenues</td><td>30,608</td><td>33,820</td><td>34,528</td></tr><tr><td>Pre-tax earnings</td><td>10,304</td><td>8,778</td><td>12,357</td></tr><tr><td>Net earnings</td><td>7,398</td><td>6,083</td><td>8,477</td></tr><tr><td>Net earnings applicable to common shareholders</td><td>7,087</td><td>5,568</td><td>8,077</td></tr><tr><td>Diluted earnings per common share</td><td>16.29</td><td>12.14</td><td>17.07</td></tr><tr><td>Return on average common shareholders&#x27; equity</td><td>9.4%</td><td>7.4%</td><td>11.2%</td></tr><tr><td>Net earnings to average assets</td><td>0.8%</td><td>0.7%</td><td>0.9%</td></tr><tr><td>Return on average total shareholders&#x27; equity</td><td>8.5%</td><td>7.0%</td><td>10.5%</td></tr><tr><td>Total average equity to average assets</td><td>9.8%</td><td>9.9%</td><td>9.0%</td></tr><tr><td>Dividend payout ratio</td><td>16.0%</td><td>21.0%</td><td>13.2%</td></tr></table>

In the table above:

• Net earnings applicable to common shareholders for 2016 includes a benefit of $266 million, reflected in preferred stock dividends, related to the exchange of APEX for shares of Series E and Series F Preferred Stock during 2016. See Note 19 to the consolidated financial statements for further information.

• ROE is calculated by dividing net earnings applicable to common shareholders by average monthly common shareholders’ equity. The table below presents our average common shareholders’ equity.

<table><tr><td rowspan="2">\( in \text{millions} \)</td><td colspan="3">Average for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Total shareholders&#x27; equity</td><td>$ 86,658</td><td>$ 86,314</td><td>$80,839</td></tr><tr><td>Preferred stock</td><td>(11,304)</td><td>(10,585)</td><td>(8,585)</td></tr><tr><td>Common shareholders&#x27; equity</td><td>$ 75,354</td><td>$ 75,729</td><td>$72,254</td></tr></table>

• Return on average total shareholders’ equity is calculated by dividing net earnings by average monthly total shareholders’ equity.

• Dividend payout ratio is calculated by dividing dividends declared per common share by diluted earnings per common share.



## Net Revenues

The table below presents our net revenues by line item in the consolidated statements of earnings.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Investment banking</td><td>$ 6,273</td><td>$ 7,027</td><td>$ 6,464</td></tr><tr><td>Investment management</td><td>5,407</td><td>5,868</td><td>5,748</td></tr><tr><td>Commissions and fees</td><td>3,208</td><td>3,320</td><td>3,316</td></tr><tr><td>Market making</td><td>9,933</td><td>9,523</td><td>8,365</td></tr><tr><td>Other principal transactions</td><td>3,200</td><td>5,018</td><td>6,588</td></tr><tr><td>Total non-interest revenues</td><td>28,021</td><td>30,756</td><td>30,481</td></tr><tr><td>Interest income</td><td>9,691</td><td>8,452</td><td>9,604</td></tr><tr><td>Interest expense</td><td>7,104</td><td>5,388</td><td>5,557</td></tr><tr><td>Net interest income</td><td>2,587</td><td>3,064</td><td>4,047</td></tr><tr><td>Total net revenues</td><td>$30,608</td><td>$33,820</td><td>$34,528</td></tr></table>

## In the table above:

• Investment banking is comprised of revenues (excluding net interest) from financial advisory and underwriting assignments, as well as derivative transactions directly related to these assignments. These activities are included in our Investment Banking segment.

• Investment management is comprised of revenues (excluding net interest) from providing investment management services to a diverse set of clients, as well as wealth advisory services and certain transaction services to high-net-worth individuals and families. These activities are included in our Investment Management segment.

• Commissions and fees is comprised of revenues from executing and clearing client transactions on major stock, options and futures exchanges worldwide, as well as over-the-counter (OTC) transactions. These activities are included in our Institutional Client Services and Investment Management segments.

• Market making is comprised of revenues (excluding net interest) from client execution activities related to making markets in interest rate products, credit products, mortgages, currencies, commodities and equity products. These activities are included in our Institutional Client Services segment.

• Other principal transactions is comprised of revenues (excluding net interest) from our investing activities and the origination of loans to provide financing to clients. In addition, Other principal transactions includes revenues related to our consolidated investments. These activities are included in our Investing & Lending segment.
Operating Environment. During the first quarter of 2016, our business activities were negatively impacted by challenging trends in the operating environment, including concerns and uncertainties about global economic growth and central bank activity as well as higher levels of volatility, all of which contributed to significant price pressure at the beginning of the year across both equity and fixed income markets. These factors negatively impacted investor conviction and risk appetite for market-making activities, and industry-wide equity underwriting and mergers and acquisitions activity for investment banking activities. Results in other principal transactions also reflected the impact of these difficult market and economic conditions. At the start of the second quarter of 2016, concerns about global economic growth moderated and conditions improved in many businesses, including a rebound in investment banking activities and improved results in other principal transactions. However, later in the second quarter, the market became increasingly focused on the political uncertainty and economic implications surrounding the potential exit of the U.K. from the E.U., impacting market-making activities.

The operating environment improved during the second half of 2016, as global equity markets steadily increased and credit spreads tightened, providing a more favorable backdrop for our business activities. For investment management activities, our assets under supervision continued to increase during 2016. The mix of our average assets under supervision shifted slightly compared with 2015 from long-term assets under supervision to liquidity products.

If the trend of macroeconomic concerns continues over the long term, and market-making activity levels, investment banking activity levels, or assets under supervision decline or if investors continue the trend of favoring assets under supervision that typically generate lower fees, net revenues would likely be negatively impacted. See “Segment Operating Results” below for further information about the operating environment and material trends and uncertainties that may impact our results of operations.

During 2015, the operating environment for market-making activities was positively impacted by diverging central bank monetary policies in the U.S. and the Euro area in the first quarter, as increased volatility levels contributed to strong client activity levels in currencies, interest rate products and equity products. However, during the remainder of 2015, concerns about global growth and uncertainty about the U.S. Federal Reserve’s interest rate policy, along with lower global equity prices, widening high-yield credit spreads and declining commodity prices, contributed to lower levels of client activity, particularly in mortgages and credit, and more difficult market-making conditions.



The operating environment for investment banking activities for 2015 reflected strong industry-wide mergers and acquisitions activity. In addition, investment management reflected an environment generally characterized by strong client net inflows, which more than offset the declines in equity and fixed income asset prices. Although other principal transactions for 2015 benefited from favorable company-specific events, including sales, initial public offerings and financings, a decline in global equity prices and widening high-yield credit spreads during the second half of 2015 impacted results.

## 2016 versus 2015

Net revenues in the consolidated statements of earnings were $30.61 billion for 2016, 9% lower than 2015, reflecting the impact of a challenging operating environment during the first half of the year, particularly during the first quarter, although the environment improved during the second half of the year. The decrease in net revenues was primarily due to significantly lower other principal transactions revenues and lower investment banking revenues, net interest income and investment management revenues. In addition, commissions and fees were slightly lower. These results were partially offset by slightly higher market-making revenues.

Non-Interest Revenues. Investment banking revenues in the consolidated statements of earnings were $6.27 billion for 2016, 11% lower compared with a strong 2015. Revenues in financial advisory were lower compared with a strong 2015, reflecting a decrease in industry-wide transactions. Revenues in underwriting were lower compared with a strong 2015, due to significantly lower revenues in equity underwriting, reflecting a decrease in industry-wide volumes. Revenues in debt underwriting were significantly higher, reflecting significantly higher revenues from asset-backed activity and higher revenues from leveraged finance activity.

Investment management revenues in the consolidated statements of earnings were $5.41 billion for 2016, 8% lower than 2015, primarily reflecting significantly lower incentive fees compared with a strong 2015. In addition, management and other fees were slightly lower, reflecting shifts in the mix of client assets and strategies, partially offset by the impact of higher average assets under supervision.

Commissions and fees in the consolidated statements of earnings were $3.21 billion for 2016, 3% lower than 2015, reflecting lower listed cash equity volumes in Asia and Europe, consistent with market volumes in these regions. Market-making revenues in the consolidated statements of earnings were $9.93 billion for 2016, 4% higher than 2015, due to significantly higher revenues in interest rate products and credit products. These results were partially offset by significantly lower revenues in equity cash products and lower revenues in currencies, mortgages, equity derivative products and commodities.

Other principal transactions revenues in the consolidated statements of earnings were $3.20 billion for 2016, 36% lower than 2015, primarily due to significantly lower revenues from investments in equities, primarily reflecting a significant decrease in net gains from private equities, driven by company-specific events and corporate performance. In addition, revenues in debt securities and loans were significantly lower compared with 2015, reflecting significantly lower revenues related to relationship lending activities, due to the impact of changes in credit spreads on economic hedges. Losses related to these hedges were $596 million in 2016, compared with gains of $329 million in 2015. This decrease was partially offset by higher net gains from investments in debt instruments. See Note 9 to the consolidated financial statements for further information about economic hedges related to our relationship lending activities.

Net Interest Income. Net interest income in the consolidated statements of earnings was $2.59 billion for 2016, 16% lower than 2015, reflecting an increase in interest expense primarily due to the impact of higher interest rates on other interest-bearing liabilities, interest-bearing deposits and collateralized financings, and increases in total average long-term borrowings and total average interest-bearing deposits. The increase in interest expense was partially offset by higher interest income related to collateralized agreements, reflecting the impact of higher interest rates, and loans receivable, reflecting an increase in total average balances and the impact of higher interest rates. See “Statistical Disclosures — Distribution of Assets, Liabilities and Shareholders’ Equity” for further information about our sources of net interest income.

## 2015 versus 2014

Net revenues in the consolidated statements of earnings were $33.82 billion for 2015, 2% lower than 2014, reflecting significantly lower other principal transactions revenues and net interest income, largely offset by higher market-making revenues and investment banking revenues, as well as slightly higher investment management revenues. Commissions and fees were essentially unchanged compared with 2014.



Non-Interest Revenues. Investment banking revenues in the consolidated statements of earnings were $7.03 billion for 2015, 9% higher than 2014, due to significantly higher revenues in financial advisory, reflecting strong client activity, particularly in the U.S. Industry-wide completed mergers and acquisitions increased significantly compared with the prior year. Revenues in underwriting were lower compared with a strong 2014. Revenues in debt underwriting were lower compared with 2014, reflecting significantly lower leveraged finance activity. Revenues in equity underwriting were also lower, reflecting significantly lower revenues from initial public offerings and convertible offerings, partially offset by significantly higher revenues from secondary offerings.

Investment management revenues in the consolidated statements of earnings were $5.87 billion for 2015, 2% higher than 2014, due to slightly higher management and other fees, primarily reflecting higher average assets under supervision, and higher transaction revenues.

Commissions and fees in the consolidated statements of earnings were $3.32 billion for 2015, essentially unchanged compared with 2014.

Market-making revenues in the consolidated statements of earnings were $9.52 billion for 2015, 14% higher than 2014. Excluding a gain of $289 million in 2014 related to the extinguishment of certain of our junior subordinated debt, market-making revenues were 18% higher than 2014, reflecting significantly higher revenues in interest rate products, currencies, equity cash products and equity derivatives. These increases were partially offset by significantly lower revenues in mortgages, commodities and credit products.

Other principal transactions revenues in the consolidated statements of earnings were $5.02 billion for 2015, 24% lower than 2014. This decrease was primarily due to lower revenues from investments in equities, principally reflecting the sale of Metro International Trade Services (Metro) in the fourth quarter of 2014 and lower net gains from investments in private equities, driven by corporate performance. In addition, revenues in debt securities and loans were significantly lower, reflecting lower net gains from investments.
Net Interest Income. Net interest income in the consolidated statements of earnings was $3.06 billion for 2015, 24% lower than 2014. The decrease compared with 2014 was due to lower interest income resulting from a reduction in interest income related to financial instruments owned, at fair value, partially offset by the impact of an increase in total average loans receivable. The decrease in interest income was partially offset by a decrease in interest expense, which primarily reflected lower interest expense related to financial instruments sold, but not yet purchased, at fair value and other interest-bearing liabilities, partially offset by higher interest expense related to long-term borrowings. See “Supplemental Financial Information — Statistical Disclosures — Distribution of Assets, Liabilities and Shareholders’ Equity” for further information about our sources of net interest income.

## Operating Expenses

Our operating expenses are primarily influenced by compensation, headcount and levels of business activity. Compensation and benefits includes salaries, discretionary compensation, amortization of equity awards and other items such as benefits. Discretionary compensation is significantly impacted by, among other factors, the level of net revenues, overall financial performance, prevailing labor markets, business mix, the structure of our share-based compensation programs and the external environment. In addition, see “Use of Estimates” for additional information about expenses that may arise from litigation and regulatory proceedings.

In the context of the challenging environment during the first half of 2016, we completed an initiative that identified areas where we can operate more efficiently, resulting in a reduction of approximately $900 million in annual run rate compensation. For 2016, net savings from this initiative, after severance and other related costs, were approximately $500 million.

The table below presents our operating expenses and total staff (which includes employees, consultants and temporary staff).

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Compensation and benefits</td><td>$11,647</td><td>$12,678</td><td>$12,691</td></tr><tr><td>Brokerage, clearing, exchange and distribution fees</td><td>2,555</td><td>2,576</td><td>2,501</td></tr><tr><td>Market development</td><td>457</td><td>557</td><td>549</td></tr><tr><td>Communications and technology</td><td>809</td><td>806</td><td>779</td></tr><tr><td>Depreciation and amortization</td><td>998</td><td>991</td><td>1,337</td></tr><tr><td>Occupancy</td><td>788</td><td>772</td><td>827</td></tr><tr><td>Professional fees</td><td>882</td><td>963</td><td>902</td></tr><tr><td>Other expenses</td><td>2,168</td><td>5,699</td><td>2,585</td></tr><tr><td>Total non-compensation expenses</td><td>8,657</td><td>12,364</td><td>9,480</td></tr><tr><td>Total operating expenses</td><td>$20,304</td><td>$25,042</td><td>$22,171</td></tr><tr><td>Total staff at period-end</td><td>34,400</td><td>36,800</td><td>34,000</td></tr></table>



In the table above, other expenses for 2015 includes provisions of $3.37 billion recorded for the settlement agreement with the RMBS Working Group. See Note 27 to the consolidated financial statements in Part II, Item 8 of the 2015 Form 10-K for further information.

2016 versus 2015. Operating expenses in the consolidated statements of earnings were $20.30 billion for 2016, 19% lower than 2015. Compensation and benefits expenses in the consolidated statements of earnings were $11.65 billion for 2016, 8% lower than 2015, reflecting a decrease in net revenues and the impact of expense savings initiatives. The ratio of compensation and benefits to net revenues for 2016 was 38.1% compared with 37.5% for 2015. Total staff decreased 7% during 2016, due to expense savings initiatives.

Non-compensation expenses in the consolidated statements of earnings were $8.66 billion for 2016, 30% lower than 2015, primarily due to significantly lower net provisions for mortgage-related litigation and regulatory matters, which are included in other expenses. In addition, market development expenses and professional fees were lower compared with 2015, reflecting expense savings initiatives. Net provisions for litigation and regulatory proceedings for 2016 were $396 million compared with $4.01 billion for 2015 (2015 primarily related to net provisions for mortgage-related matters). 2016 included a $114 million charitable contribution to Goldman Sachs Gives, our donor-advised fund. Compensation was reduced to fund this charitable contribution to Goldman Sachs Gives. We ask our participating managing directors to make recommendations regarding potential charitable recipients for this contribution.

2015 versus 2014. Operating expenses in the consolidated statements of earnings were $25.04 billion for 2015, 13% higher than 2014. Compensation and benefits expenses in the consolidated statements of earnings were $12.68 billion for 2015, essentially unchanged compared with 2014. The ratio of compensation and benefits to net revenues for 2015 was 37.5% compared with 36.8% for 2014. Total staff increased 8% during 2015, primarily due to activity levels in certain businesses and continued investment in regulatory compliance.
Non-compensation expenses in the consolidated statements of earnings were $12.36 billion for 2015, 30% higher than 2014, due to significantly higher net provisions for mortgage-related litigation and regulatory matters, which are included in other expenses. This increase was partially offset by lower depreciation and amortization expenses, primarily reflecting lower impairment charges related to consolidated investments, and a reduction in expenses related to the sale of Metro in the fourth quarter of 2014. Net provisions for litigation and regulatory proceedings for 2015 were $4.01 billion compared with $754 million for 2014 (both primarily comprised of net provisions for mortgage-related matters). 2015 included a $148 million charitable contribution to Goldman Sachs Gives, our donor-advised fund. Compensation was reduced to fund this charitable contribution to Goldman Sachs Gives. We ask our participating managing directors to make recommendations regarding potential charitable recipients for this contribution.

## Provision for Taxes

The effective income tax rate for 2016 was 28.2%, down from 30.7% for 2015. The decline compared with 2015 was primarily due to the impact of non-deductible provisions for mortgage-related litigation and regulatory matters in 2015, partially offset by the impact of changes in tax law on deferred tax assets, the mix of earnings and an increase related to higher enacted tax rates impacting certain of our U.K. subsidiaries in 2016.

The effective income tax rate for 2015 was 30.7%, down from 31.4% for 2014. The decline compared with 2014 reflected reductions related to a change in the mix of earnings, the impact of changes in tax law on deferred tax assets, settlements of tax audits and the determination that certain non-U.S. earnings would be permanently reinvested abroad, and an increase related to the impact of non-deductible provisions for mortgage-related litigation and regulatory matters.

In September 2016, the U.K. government enacted a budget that will reduce the corporate income tax base rate by 1 percentage point effective April 1, 2020. During 2016, we remeasured deferred income tax assets accordingly. This change did not have a material impact on our effective tax rate for the year ended December 2016, and we do not expect it to have a material impact on our future effective tax rate.



In October 2016, the U.S. Department of the Treasury issued rules under Section 385 of the Internal Revenue Code that could, in some circumstances, re-characterize debt as equity for U.S. federal income tax purposes. The rules contain exclusions applicable to, among other things, debt instruments issued by regulated financial companies, non-U.S. subsidiaries, certain U.S. subsidiaries where the holder of the debt instrument is included in a consolidated U.S. tax return, and ordinary business transactions. The rules also contain exclusions applicable to members of a regulated financial group other than subsidiaries held under the merchant banking authority, grandfathered commodities, or complementary activities under the Bank Holding Company Act of 1956. These exceptions would exclude from re-characterization substantially all debt instruments issued by us. We do not expect these rules to have a material impact on our financial condition, results of operations, effective income tax rate or cash flows.

## Segment Operating Results

The table below presents the net revenues, operating expenses and pre-tax earnings of our segments.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Investment Banking</td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$ 6,273</td><td>$ 7,027</td><td>$ 6,464</td></tr><tr><td>Operating expenses</td><td>3,437</td><td>3,713</td><td>3,688</td></tr><tr><td>Pre-tax earnings</td><td>$ 2,836</td><td>$ 3,314</td><td>$ 2,776</td></tr><tr><td>Institutional Client Services</td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$14,467</td><td>$15,151</td><td>$15,197</td></tr><tr><td>Operating expenses</td><td>9,713</td><td>13,938</td><td>10,880</td></tr><tr><td>Pre-tax earnings</td><td>$ 4,754</td><td>$ 1,213</td><td>$ 4,317</td></tr><tr><td>Investing &amp; Lending</td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$ 4,080</td><td>$ 5,436</td><td>$ 6,825</td></tr><tr><td>Operating expenses</td><td>2,386</td><td>2,402</td><td>2,819</td></tr><tr><td>Pre-tax earnings</td><td>$ 1,694</td><td>$ 3,034</td><td>$ 4,006</td></tr><tr><td>Investment Management</td><td></td><td></td><td></td></tr><tr><td>Net revenues</td><td>$ 5,788</td><td>$ 6,206</td><td>$ 6,042</td></tr><tr><td>Operating expenses</td><td>4,654</td><td>4,841</td><td>4,647</td></tr><tr><td>Pre-tax earnings</td><td>$ 1,134</td><td>$ 1,365</td><td>$ 1,395</td></tr><tr><td>Total net revenues</td><td>$30,608</td><td>$33,820</td><td>$34,528</td></tr><tr><td>Total operating expenses</td><td>20,304</td><td>25,042</td><td>22,171</td></tr><tr><td>Total pre-tax earnings</td><td>$10,304</td><td>$ 8,778</td><td>$12,357</td></tr></table>

In the table above:

• Operating expenses includes provisions of $3.37 billion recorded in Institutional Client Services during 2015 for the settlement agreement with the RMBS Working Group. See Note 27 to the consolidated financial statements in Part II, Item 8 of the 2015 Form 10-K for further information.

• All operating expenses have been allocated to our segments except for charitable contributions of $114 million for 2016, $148 million for 2015 and $137 million for 2014.
Net revenues in our segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. See Note 25 to the consolidated financial statements for further information about our business segments.

Our cost drivers taken as a whole, compensation, headcount and levels of business activity, are broadly similar in each of our business segments. Compensation and benefits expenses within our segments reflect, among other factors, our overall performance, as well as the performance of individual businesses. Consequently, pretax margins in one segment of our business may be significantly affected by the performance of our other business segments. A description of segment operating results follows.

## Investment Banking

Our Investment Banking segment is comprised of:

Financial Advisory. Includes strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs, risk management and derivative transactions directly related to these client advisory assignments.

Underwriting. Includes public offerings and private placements, including local and cross-border transactions and acquisition financing, of a wide range of securities and other financial instruments, including loans, and derivative transactions directly related to these client underwriting activities.

The table below presents the operating results of our Investment Banking segment.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Financial Advisory</td><td>$2,932</td><td>$3,470</td><td>$2,474</td></tr><tr><td>Equity underwriting</td><td>891</td><td>1,546</td><td>1,750</td></tr><tr><td>Debt underwriting</td><td>2,450</td><td>2,011</td><td>2,240</td></tr><tr><td>Total Underwriting</td><td>3,341</td><td>3,557</td><td>3,990</td></tr><tr><td>Total net revenues</td><td>6,273</td><td>7,027</td><td>6,464</td></tr><tr><td>Operating expenses</td><td>3,437</td><td>3,713</td><td>3,688</td></tr><tr><td>Pre-tax earnings</td><td>$2,836</td><td>$3,314</td><td>$2,776</td></tr></table>

The table below presents our financial advisory and underwriting transaction volumes (Source: Thomson Reuters).

<table><tr><td rowspan="2">\( in billions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Announced mergers and acquisitions</td><td>$ 994</td><td>$1,472</td><td>$ 934</td></tr><tr><td>Completed mergers and acquisitions</td><td>1,170</td><td>1,109</td><td>665</td></tr><tr><td>Equity and equity-related offerings</td><td>47</td><td>72</td><td>78</td></tr><tr><td>Debt offerings</td><td>282</td><td>253</td><td>281</td></tr></table>



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

In the table above:

• Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or a change in the value of a transaction.

• Equity and equity-related offerings includes Rule 144A and public common stock offerings, convertible offerings and rights offerings.

• Debt offerings includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. Excludes leveraged loans.

Operating Environment. In mergers and acquisitions, industry-wide completed activity remained strong for 2016 and industry-wide announced activity continued to be robust for most of the year, but both declined for the industry compared with the level of activity during 2015. In underwriting, industry-wide equity underwriting volumes decreased significantly compared with 2015, due to a continued weak backdrop for new issuances. This compares with strong activity levels in 2015, which benefited from favorable equity market conditions during the first half of the year. Industry-wide debt underwriting volumes during 2016 increased compared with 2015. In the future, if industry-wide activity levels in mergers and acquisitions or equity underwriting continue the downward trend or if industry-wide activity levels in debt underwriting decline, net revenues in Investment Banking would likely continue to be negatively impacted.

During 2015, Investment Banking operated in an environment characterized by strong industry-wide mergers and acquisitions activity. Industry-wide activity in both debt and equity underwriting declined compared with 2014.

2016 versus 2015. Net revenues in Investment Banking were $6.27 billion for 2016, 11% lower compared with a strong 2015.

Net revenues in Financial Advisory were $2.93 billion, 16% lower compared with a strong 2015, reflecting a decrease in industry-wide transactions. Net revenues in Underwriting were $3.34 billion, 6% lower compared with a strong 2015, due to significantly lower net revenues in equity underwriting, reflecting a decrease in industry-wide volumes. Net revenues in debt underwriting were significantly higher, reflecting significantly higher net revenues from asset-backed activity and higher net revenues from leveraged finance activity. Operating expenses were $3.44 billion for 2016, 7% lower than 2015, due to decreased compensation and benefits expenses, reflecting lower net revenues. Pre-tax earnings were $2.84 billion in 2016, 14% lower than 2015.

As of December 2016, our investment banking transaction backlog was lower compared with a strong level of backlog at the end of 2015, primarily due to lower estimated net revenues from potential advisory transactions and significantly lower estimated net revenues from potential debt underwriting transactions, principally reflecting decreases in mergers and acquisitions activity and acquisition-related financing, respectively. Estimated net revenues from potential equity underwriting transactions were slightly lower compared with the end of 2015.

Our investment banking transaction backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not. We believe changes in our investment banking transaction backlog may be a useful indicator of client activity levels which, over the long term, impact our net revenues. However, the time frame for completion and corresponding revenue recognition of transactions in our backlog varies based on the nature of the assignment, as certain transactions may remain in our backlog for longer periods of time and others may enter and leave within the same reporting period. In addition, our transaction backlog is subject to certain limitations, such as assumptions about the likelihood that individual client transactions will occur in the future. Transactions may be cancelled or modified, and transactions not included in the estimate may also occur.

2015 versus 2014. Net revenues in Investment Banking were $7.03 billion for 2015, 9% higher than 2014.

Net revenues in Financial Advisory were $3.47 billion, 40% higher than 2014, reflecting strong client activity, particularly in the U.S. Industry-wide completed mergers and acquisitions increased significantly compared with the prior year. Net revenues in Underwriting were $3.56 billion, 11% lower compared with a strong 2014. Net revenues in debt underwriting were lower compared with 2014, reflecting significantly lower leveraged finance activity. Net revenues in equity underwriting were also lower, reflecting significantly lower net revenues from initial public offerings and convertible offerings, partially offset by significantly higher net revenues from secondary offerings.

Operating expenses were $3.71 billion for 2015, essentially unchanged compared with 2014. Pre-tax earnings were $3.31 billion in 2015, 19% higher than 2014.



As of December 2015, our investment banking transaction backlog was higher compared with the end of 2014, primarily due to significantly higher estimated net revenues from potential debt underwriting transactions, principally related to leveraged finance transactions, and higher estimated net revenues from potential advisory transactions, reflecting the continued high level of mergers and acquisitions activity. Estimated net revenues from potential equity underwriting transactions were slightly higher compared with the end of 2014.

## Institutional Client Services

Our Institutional Client Services segment is comprised of:

Fixed Income, Currency and Commodities Client Execution. Includes client execution activities related to making markets in both cash and derivative instruments for interest rate products, credit products, mortgages, currencies and commodities.

• Interest Rate Products. Government bonds (including inflation-linked securities) across maturities, other government-backed securities, repurchase agreements, and interest rate swaps, options and other derivatives.

• Credit Products. Investment-grade corporate securities, high-yield securities, credit derivatives, exchange-traded funds, bank and bridge loans, municipal securities, emerging market and distressed debt, and trade claims.

• Mortgages. Commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations and other securities and loans), and other asset-backed securities, loans and derivatives.

• Currencies. Currency options, spot/forwards and other derivatives on G-10 currencies and emerging-market products.

• Commodities. Commodity derivatives and, to a lesser extent, physical commodities, involving crude oil and petroleum products, natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products.

Equities. Includes client execution activities related to making markets in equity products and commissions and fees from executing and clearing institutional client transactions on major stock, options and futures exchanges worldwide, as well as OTC transactions. Equities also includes our securities services business, which provides financing, securities lending and other prime brokerage services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and generates revenues primarily in the form of interest rate spreads or fees.
As a market maker, we facilitate transactions in both liquid and less liquid markets, primarily for institutional clients, such as corporations, financial institutions, investment funds and governments, to assist clients in meeting their investment objectives and in managing their risks. In this role, we seek to earn the difference between the price at which a market participant is willing to sell an instrument to us and the price at which another market participant is willing to buy it from us, and vice versa (i.e., bid/offer spread). In addition, we maintain inventory, typically for a short period of time, in response to, or in anticipation of, client demand. We also hold inventory to actively manage our risk exposures that arise from these market-making activities. Our market-making inventory is recorded in financial instruments owned, at fair value (long positions) or financial instruments sold, but not yet purchased, at fair value (short positions) in our consolidated statements of financial condition.

Our results are influenced by a combination of interconnected drivers, including (i) client activity levels and transactional bid/offer spreads (collectively, client activity), and (ii) changes in the fair value of our inventory and interest income and interest expense related to the holding, hedging and funding of our inventory (collectively, market-making inventory changes). Due to the integrated nature of our market-making activities, disaggregation of net revenues into client activity and market-making inventory changes is judgmental and has inherent complexities and limitations.

The amount and composition of our net revenues vary over time as these drivers are impacted by multiple interrelated factors affecting economic and market conditions, including volatility and liquidity in the market, changes in interest rates, currency exchange rates, credit spreads, equity prices and commodity prices, investor confidence, and other macroeconomic concerns and uncertainties.

In general, assuming all other market-making conditions remain constant, increases in client activity levels or bid/offer spreads tend to result in increases in net revenues, and decreases tend to have the opposite effect. However, changes in market-making conditions can materially impact client activity levels and bid/offer spreads, as well as the fair value of our inventory. For example, a decrease in liquidity in the market could have the impact of (i) increasing our bid/offer spread, (ii) decreasing investor confidence and thereby decreasing client activity levels, and (iii) wider credit spreads on our inventory positions.



The table below presents the operating results of our Institutional Client Services segment.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Fixed Income, Currency and Commodities Client Execution</td><td>$ 7,556</td><td>$ 7,322</td><td>$ 8,461</td></tr><tr><td>Equities client execution</td><td>2,194</td><td>3,028</td><td>2,079</td></tr><tr><td>Commissions and fees</td><td>3,078</td><td>3,156</td><td>3,153</td></tr><tr><td>Securities services</td><td>1,639</td><td>1,645</td><td>1,504</td></tr><tr><td>Total Equities</td><td>6,911</td><td>7,829</td><td>6,736</td></tr><tr><td>Total net revenues</td><td>14,467</td><td>15,151</td><td>15,197</td></tr><tr><td>Operating expenses</td><td>9,713</td><td>13,938</td><td>10,880</td></tr><tr><td>Pre-tax earnings</td><td>$ 4,754</td><td>$ 1,213</td><td>$ 4,317</td></tr></table>

The table below presents the net revenues of our Institutional Client Services segment by line item in the consolidated statements of earnings. See “Net Revenues” above for further information about market-making revenues, commissions and fees and net interest income.

<table><tr><td>$ in millions</td><td>Fixed Income, Currency and Commodities Client Execution</td><td>Total Equities</td><td>Institutional Client Services</td></tr><tr><td>Year Ended December 2016</td><td></td><td></td><td></td></tr><tr><td>Market making</td><td>$ 6,803</td><td>$ 3,130</td><td>$ 9,933</td></tr><tr><td>Commissions and fees</td><td>—</td><td>3,078</td><td>3,078</td></tr><tr><td>Net interest income</td><td>753</td><td>703</td><td>1,456</td></tr><tr><td>Total net revenues</td><td>$ 7,556</td><td>$ 6,911</td><td>$14,467</td></tr><tr><td>Year Ended December 2015</td><td></td><td></td><td></td></tr><tr><td>Market making</td><td>$ 5,893</td><td>$ 3,630</td><td>$ 9,523</td></tr><tr><td>Commissions and fees</td><td>—</td><td>3,156</td><td>3,156</td></tr><tr><td>Net interest income</td><td>1,429</td><td>1,043</td><td>2,472</td></tr><tr><td>Total net revenues</td><td>$ 7,322</td><td>$ 7,829</td><td>$15,151</td></tr><tr><td>Year Ended December 2014</td><td></td><td></td><td></td></tr><tr><td>Market making</td><td>$ 5,623</td><td>$ 2,742</td><td>$ 8,365</td></tr><tr><td>Commissions and fees</td><td>—</td><td>3,153</td><td>3,153</td></tr><tr><td>Net interest income</td><td>2,838</td><td>841</td><td>3,679</td></tr><tr><td>Total net revenues</td><td>$ 8,461</td><td>$ 6,736</td><td>$15,197</td></tr></table>

In the table above:

• The difference between commissions and fees and those in the consolidated statements of earnings represents commissions and fees included in our Investment Management segment.

• See Note 25 to the consolidated financial statements for net interest income by business segment.

• The primary driver of net revenues for Fixed Income, Currency and Commodities Client Execution, for the periods in the table above, was attributable to client activity.
Operating Environment. Challenging trends in the operating environment for Institutional Client Services that existed throughout the second half of 2015 continued during the first quarter of 2016, including concerns and uncertainties about global economic growth and central bank activity. These concerns contributed to significant price pressure across both equity and fixed income markets. Volatility peaked in February with the VIX reaching over 28, and global equity markets materially declined during the first half of the first quarter with the Dow Jones Industrial Average, Shanghai Composite Index, and Nikkei 225 Index down 10%, 25% and 21%, respectively, at their lowest points. Credit spreads for high-yield issuers widened over 100 basis points early in the first quarter, driven by the energy sector, and oil and natural gas prices continued their downward trend that began during the middle of 2015, reaching as low as $26 per barrel (WTI) and $1.64 per million British thermal units, respectively. Concerns about global economic growth moderated at the beginning of the second quarter, however the market became increasingly focused on the political uncertainty and economic implications surrounding the potential exit of the U.K. from the E.U. In response to the “leave vote,” the MSCI World Index declined 7% in two days and volumes generally spiked, both of which largely reversed shortly thereafter. In addition, the Nikkei 225 Index and the Shanghai Composite Index were down 18% and 17%, respectively, during the first half of 2016. This challenging environment, including low interest rates, impacted client sentiment and risk appetite, and market-making conditions remained difficult.

During the second half of 2016, the operating environment improved, as global equity markets steadily increased, with the MSCI World Index up 6% and the S&P 500 Index up 7% during the period. In addition, equity markets in Asia generally rebounded, with the Nikkei 225 Index up 23% and the Shanghai Composite Index up 6%. Average volatility in equity markets was lower during the second half of 2016 compared with the beginning of the year. In credit and commodity markets, U.S. investment grade and high-yield credit spreads tightened by nearly 40 basis points and over 150 basis points, respectively, during the second half of 2016, and oil and natural gas prices increased to approximately $54 per barrel (WTI) and $3.72 per million British thermal units, respectively. These trends drove improved client sentiment and market-making conditions during the second half of 2016. If the trend of macroeconomic concerns continues over the long term and activity levels decline, net revenues in Institutional Client Services would likely continue to be negatively impacted. See “Business Environment” above for further information about economic and market conditions in the global operating environment during the year.



During 2015, the operating environment for Institutional Client Services was positively impacted by diverging central bank monetary policies in the U.S. and the Euro area in the first quarter, as increased volatility levels contributed to strong client activity levels in currencies, interest rate products and equity products, and market-making conditions improved. However, during the remainder of 2015, concerns about global growth and uncertainty about the U.S. Federal Reserve’s interest rate policy, along with lower global equity prices, widening high-yield credit spreads and declining commodity prices, contributed to lower levels of client activity, particularly in mortgages and credit, and more difficult market-making conditions.

2016 versus 2015. Net revenues in Institutional Client Services were $14.47 billion for 2016, 5% lower than 2015.

Net revenues in Fixed Income, Currency and Commodities Client Execution were $7.56 billion for 2016, 3% higher than 2015. This increase was primarily driven by the impact of changes in market-making conditions on our inventory.

The following provides details of our Fixed Income, Currency and Commodities Client Execution net revenues by business, compared with 2015 results:

• Net revenues in credit products were significantly higher, reflecting improved market-making conditions, including generally tighter spreads, and higher client activity levels compared with low activity in 2015.

• Net revenues in interest rate products were higher, reflecting higher client activity levels.

• Net revenues in mortgages were significantly lower, reflecting less favorable market-making conditions, including generally wider spreads.

• Net revenues in currencies were lower, reflecting less favorable market-making conditions in emerging markets products compared with 2015, which included a strong first quarter of 2015.

• Net revenues in commodities were lower, reflecting significantly lower client activity.

Net revenues in Equities were $6.91 billion, 12% lower than 2015, primarily due to significantly lower net revenues in equities client execution, reflecting significantly lower net revenues in cash products, primarily in Asia, as well as lower net revenues in derivatives. Commissions and fees were slightly lower, reflecting lower listed cash equity volumes in Asia and Europe, consistent with market volumes in these regions, and net revenues in securities services were essentially unchanged compared with 2015.
We elect the fair value option for certain unsecured borrowings. For 2015, the fair value net gain attributable to the impact of changes in our credit spreads on these borrowings was $255 million ($214 million and $41 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively). For 2016, we adopted the requirement in ASU No. 2016-01 to present separately such gains and losses in other comprehensive income. The amount included in accumulated other comprehensive loss for 2016 was a loss of $844 million ($544 million, net of tax). See Note 3 to the consolidated financial statements for further information about ASU No. 2016-01.

Operating expenses were $9.71 billion for 2016, 30% lower than 2015, primarily due to significantly lower net provisions for mortgage-related litigation and regulatory matters, and decreased compensation and benefits expenses, reflecting lower net revenues. Pre-tax earnings were $4.75 billion in 2016 compared with $1.21 billion in 2015.

2015 versus 2014. Net revenues in Institutional Client Services were $15.15 billion for 2015, essentially unchanged compared with 2014.

Net revenues in Fixed Income, Currency and Commodities Client Execution were $7.32 billion for 2015, 13% lower than 2014. Excluding a gain of $168 million in 2014 related to the extinguishment of certain of our junior subordinated debt, net revenues in Fixed Income, Currency and Commodities Client Execution were 12% lower than 2014. This decrease was primarily driven by the impact of changes in market-making conditions on our inventory.

The following provides details of our Fixed Income, Currency and Commodities Client Execution net revenues by business, compared with 2014 results:

• Net revenues in mortgages and credit products were both significantly lower, reflecting challenging market-making conditions and generally low levels of activity during 2015.

• Net revenues in commodities were significantly lower, primarily reflecting less favorable market-making conditions compared with 2014, which included a strong first quarter of 2014.

• Net revenues in interest rate products and currencies were both significantly higher, reflecting higher volatility levels which contributed to higher client activity levels, particularly during the first quarter of 2015.



Net revenues in Equities were $7.83 billion for 2015, 16% higher than 2014. Excluding a gain of $121 million ($30 million and $91 million included in equities client execution and securities services, respectively) in 2014 related to the extinguishment of certain of our junior subordinated debt, net revenues in Equities were 18% higher than 2014, primarily due to significantly higher net revenues in equities client execution across the major regions, reflecting significantly higher results in both derivatives and cash products, and higher net revenues in securities services, reflecting the impact of higher average customer balances and improved securities lending spreads. Commissions and fees were essentially unchanged compared with 2014.

We elect the fair value option for certain unsecured borrowings. The fair value net gain attributable to the impact of changes in our credit spreads on these borrowings was $255 million ($214 million and $41 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2015, compared with a net gain of $144 million ($108 million and $36 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2014.

Operating expenses were $13.94 billion for 2015, 28% higher than 2014, due to significantly higher net provisions for mortgage-related litigation and regulatory matters, partially offset by decreased compensation and benefits expenses. Pre-tax earnings were $1.21 billion in 2015, 72% lower than 2014.

## Investing & Lending

Investing & Lending includes our investing activities and the origination of loans, including our relationship lending activities, to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, some of which are consolidated, directly and indirectly through funds that we manage, in debt securities and loans, public and private equity securities, infrastructure and real estate entities. We also make unsecured loans to individuals through our online platform.

The table below presents the operating results of our Investing & Lending segment.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Equity securities</td><td>$2,573</td><td>$3,781</td><td>$4,579</td></tr><tr><td>Debt securities and loans</td><td>1,507</td><td>1,655</td><td>2,246</td></tr><tr><td>Total net revenues</td><td>4,080</td><td>5,436</td><td>6,825</td></tr><tr><td>Operating expenses</td><td>2,386</td><td>2,402</td><td>2,819</td></tr><tr><td>Pre-tax earnings</td><td>$1,694</td><td>$3,034</td><td>$4,006</td></tr></table>

Operating Environment. Following difficult market conditions and the impact of a challenging macroeconomic environment on corporate performance, particularly in the energy sector, in the first quarter of 2016, market conditions improved during the rest of the year as macroeconomic concerns moderated. Global equity markets increased during 2016, contributing to net gains from investments in public equities, and corporate performance rebounded from the difficult start to the year. If macroeconomic concerns negatively affect corporate performance or company-specific events, or if global equity markets decline, net revenues in Investing & Lending would likely be negatively impacted.

Although net revenues in Investing & Lending for 2015 benefited from favorable company-specific events, including sales, initial public offerings and financings, a decline in global equity prices and widening high-yield credit spreads during the second half of 2015 impacted results.

2016 versus 2015. Net revenues in Investing & Lending were $4.08 billion for 2016, 25% lower than 2015. This decrease was primarily due to significantly lower net revenues from investments in equities, primarily reflecting a significant decrease in net gains from private equities, driven by company-specific events and corporate performance. In addition, net revenues in debt securities and loans were lower compared with 2015, reflecting significantly lower net revenues related to relationship lending activities, due to the impact of changes in credit spreads on economic hedges. Losses related to these hedges were $596 million in 2016, compared with gains of $329 million in 2015. This decrease was partially offset by higher net gains from investments in debt instruments and higher net interest income. See Note 9 to the consolidated financial statements for further information about economic hedges related to our relationship lending activities.

Operating expenses were $2.39 billion for 2016, essentially unchanged compared with 2015. Pre-tax earnings were $1.69 billion in 2016, 44% lower than 2015.

2015 versus 2014. Net revenues in Investing & Lending were $5.44 billion for 2015, 20% lower than 2014. This decrease was primarily due to lower net revenues from investments in equities, principally reflecting the sale of Metro in the fourth quarter of 2014 and lower net gains from investments in private equities, driven by corporate performance. In addition, net revenues in debt securities and loans were significantly lower, reflecting lower net gains from investments.



Operating expenses were $2.40 billion for 2015, 15% lower than 2014, due to lower depreciation and amortization expenses, primarily reflecting lower impairment charges related to consolidated investments, and a reduction in expenses related to the sale of Metro in the fourth quarter of 2014. Pre-tax earnings were $3.03 billion in 2015, 24% lower than 2014.

## Investment Management

Investment Management provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. Investment Management also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.

Assets under supervision (AUS) include client assets where we earn a fee for managing assets on a discretionary basis. This includes net assets in our mutual funds, hedge funds, credit funds and private equity funds (including real estate funds), and separately managed accounts for institutional and individual investors. Assets under supervision also include client assets invested with third-party managers, bank deposits and advisory relationships where we earn a fee for advisory and other services, but do not have investment discretion. Assets under supervision do not include the self-directed brokerage assets of our clients. Long-term assets under supervision represent assets under supervision excluding liquidity products. Liquidity products represent money market and bank deposit assets.

Assets under supervision typically generate fees as a percentage of net asset value, which vary by asset class and distribution channel and are affected by investment performance as well as asset inflows and redemptions. Asset classes such as alternative investment and equity assets typically generate higher fees relative to fixed income and liquidity product assets. The average effective management fee (which excludes non-asset-based fees) we earned on our assets under supervision was 35 basis points for 2016, 39 basis points for 2015 and 40 basis points for 2014. These decreases reflected shifts in the mix of client assets and strategies.

In certain circumstances, we are also entitled to receive incentive fees based on a percentage of a fund’s or a separately managed account’s return, or when the return exceeds a specified benchmark or other performance targets. Incentive fees are recognized only when all material contingencies are resolved.
The table below presents the operating results of our Investment Management segment.

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Management and other fees</td><td>4,798</td><td>4,887</td><td>4,800</td></tr><tr><td>Incentive fees</td><td>421</td><td>780</td><td>776</td></tr><tr><td>Transaction revenues</td><td>569</td><td>539</td><td>466</td></tr><tr><td>Total net revenues</td><td>5,788</td><td>6,206</td><td>6,042</td></tr><tr><td>Operating expenses</td><td>4,654</td><td>4,841</td><td>4,647</td></tr><tr><td>Pre-tax earnings</td><td>1,134</td><td>1,365</td><td>1,395</td></tr></table>

The tables below present our period-end assets under supervision by asset class and by distribution channel.

<table><tr><td rowspan="2">\( in \text{ billions} \)</td><td colspan="3">As of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Asset Class</td><td></td><td></td><td></td></tr><tr><td>Alternative investments</td><td>$ 154</td><td>$ 148</td><td>$ 143</td></tr><tr><td>Equity</td><td>266</td><td>252</td><td>236</td></tr><tr><td>Fixed income</td><td>601</td><td>546</td><td>516</td></tr><tr><td>Total long-term assets under supervision</td><td>1,021</td><td>946</td><td>895</td></tr><tr><td>Liquidity products</td><td>358</td><td>306</td><td>283</td></tr><tr><td>Total assets under supervision</td><td>$1,379</td><td>$1,252</td><td>$1,178</td></tr><tr><td>Distribution Channel</td><td></td><td></td><td></td></tr><tr><td>Institutional</td><td>$ 511</td><td>$ 471</td><td>$ 412</td></tr><tr><td>High-net-worth individuals</td><td>413</td><td>369</td><td>363</td></tr><tr><td>Third-party distributed</td><td>455</td><td>412</td><td>403</td></tr><tr><td>Total</td><td>$1,379</td><td>$1,252</td><td>$1,178</td></tr></table>

In the table above, alternative investments primarily includes hedge funds, credit funds, private equity, real estate, currencies, commodities and asset allocation strategies.

The table below presents a summary of the changes in our assets under supervision.

<table><tr><td rowspan="2">\( in \text{ billions} \)</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Beginning balance</td><td>$1,252</td><td>$1,178</td><td>$1,042</td></tr><tr><td>Net inflows/(outflows)</td><td></td><td></td><td></td></tr><tr><td>Alternative investments</td><td>5</td><td>7</td><td>1</td></tr><tr><td>Equity</td><td>(3)</td><td>23</td><td>15</td></tr><tr><td>Fixed income</td><td>40</td><td>41</td><td>58</td></tr><tr><td>Total long-term AUS net inflows/(outflows)</td><td>42</td><td>71</td><td>74</td></tr><tr><td>Liquidity products</td><td>52</td><td>23</td><td>37</td></tr><tr><td>Total AUS net inflows/(outflows)</td><td>94</td><td>94</td><td>111</td></tr><tr><td>Net market appreciation/(depreciation)</td><td>33</td><td>(20)</td><td>25</td></tr><tr><td>Ending balance</td><td>$1,379</td><td>$1,252</td><td>$1,178</td></tr></table>

## In the table above:

• Total long-term AUS net inflows/(outflows) for 2015 includes $18 billion of fixed income, equity and alternative investments asset inflows in connection with our acquisition of Pacific Global Advisors’ solutions business.



• Total AUS net inflows/(outflows) for 2014 includes $19 billion of fixed income asset inflows in connection with our acquisition of Deutsche Asset & Wealth Management’s stable value business and $6 billion of liquidity products inflows in connection with our acquisition of RBS Asset Management’s money market funds.

The table below presents our average monthly assets under supervision by asset class.

<table><tr><td rowspan="2">\( in billions</td><td colspan="3">Average for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Alternative investments</td><td>$ 149</td><td>$ 145</td><td>$ 145</td></tr><tr><td>Equity</td><td>256</td><td>247</td><td>225</td></tr><tr><td>Fixed income</td><td>578</td><td>530</td><td>499</td></tr><tr><td>Total long-term assets under supervision</td><td>983</td><td>922</td><td>869</td></tr><tr><td>Liquidity products</td><td>326</td><td>272</td><td>248</td></tr><tr><td>Total assets under supervision</td><td>$1,309</td><td>$1,194</td><td>$1,117</td></tr></table>

Operating Environment. Following a challenging first quarter of 2016, market conditions continued to improve with higher asset prices resulting in full year appreciation in our client assets in both equity and fixed income assets. Also, our assets under supervision increased during 2016 from net inflows, primarily in fixed income assets, and liquidity products. The mix of our average assets under supervision shifted slightly compared with 2015 from long-term assets under supervision to liquidity products. Management fees have been impacted by many factors, including inflows to advisory services and outflows from actively-managed mutual funds. In the future, if asset prices decline, or investors continue the trend of favoring assets that typically generate lower fees or investors withdraw their assets, net revenues in Investment Management would likely be negatively impacted.

During 2015, Investment Management operated in an environment generally characterized by strong client net inflows, which more than offset the declines in equity and fixed income asset prices, which resulted in depreciation in the value of client assets, particularly in the third quarter of 2015. The mix of average assets under supervision shifted slightly from long-term assets under supervision to liquidity products compared with 2014.
2016 versus 2015. Net revenues in Investment Management were $5.79 billion for 2016, 7% lower than 2015. This decrease primarily reflected significantly lower incentive fees compared with a strong 2015. In addition, management and other fees were slightly lower, reflecting shifts in the mix of client assets and strategies, partially offset by the impact of higher average assets under supervision. During the year, total assets under supervision increased $127 billion to $1.38 trillion. Long-term assets under supervision increased $75 billion, including net inflows of $42 billion, primarily in fixed income assets, and net market appreciation of $33 billion, primarily in equity and fixed income assets. In addition, liquidity products increased $52 billion.

Operating expenses were $4.65 billion for 2016, 4% lower than 2015, due to decreased compensation and benefits expenses, reflecting lower net revenues. Pre-tax earnings were $1.13 billion in 2016, 17% lower than 2015.

2015 versus 2014. Net revenues in Investment Management were $6.21 billion for 2015, 3% higher than 2014, due to slightly higher management and other fees, primarily reflecting higher average assets under supervision, and higher transaction revenues. During 2015, total assets under supervision increased $74 billion to $1.25 trillion. Long-term assets under supervision increased $51 billion, including net inflows of $71 billion (which includes $18 billion of asset inflows in connection with our acquisition of Pacific Global Advisors' solutions business), and net market depreciation of $20 billion, both primarily in fixed income and equity assets. In addition, liquidity products increased $23 billion.

Operating expenses were $4.84 billion for 2015, 4% higher than 2014, due to increased compensation and benefits expenses, reflecting higher net revenues. Pre-tax earnings were $1.37 billion in 2015, 2% lower than 2014.

## Geographic Data

See Note 25 to the consolidated financial statements for a summary of our total net revenues, pre-tax earnings and net earnings by geographic region.



## Balance Sheet and Funding Sources

## Balance Sheet Management

One of our risk management disciplines is our ability to manage the size and composition of our balance sheet. While our asset base changes due to client activity, market fluctuations and business opportunities, the size and composition of our balance sheet also reflects factors including (i) our overall risk tolerance, (ii) the amount of equity capital we hold and (iii) our funding profile, among other factors. See “Equity Capital Management and Regulatory Capital — Equity Capital Management” for information about our equity capital management process.

Although our balance sheet fluctuates on a day-to-day basis, our total assets at quarter-end and year-end dates are generally not materially different from those occurring within our reporting periods.

In order to ensure appropriate risk management, we seek to maintain a sufficiently liquid balance sheet and have processes in place to dynamically manage our assets and liabilities which include (i) balance sheet planning, (ii) business-specific limits, (iii) monitoring of key metrics and (iv) scenario analyses.

Balance Sheet Planning. We prepare a balance sheet plan that combines our projected total assets and composition of assets with our expected funding sources over a one-year time horizon. This plan is reviewed semi-annually and may be adjusted in response to changing business needs or market conditions. The objectives of this planning process are:

• To develop our balance sheet projections, taking into account the general state of the financial markets and expected business activity levels, as well as regulatory requirements;

• To allow business risk managers and managers from our independent control and support functions to objectively evaluate balance sheet limit requests from business managers in the context of our overall balance sheet constraints, including our liability profile and equity capital levels, and key metrics; and

• To inform the target amount, tenor and type of funding to raise, based on our projected assets and contractual maturities.
Business risk managers and managers from our independent control and support functions meet with business managers to review current and prior period information and discuss expectations for the year to prepare our balance sheet plan. The specific information reviewed includes asset and liability size and composition, limit utilization, risk and performance measures, and capital usage.

Our consolidated balance sheet plan, including our balance sheets by business, funding projections, and projected key metrics, is reviewed and approved by the Firmwide Finance Committee. See “Overview and Structure of Risk Management” for an overview of our risk management structure.

Business-Specific Limits. The Firmwide Finance Committee sets asset and liability limits for each business. These limits are set at levels which are close to actual operating levels, rather than at levels which reflect our maximum risk appetite, in order to ensure prompt escalation and discussion among business managers and managers in our independent control and support functions on a routine basis. The Firmwide Finance Committee reviews and approves balance sheet limits on a semi-annual basis and may also approve changes in limits on a more frequent basis in response to changing business needs or market conditions. In addition, the Risk Governance Committee sets aged inventory limits for certain financial instruments as a disincentive to hold inventory over longer periods of time. Requests for changes in limits are evaluated after giving consideration to their impact on key firm metrics. Compliance with limits is monitored on a daily basis by business risk managers, as well as managers in our independent control and support functions.

Monitoring of Key Metrics. We monitor key balance sheet metrics daily both by business and on a consolidated basis, including asset and liability size and composition, limit utilization and risk measures. We allocate assets to businesses and review and analyze movements resulting from new business activity as well as market fluctuations.



Scenario Analyses. We conduct various scenario analyses including as part of the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Tests (DFAST), as well as our resolution and recovery planning. See “Equity Capital Management and Regulatory Capital — Equity Capital Management” below for further information about these scenario analyses. These scenarios cover short-term and long-term time horizons using various macroeconomic and firm-specific assumptions, based on a range of economic scenarios. We use these analyses to assist us in developing our longer-term balance sheet management strategy, including the level and composition of assets, funding and equity capital. Additionally, these analyses help us develop approaches for maintaining appropriate funding, liquidity and capital across a variety of situations, including a severely stressed environment.

## Balance Sheet Allocation

In addition to preparing our consolidated statements of financial condition in accordance with U.S. GAAP, we prepare a balance sheet that generally allocates assets to our businesses, which is a non-GAAP presentation and may not be comparable to similar non-GAAP presentations used by other companies. We believe that presenting our assets on this basis is meaningful because it is consistent with the way management views and manages risks associated with our assets and better enables investors to assess the liquidity of our assets.

The table below presents our balance sheet allocation.

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Global Core Liquid Assets (GCLA)</td><td>$226,066</td><td>$199,120</td></tr><tr><td>Other cash</td><td>9,088</td><td>9,180</td></tr><tr><td>GCLA and cash</td><td>235,154</td><td>208,300</td></tr><tr><td>Secured client financing</td><td>199,387</td><td>221,325</td></tr><tr><td>Inventory</td><td>206,988</td><td>208,836</td></tr><tr><td>Secured financing agreements</td><td>65,606</td><td>63,495</td></tr><tr><td>Receivables</td><td>29,592</td><td>39,976</td></tr><tr><td>Institutional Client Services</td><td>302,186</td><td>312,307</td></tr><tr><td>Public equity</td><td>3,224</td><td>3,991</td></tr><tr><td>Private equity</td><td>18,224</td><td>16,985</td></tr><tr><td>Debt</td><td>21,675</td><td>23,216</td></tr><tr><td>Loans receivable</td><td>49,672</td><td>45,407</td></tr><tr><td>Other</td><td>5,162</td><td>4,646</td></tr><tr><td>Investing &amp; Lending</td><td>97,957</td><td>94,245</td></tr><tr><td>Total inventory and related assets</td><td>400,143</td><td>406,552</td></tr><tr><td>Other assets</td><td>25,481</td><td>25,218</td></tr><tr><td>Total assets</td><td>$860,165</td><td>$861,395</td></tr></table>

The following is a description of the captions in the table above:

• Global Core Liquid Assets and Cash. We maintain liquidity to meet a broad range of potential cash outflows and collateral needs in a stressed environment. See “Liquidity Risk Management” below for details on the composition and sizing of our “Global Core Liquid Assets” (GCLA). In addition to our GCLA, we maintain other unrestricted operating cash balances, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.

• Secured Client Financing. We provide collateralized financing for client positions, including margin loans secured by client collateral, securities borrowed, and resale agreements primarily collateralized by government obligations. We segregate cash and securities for regulatory and other purposes related to client activity. Securities are segregated from our own inventory as well as from collateral obtained through securities borrowed or resale agreements. Our secured client financing arrangements, which are generally short-term, are accounted for at fair value or at amounts that approximate fair value, and include daily margin requirements to mitigate counterparty credit risk.

• Institutional Client Services. In Institutional Client Services, we maintain inventory positions to facilitate market making in fixed income, equity, currency and commodity products. Additionally, as part of market-making activities, we enter into resale or securities borrowing arrangements to obtain securities or use our own inventory to cover transactions in which we or our clients have sold securities that have not yet been purchased. The receivables in Institutional Client Services primarily relate to securities transactions.

• Investing & Lending. In Investing & Lending, we make investments and originate loans to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, directly and indirectly through funds that we manage, in debt securities, loans, public and private equity securities, infrastructure, real estate entities and other investments. We also make unsecured loans to individuals through our online platform. Debt includes $14.23 billion and $17.29 billion as of December 2016 and December 2015, respectively, of direct loans primarily extended to corporate and private wealth management clients that are accounted for at fair value. Loans receivable is comprised of loans held for investment that are accounted for at amortized cost net of allowance for loan losses. See Note 9 to the consolidated financial statements for further information about loans receivable.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

• Other Assets. Other assets are generally less liquid, non-financial assets, including property, leasehold improvements and equipment, goodwill and identifiable intangible assets, income tax-related receivables, equity-method investments, assets classified as held for sale and miscellaneous receivables.

The table below presents the reconciliation of this balance sheet allocation to our U.S. GAAP balance sheet.

<table><tr><td></td><td>GCLA and Cash</td><td>Secured Client Financing</td><td>Institutional Client Services</td><td>Investing &amp; Lending</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$107,066</td><td>$ 14,645</td><td>$ —</td><td>—</td><td>$121,711</td></tr><tr><td>Securities purchased under agreements to resell and federal funds sold</td><td>56,583</td><td>40,436</td><td>18,844</td><td>1,062</td><td>116,925</td></tr><tr><td>Securities borrowed</td><td>41,652</td><td>96,186</td><td>46,762</td><td>—</td><td>184,600</td></tr><tr><td>Receivables from brokers, dealers and clearing organizations</td><td>—</td><td>6,540</td><td>11,504</td><td>—</td><td>18,044</td></tr><tr><td>Receivables from customers and counterparties</td><td>—</td><td>26,286</td><td>18,088</td><td>3,406</td><td>47,780</td></tr><tr><td>Loans receivable</td><td>—</td><td>—</td><td>—</td><td>49,672</td><td>49,672</td></tr><tr><td>Financial instruments owned, at fair value</td><td>29,853</td><td>15,294</td><td>206,988</td><td>43,817</td><td>295,952</td></tr><tr><td>Subtotal</td><td>$235,154</td><td>$199,387</td><td>$302,186</td><td>$97,957</td><td>$834,684</td></tr><tr><td>Other assets</td><td></td><td></td><td></td><td></td><td>25,481</td></tr><tr><td>Total assets</td><td></td><td></td><td></td><td></td><td>$860,165</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 75,105</td><td>$ 18,334</td><td>$ —</td><td>—</td><td>$ 93,439</td></tr><tr><td>Securities purchased under agreements to resell and federal funds sold</td><td>60,092</td><td>56,189</td><td>16,368</td><td>1,659</td><td>134,308</td></tr><tr><td>Securities borrowed</td><td>33,260</td><td>97,251</td><td>47,127</td><td>—</td><td>177,638</td></tr><tr><td>Receivables from brokers, dealers and clearing organizations</td><td>—</td><td>5,912</td><td>19,541</td><td>—</td><td>25,453</td></tr><tr><td>Receivables from customers and counterparties</td><td>—</td><td>24,077</td><td>20,435</td><td>1,918</td><td>46,430</td></tr><tr><td>Loans receivable</td><td>—</td><td>—</td><td>—</td><td>45,407</td><td>45,407</td></tr><tr><td>Financial instruments owned, at fair value</td><td>39,843</td><td>19,562</td><td>208,836</td><td>45,261</td><td>313,502</td></tr><tr><td>Subtotal</td><td>$208,300</td><td>$221,325</td><td>$312,307</td><td>$94,245</td><td>$836,177</td></tr><tr><td>Other assets</td><td></td><td></td><td></td><td></td><td>25,218</td></tr><tr><td>Total assets</td><td></td><td></td><td></td><td></td><td>$861,395</td></tr></table>

## In the table above:

• Total assets for Institutional Client Services and Investing & Lending represent inventory and related assets. These amounts differ from total assets by business segment disclosed in Note 25 to the consolidated financial statements because total assets disclosed in Note 25 include allocations of our GCLA and cash, secured client financing and other assets.
• See “Balance Sheet Analysis and Metrics” for explanations on the changes in our balance sheet from December 2015 to December 2016.

## Balance Sheet Analysis and Metrics

As of December 2016, total assets in our consolidated statements of financial condition were $860.17 billion, essentially unchanged from December 2015, reflecting an increase in cash and cash equivalents of $28.27 billion, offset by a decrease in financial instruments owned, at fair value of $17.55 billion and a net decrease in collateralized agreements of $10.42 billion. The increase in cash and cash equivalents was primarily due to an increase in deposits, reflecting the acquisition of GE Capital Bank’s online deposit platform. The decrease in financial instruments owned, at fair value primarily reflected decreases in U.S. government and federal agency obligations, equities and convertible debentures and money market instruments related to market-making activity, and the net decrease in collateralized agreements reflected the impact of firm and client activity.

As of December 2016, total liabilities in our consolidated statements of financial condition were $773.27 billion, essentially unchanged from December 2015, reflecting increases in deposits of $26.58 billion and unsecured long-term borrowings of $13.66 billion, offset by decreases in payables to customers and counterparties of $20.89 billion, securities sold under agreements to repurchase, at fair value of $14.25 billion, and other liabilities and accrued expenses of $4.53 billion. The increase in deposits reflected the acquisition of GE Capital Bank’s online deposit platform, and the increase in unsecured long-term borrowings was due to net new issuances. The decrease in payables to customers and counterparties reflected changes in client activity and the decrease in securities sold under agreements to repurchase, at fair value reflected the impact of firm and client activity. The decrease in other liabilities and accrued expenses primarily reflected payments related to the settlement agreement with the RMBS Working Group.

As of December 2016, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $71.82 billion, which was 5% lower and 9% lower than the daily average amount of repurchase agreements during the quarter ended and year ended December 2016, respectively. The decrease in our repurchase agreements relative to the daily average during 2016 resulted from the impact of firm and client activity at the end of the year.



As of December 2015, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $86.07 billion, which was 3% higher than the daily average amount of repurchase agreements during both the quarter ended and year ended December 2015. The increase in our repurchase agreements relative to the daily average during 2015 resulted from an increase in firm financing and client activity at the end of the year.

The level of our repurchase agreements fluctuates between and within periods, primarily due to providing clients with access to highly liquid collateral, such as U.S. government and federal agency, and investment-grade sovereign obligations through collateralized financing activities.

The table below presents information about our assets, unsecured long-term borrowings, shareholders' equity and leverage ratios.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Total assets</td><td>$860,165</td><td>$861,395</td></tr><tr><td>Unsecured long-term borrowings</td><td>189,086</td><td>175,422</td></tr><tr><td>Total shareholders&#x27; equity</td><td>86,893</td><td>86,728</td></tr><tr><td>Leverage ratio</td><td>9.9x</td><td>9.9x</td></tr><tr><td>Debt to equity ratio</td><td>2.2x</td><td>2.0x</td></tr></table>

In the table above:

• The leverage ratio equals total assets divided by total shareholders’ equity and measures the proportion of equity and debt we use to finance assets. This ratio is different from the Tier 1 leverage ratio included in Note 20 to the consolidated financial statements.

• The debt to equity ratio equals unsecured long-term borrowings divided by total shareholders’ equity.

The table below presents information about our shareholders' equity and book value per common share, including the reconciliation of total shareholders' equity to tangible common shareholders' equity.

<table><tr><td rowspan="2">$ in millions, except per share amounts</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Total shareholders&#x27; equity</td><td>$ 86,893</td><td>$ 86,728</td></tr><tr><td>Less: Preferred stock</td><td>(11,203)</td><td>(11,200)</td></tr><tr><td>Common shareholders&#x27; equity</td><td>75,690</td><td>75,528</td></tr><tr><td>Less: Goodwill and identifiable intangible assets</td><td>(4,095)</td><td>(4,148)</td></tr><tr><td>Tangible common shareholders&#x27; equity</td><td>$ 71,595</td><td>$ 71,380</td></tr><tr><td>Book value per common share</td><td>$ 182.47</td><td>$ 171.03</td></tr><tr><td>Tangible book value per common share</td><td>172.60</td><td>161.64</td></tr></table>

In the table above:

• Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets. We believe that tangible common shareholders’ equity is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible common shareholders’ equity is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

• Book value per common share and tangible book value per common share are based on common shares outstanding and restricted stock units granted to employees with no future service requirements (collectively, basic shares) of 414.8 million and 441.6 million as of December 2016 and December 2015, respectively. We believe that tangible book value per common share (tangible common shareholders’ equity divided by basic shares) is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible book value per common share is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

## Funding Sources

Our primary sources of funding are secured financings, unsecured long-term and short-term borrowings, and deposits. We seek to maintain broad and diversified funding sources globally across products, programs, markets, currencies and creditors to avoid funding concentrations.

We raise funding through a number of different products, including:

• Collateralized financings, such as repurchase agreements, securities loaned and other secured financings;

• Long-term unsecured debt (including structured notes) through syndicated U.S. registered offerings, U.S. registered and Rule 144A medium-term note programs, offshore medium-term note offerings and other debt offerings;

• Savings, demand and time deposits through internal and third-party broker-dealers, as well as from retail and institutional customers; and

• Short-term unsecured debt at the subsidiary level through U.S. and non-U.S. hybrid financial instruments and other methods.



Our funding is primarily raised in U.S. dollar, Euro, British pound and Japanese yen. We generally distribute our funding products through our own sales force and third-party distributors to a large, diverse creditor base in a variety of markets in the Americas, Europe and Asia. We believe that our relationships with our creditors are critical to our liquidity. Our creditors include banks, governments, securities lenders, pension funds, insurance companies, mutual funds and individuals. We have imposed various internal guidelines to monitor creditor concentration across our funding programs.

Secured Funding. We fund a significant amount of inventory on a secured basis, including repurchase agreements, securities loaned and other secured financings. As of December 2016 and December 2015, secured funding included in “Collateralized financings” in the consolidated statements of financial condition was $100.86 billion and $114.44 billion, respectively. We may also pledge our inventory as collateral for securities borrowed under a securities lending agreement or as collateral for derivative transactions. We also use our own inventory to cover transactions in which we or our clients have sold securities that have not yet been purchased. Secured funding is less sensitive to changes in our credit quality than unsecured funding, due to our posting of collateral to our lenders. Nonetheless, we continually analyze the refinancing risk of our secured funding activities, taking into account trade tenors, maturity profiles, counterparty concentrations, collateral eligibility and counterparty rollover probabilities. We seek to mitigate our refinancing risk by executing term trades with staggered maturities, diversifying counterparties, raising excess secured funding, and pre-funding residual risk through our GCLA.

We seek to raise secured funding with a term appropriate for the liquidity of the assets that are being financed, and we seek longer maturities for secured funding collateralized by asset classes that may be harder to fund on a secured basis, especially during times of market stress. Our secured funding, excluding funding collateralized by liquid government obligations, is primarily executed for tenors of one month or greater. Assets that may be harder to fund on a secured basis during times of market stress include certain financial instruments in the following categories: mortgage and other asset-backed loans and securities, non-investment-grade corporate debt securities, equities and convertible debentures and emerging market securities. Assets that are classified as level 3 in the fair value hierarchy are generally funded on an unsecured basis. See Notes 5 and 6 to the consolidated financial statements for further information about the classification of financial instruments in the fair value hierarchy and “Unsecured Long-Term Borrowings” below for further information about the use of unsecured long-term borrowings as a source of funding.
The weighted average maturity of our secured funding included in “Collateralized financings” in the consolidated statements of financial condition, excluding funding that can only be collateralized by highly liquid securities eligible for inclusion in our GCLA, exceeded 120 days as of December 2016.

A majority of our secured funding for securities not eligible for inclusion in the GCLA is executed through term repurchase agreements and securities loaned contracts. We also raise financing through other types of collateralized financings, such as secured loans and notes. Goldman Sachs Bank USA (GS Bank USA) has access to funding from the Federal Home Loan Bank (FHLB). As of December 2016, our outstanding borrowings against the FHLB were $2.43 billion.

GS Bank USA also has access to funding through the Federal Reserve Bank discount window. While we do not rely on this funding in our liquidity planning and stress testing, we maintain policies and procedures necessary to access this funding and test discount window borrowing procedures.

Unsecured Long-Term Borrowings. We issue unsecured long-term borrowings as a source of funding for inventory and other assets and to finance a portion of our GCLA. We issue in different tenors, currencies and products to maximize the diversification of our investor base.

The table below presents our quarterly unsecured long-term borrowings maturity profile as of December 2016.

<table><tr><td>$ in \text{millions}</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td><td>Total</td></tr><tr><td>2018</td><td>$9,127</td><td>$8,156</td><td>$4,858</td><td>$ 4,563</td><td>$ 26,704</td></tr><tr><td>2019</td><td>6,634</td><td>5,975</td><td>2,765</td><td>10,220</td><td>25,594</td></tr><tr><td>2020</td><td>4,480</td><td>7,495</td><td>5,475</td><td>959</td><td>18,409</td></tr><tr><td>2021</td><td>2,652</td><td>3,497</td><td>7,347</td><td>7,249</td><td>20,745</td></tr><tr><td>2022 - thereafter</td><td></td><td></td><td></td><td>97,634</td><td></td></tr><tr><td>Total</td><td></td><td></td><td></td><td>$189,086</td><td></td></tr></table>

The weighted average maturity of our unsecured long-term borrowings as of December 2016 was approximately eight years. To mitigate refinancing risk, we seek to limit the principal amount of debt maturing on any one day or during any week or year. We enter into interest rate swaps to convert a portion of our unsecured long-term borrowings into floating-rate obligations in order to manage our exposure to interest rates. See Note 16 to the consolidated financial statements for further information about our unsecured long-term borrowings.



Deposits. Our deposits provide us with a diversified source of liquidity and reduce our reliance on wholesale funding. A growing source of our deposit base is comprised of retail deposits. Deposits are primarily used to finance lending activity, other inventory and a portion of our GCLA. We raise deposits primarily through GS Bank USA and Goldman Sachs International Bank (GSIB). As of December 2016 and December 2015, our deposits were $124.10 billion and $97.52 billion, respectively. See Note 14 to the consolidated financial statements for further information about our deposits.

Unsecured Short-Term Borrowings. A significant portion of our unsecured short-term borrowings was originally long-term debt that is scheduled to mature within one year of the reporting date. We use unsecured short-term borrowings, including hybrid financial instruments, to finance liquid assets and for other cash management purposes. In light of regulatory developments, Group Inc. no longer issues debt with an original maturity of less than one year, other than to its subsidiaries.

As of December 2016 and December 2015, our unsecured short-term borrowings, including the current portion of unsecured long-term borrowings, were $39.27 billion and $42.79 billion, respectively. See Note 15 to the consolidated financial statements for further information about our unsecured short-term borrowings.

## Equity Capital Management and Regulatory Capital

Capital adequacy is of critical importance to us. We have in place a comprehensive capital management policy that provides a framework, defines objectives and establishes guidelines to assist us in maintaining the appropriate level and composition of capital in both business-as-usual and stressed conditions.

## Equity Capital Management

We determine the appropriate level and composition of our equity capital by considering multiple factors including our current and future consolidated regulatory capital requirements, the results of our capital planning and stress testing process and other factors such as rating agency guidelines, subsidiary capital requirements, the business environment and conditions in the financial markets. We manage our capital requirements and the levels of our capital usage principally by setting limits on balance sheet assets and/or limits on risk, in each case at both the consolidated and business levels.

We principally manage the level and composition of our equity capital through issuances and repurchases of our common stock. We may also, from time to time, issue or repurchase our preferred stock, junior subordinated debt issued to trusts, and other subordinated debt or other forms of capital as business conditions warrant. Prior to any repurchases, we must receive confirmation that the Board of Governors of the Federal Reserve System (Federal Reserve Board) does not object to such capital actions. See Notes 16 and 19 to the consolidated financial statements for further information about our preferred stock, junior subordinated debt issued to trusts and other subordinated debt.

Capital Planning and Stress Testing Process. As part of capital planning, we project sources and uses of capital given a range of business environments, including stressed conditions. Our stress testing process is designed to identify and measure material risks associated with our business activities including market risk, credit risk and operational risk, as well as our ability to generate revenues.



The following is a description of our capital planning and stress testing process:

• Capital Planning. Our capital planning process incorporates an internal capital adequacy assessment with the objective of ensuring that we are appropriately capitalized relative to the risks in our business. We incorporate stress scenarios into our capital planning process with a goal of holding sufficient capital to ensure we remain adequately capitalized after experiencing a severe stress event. Our assessment of capital adequacy is viewed in tandem with our assessment of liquidity adequacy and is integrated into our overall risk management structure, governance and policy framework.

Our capital planning process also includes an internal risk-based capital assessment. This assessment incorporates market risk, credit risk and operational risk. Market risk is calculated by using Value-at-Risk (VaR) calculations supplemented by risk-based add-ons which include risks related to rare events (tail risks). Credit risk utilizes assumptions about our counterparties' probability of default and the size of our losses in the event of a default. Operational risk is calculated based on scenarios incorporating multiple types of operational failures as well as considering internal and external actual loss experience. Backtesting for market risk and credit risk is used to gauge the effectiveness of models at capturing and measuring relevant risks.

• Stress Testing. Our stress tests incorporate our internally designed stress scenarios, including our internally developed severely adverse scenario, and those required under CCAR and DFAST, and are designed to capture our specific vulnerabilities and risks. We provide additional information about our stress test processes and a summary of the results on our website as described in “Business — Available Information” in Part I, Item 1 of this Form 10-K.

As required by the Federal Reserve Board’s annual CCAR rules, we submit a capital plan for review by the Federal Reserve Board. The purpose of the Federal Reserve Board’s review is to ensure that we have a robust, forward-looking capital planning process that accounts for our unique risks and that permits continued operation during times of economic and financial stress.
The Federal Reserve Board evaluates us based, in part, on whether we have the capital necessary to continue operating under the baseline and stress scenarios provided by the Federal Reserve Board and those developed internally. This evaluation also takes into account our process for identifying risk, our controls and governance for capital planning, and our guidelines for making capital planning decisions. In addition, the Federal Reserve Board evaluates our plan to make capital distributions (i.e., dividend payments and repurchases or redemptions of stock, subordinated debt or other capital securities) and issue capital, across a range of macroeconomic scenarios and firm-specific assumptions.

In addition, the DFAST rules require us to conduct stress tests on a semi-annual basis and publish a summary of certain results. The Federal Reserve Board also conducts its own annual stress tests and publishes a summary of certain results.

We submitted our 2016 CCAR results in April 2016 and the Federal Reserve Board informed us that it did not object to our capital actions, including the potential repurchase of outstanding common stock, a potential increase in our quarterly common stock dividend and the possible issuance, redemption and modification of other capital securities from the third quarter of 2016 through the second quarter of 2017. We published a summary of our annual DFAST results in June 2016. See “Business — Available Information” in Part I, Item 1 of this Form 10-K.

In September 2016, we submitted our semi-annual DFAST results to the Federal Reserve Board and subsequently published a summary of our internally developed severely adverse scenario results in October 2016. See “Business — Available Information” in Part I, Item 1 of this Form 10-K.

We are required to submit our 2017 CCAR results to the Federal Reserve Board by April 5, 2017.

In addition, the rules adopted by the Federal Reserve Board under the Dodd-Frank Act require GS Bank USA to conduct stress tests on an annual basis and publish a summary of certain results. GS Bank USA submitted its 2016 annual DFAST stress results to the Federal Reserve Board in April 2016 and published a summary of its results in June 2016. See “Business — Available Information” in Part I, Item 1 of this Form 10-K.



Goldman Sachs International (GSI) also has its own capital planning and stress testing process, which incorporates internally designed stress tests and those required under the Prudential Regulation Authority’s (PRA) Internal Capital Adequacy Assessment Process.

Contingency Capital Plan. As part of our comprehensive capital management policy, we maintain a contingency capital plan. Our contingency capital plan provides a framework for analyzing and responding to a perceived or actual capital deficiency, including, but not limited to, identification of drivers of a capital deficiency, as well as mitigants and potential actions. It outlines the appropriate communication procedures to follow during a crisis period, including internal dissemination of information as well as timely communication with external stakeholders.

Capital Attribution. We assess each of our businesses' capital usage based upon our internal assessment of risks, which incorporates an attribution of all of our relevant regulatory capital requirements. These regulatory capital requirements are allocated using our attributed equity framework, which takes into consideration our binding capital constraints. We also attribute risk-weighted assets (RWAs) to our business segments. As of December 2016, approximately two-thirds of RWAs calculated in accordance with the Standardized Capital Rules and the Basel III Advanced Rules, subject to transitional provisions, were attributed to our Institutional Client Services segment and substantially all of the remaining RWAs were attributed to our Investing & Lending segment. We manage the levels of our capital usage based upon balance sheet and risk limits, as well as capital return analyses of our businesses based on our capital attribution.

Share Repurchase Program. We use our share repurchase program to help maintain the appropriate level of common equity. The repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), the amounts and timing of which are determined primarily by our current and projected capital position and our capital plan submitted to the Federal Reserve Board as part of CCAR. The amounts and timing of the repurchases may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock.
As of December 2016, the remaining share authorization under our existing repurchase program was 26.6 million shares; however, we are only permitted to make repurchases to the extent that such repurchases have not been objected to by the Federal Reserve Board. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this Form 10-K and Note 19 to the consolidated financial statements for additional information about our share repurchase program and see above for information about our capital planning and stress testing process.

## Resolution and Recovery Plans

We are required by the Federal Reserve Board and the FDIC to submit a periodic plan that describes our strategy for a rapid and orderly resolution in the event of material financial distress or failure (resolution plan). We are also required by the Federal Reserve Board to submit and have submitted, on a periodic basis, a global recovery plan that outlines the steps that management could take to reduce risk, maintain sufficient liquidity, and conserve capital in times of prolonged stress.

In April 2016, the Federal Reserve Board and the FDIC provided feedback on the 2015 resolution plans of eight systemically important domestic banking institutions and provided guidance related to the 2017 resolution plan submissions. While our plan was not jointly found to be deficient (i.e., non-credible or to not facilitate an orderly resolution under the U.S. Bankruptcy Code), the FDIC identified deficiencies and both the FDIC and Federal Reserve Board also identified certain shortcomings. In response to the feedback received, in September 2016, we submitted a status report on our actions to address these shortcomings and a separate public section that explains these actions, at a high level. Our 2017 resolution plan, which is due by July 1, 2017, is also required to address the shortcomings and take into account the additional guidance.

In addition, GS Bank USA is required to submit a resolution plan to the FDIC and, accordingly, submitted its 2015 resolution plan on September 1, 2015. GS Bank USA has not yet received supervisory feedback on its 2015 resolution plan. In July 2016, GS Bank USA received notification from the FDIC that its resolution plan submission date was extended to October 1, 2017 and the 2016 resolution plan requirement will be satisfied by the submission of the 2017 resolution plan.



## Rating Agency Guidelines

The credit rating agencies assign credit ratings to the obligations of Group Inc., which directly issues or guarantees substantially all of our senior unsecured obligations. Goldman, Sachs & Co. (GS&Co.) and GSI have been assigned long- and short-term issuer ratings by certain credit rating agencies. GS Bank USA and GSIB have also been assigned long- and short-term issuer ratings, as well as ratings on their long-term and short-term bank deposits. In addition, credit rating agencies have assigned ratings to debt obligations of certain other subsidiaries of Group Inc.

The level and composition of our equity capital are among the many factors considered in determining our credit ratings. Each agency has its own definition of eligible capital and methodology for evaluating capital adequacy, and assessments are generally based on a combination of factors rather than a single calculation. See “Liquidity Risk Management — Credit Ratings” for further information about credit ratings of Group Inc., GS Bank USA, GSIB, GS&Co. and GSI.

## Consolidated Regulatory Capital

We are subject to the Federal Reserve Board’s revised risk-based capital and leverage regulations, subject to certain transitional provisions (Revised Capital Framework). These regulations 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 Revised Capital Framework, we are an “Advanced approach” banking organization.

We calculate our Common Equity Tier 1 (CET1), Tier 1 capital and Total capital ratios in accordance with (i) the Standardized approach and market risk rules set out in the Revised Capital Framework (together, the Standardized Capital Rules) and (ii) the Advanced approach and market risk rules set out in the Revised Capital Framework (together, the Basel III Advanced Rules) as described in Note 20 to the consolidated financial statements. The lower of each ratio calculated in (i) and (ii) is the ratio against which our compliance with minimum ratio requirements is assessed. Each of the ratios calculated in accordance with the Basel III Advanced Rules was lower than that calculated in accordance with the Standardized Capital Rules and therefore the Basel III Advanced ratios were the ratios that applied to us as of December 2016 and December 2015.

See Note 20 to the consolidated financial statements for further information about our capital ratios as of December 2016 and December 2015, and for additional information about the Revised Capital Framework.

## Minimum Capital Ratios and Capital Buffers

The table below presents our minimum required ratios as of December 2016, as well as the estimated minimum ratios that we expect will apply at the end of the transitional provisions beginning January 2019.

<table><tr><td></td><td>December 2016 Minimum Ratio</td><td>January 2019 Estimated Minimum Ratio</td></tr><tr><td>CET1 ratio</td><td>5.875%</td><td>9.5%</td></tr><tr><td>Tier 1 capital ratio</td><td>7.375%</td><td>11.0%</td></tr><tr><td>Total capital ratio</td><td>9.375%</td><td>13.0%</td></tr><tr><td>Tier 1 leverage ratio</td><td>4.000%</td><td>4.0%</td></tr></table>

In the table above:

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

• The estimated minimum ratios as of January 2019 reflect (i) the fully phased-in capital conservation buffer (2.5%), (ii) the fully phased-in G-SIB buffer (2.5%), and (iii) the counter-cyclical capital buffer of zero percent. The G-SIB buffer of 2.5% is estimated based on 2016 financial data, a reduction from the 3.0% buffer effective January 1, 2016. The G-SIB and counter-cyclical buffers in the future may differ from these estimates due to additional guidance from our regulators and/or positional changes. As a result, the minimum ratios we are subject to as of January 1, 2019 could be higher than the amounts presented in the table above.

• As of December 2016, in order to meet the quantitative requirements for being “well-capitalized” under the Federal Reserve Board’s regulations, we must meet a higher required minimum Total capital ratio of 10.0%.

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

See Note 20 to the consolidated financial statements for information about the capital conservation buffer, the current G-SIB buffer and the counter-cyclical capital buffer.

Our minimum required supplementary leverage ratio will be 5.0% on January 1, 2018. See “Supplementary Leverage Ratio” below for further information.



## Fully Phased-in Capital Ratios

The table below presents our capital ratios calculated in accordance with the Standardized Capital Rules and the Basel III Advanced Rules on a fully phased-in basis.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Common shareholders&#x27; equity</td><td>$ 75,690</td><td>$ 75,528</td></tr><tr><td>Deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities</td><td>(3,015)</td><td>(3,044)</td></tr><tr><td>Deductions for investments in nonconsolidated financial institutions</td><td>(765)</td><td>(2,274)</td></tr><tr><td>Other adjustments</td><td>(799)</td><td>(1,409)</td></tr><tr><td>Total Common Equity Tier 1</td><td>71,111</td><td>68,801</td></tr><tr><td>Preferred stock</td><td>11,203</td><td>11,200</td></tr><tr><td>Deduction for investments in covered funds</td><td>(445)</td><td>(413)</td></tr><tr><td>Other adjustments</td><td>(61)</td><td>(128)</td></tr><tr><td>Tier 1 capital</td><td>$ 81,808</td><td>$ 79,460</td></tr><tr><td>Standardized Tier 2 and Total capital</td><td></td><td></td></tr><tr><td>Tier 1 capital</td><td>$ 81,808</td><td>$ 79,460</td></tr><tr><td>Qualifying subordinated debt</td><td>14,566</td><td>15,132</td></tr><tr><td>Allowance for losses on loans and lending commitments</td><td>722</td><td>602</td></tr><tr><td>Other adjustments</td><td>(6)</td><td>(19)</td></tr><tr><td>Standardized Tier 2 capital</td><td>15,282</td><td>15,715</td></tr><tr><td>Standardized Total capital</td><td>$ 97,090</td><td>$ 95,175</td></tr><tr><td>Basel III Advanced Tier 2 and Total capital</td><td></td><td></td></tr><tr><td>Tier 1 capital</td><td>$ 81,808</td><td>$ 79,460</td></tr><tr><td>Standardized Tier 2 capital</td><td>15,282</td><td>15,715</td></tr><tr><td>Allowance for losses on loans and lending commitments</td><td>(722)</td><td>(602)</td></tr><tr><td>Basel III Advanced Tier 2 capital</td><td>14,560</td><td>15,113</td></tr><tr><td>Basel III Advanced Total capital</td><td>$ 96,368</td><td>$ 94,573</td></tr><tr><td>RWAs</td><td></td><td></td></tr><tr><td>Standardized</td><td>$507,807</td><td>$534,135</td></tr><tr><td>Basel III Advanced</td><td>560,786</td><td>587,319</td></tr><tr><td>CET1 ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>14.0%</td><td>12.9%</td></tr><tr><td>Basel III Advanced</td><td>12.7%</td><td>11.7%</td></tr><tr><td>Tier 1 capital ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>16.1%</td><td>14.9%</td></tr><tr><td>Basel III Advanced</td><td>14.6%</td><td>13.5%</td></tr><tr><td>Total capital ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>19.1%</td><td>17.8%</td></tr><tr><td>Basel III Advanced</td><td>17.2%</td><td>16.1%</td></tr></table>

Although the fully phased-in capital ratios are not applicable until 2019, we believe that the ratios in the table above are meaningful because they are measures that we, our regulators and investors use to assess our ability to meet future regulatory capital requirements. The fully phased-in Basel III Advanced and Standardized capital ratios are non-GAAP measures and may not be comparable to similar non-GAAP measures used by other companies. These ratios are based on our current interpretation, expectations and understanding of the Revised Capital Framework and may evolve as we discuss the interpretation and application of this framework with our regulators.
In the table above:

• The deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities, include goodwill of $3.67 billion and $3.66 billion as of December 2016 and December 2015, respectively, and identifiable intangible assets of $429 million and $491 million as of December 2016 and December 2015, respectively, net of associated deferred tax liabilities of $1.08 billion and $1.10 billion as of December 2016 and December 2015, respectively.

• The deductions for investments in nonconsolidated financial institutions represent the amount by which our investments in the capital of nonconsolidated financial institutions exceed certain prescribed thresholds. The decrease from December 2015 to December 2016 primarily reflects reductions in our fund investments.

• The deduction for investments in covered funds represents our aggregate investments in applicable covered funds, as permitted by the Volcker Rule, that were purchased after December 2013. Substantially all of these investments in covered funds were purchased in connection with our market-making activities. This deduction was not subject to a transition period. See “Regulatory Developments” below for further information about the Volcker Rule.

• Other adjustments within CET1 primarily include the overfunded portion of our defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax assets, credit valuation adjustments on derivative liabilities, debt valuation adjustments and other required credit risk-based deductions.

• 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 to the consolidated financial statements for additional information about our subordinated debt.

See Note 20 to the consolidated financial statements for information about our transitional capital ratios, which represent the ratios that are applicable to us as of December 2016 and December 2015.



## Supplementary Leverage Ratio

The Revised Capital Framework includes a supplementary leverage ratio requirement for Advanced approach banking organizations. Under amendments to the Revised Capital Framework, the U.S. federal bank regulatory agencies approved a final rule that implements the supplementary leverage ratio aligned with the definition of leverage established by the Basel Committee. The supplementary leverage ratio compares Tier 1 capital to a measure of leverage exposure, which consists of total daily average assets for the quarter and certain off-balance-sheet exposures (which include a measure of derivatives exposures and commitments), less certain balance sheet deductions. The Revised Capital Framework requires a minimum supplementary leverage ratio of 5.0% (comprised of the minimum requirement of 3.0% and a 2.0% buffer) for U.S. bank holding companies deemed to be G-SIBs, effective on January 1, 2018.

As of December 2016 and December 2015, our supplementary leverage ratio was 6.4% and 5.9%, respectively, based on Tier 1 capital on a fully phased-in basis of $81.81 billion and $79.46 billion, respectively, divided by total leverage exposure of $1.27 trillion (consists of total daily average assets for the quarter of $884 billion and certain off-balance-sheet exposures of $392 billion, less certain balance sheet deductions of $5 billion) and $1.34 trillion (consists of total daily average assets for the quarter of $878 billion and certain off-balance-sheet exposures of $471 billion, less certain balance sheet deductions of $6 billion), respectively. Within total leverage exposure, the adjustments to quarterly average assets in both periods were primarily comprised of off-balance-sheet exposures related to derivatives, secured financing transactions, commitments and guarantees.

This supplementary leverage ratio is based on our current interpretation and understanding of the U.S. federal bank regulatory agencies' final rule and may evolve as we discuss the interpretation and application of this rule with our regulators.

## Subsidiary Capital Requirements

Many of our subsidiaries, including GS Bank USA and our broker-dealer subsidiaries, are subject to separate regulation and capital requirements of the jurisdictions in which they operate.
GS Bank USA. GS Bank USA is subject to regulatory capital requirements that are calculated in substantially the same manner as those applicable to bank holding companies and calculates its capital ratios in accordance with the risk-based capital and leverage requirements applicable to state member banks, which are based on the Revised Capital Framework. See Note 20 to the consolidated financial statements for further information about the Revised Capital Framework as it relates to GS Bank USA, including GS Bank USA’s capital ratios and required minimum ratios.

In addition, under Federal Reserve Board rules, commencing on January 1, 2018, in order to be considered a “well-capitalized” depository institution, GS Bank USA must have a supplementary leverage ratio of 6.0% or greater. The supplementary leverage ratio compares Tier 1 capital to a measure of leverage exposure, defined as total daily average assets for the quarter and certain off-balance-sheet exposures (which include a measure of derivatives exposures and commitments), less certain balance sheet deductions. As of December 2016, GS Bank USA’s supplementary leverage ratio was 7.3%, based on Tier 1 capital on a fully phased-in basis of $24.48 billion, divided by total leverage exposure of $333 billion (consists of total daily average assets for the quarter of $170 billion and certain off-balance-sheet exposures of $163 billion, less certain balance sheet deductions of $20 million). As of December 2015, GS Bank USA’s supplementary leverage ratio was 7.1%, based on Tier 1 capital on a fully phased-in basis of $23.02 billion, divided by total leverage exposure of $324 billion (total daily average assets for the quarter of $134 billion and certain off-balance-sheet exposures of $190 billion, less certain balance sheet deductions of $5 million). This supplementary leverage ratio is based on our current interpretation and understanding of this rule and may evolve as we discuss their interpretation and application with our regulators.

GSI. Our regulated U.K. broker-dealer, GSI, is one of our principal non-U.S. regulated subsidiaries and is regulated by the PRA and the Financial Conduct Authority. GSI is subject to the revised capital framework for E.U.-regulated financial institutions prescribed in the E.U. Fourth Capital Requirements Directive (CRD IV) and the E.U. Capital Requirements Regulation (CRR). These capital regulations are largely based on Basel III.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

The table below presents GSI’s minimum required ratios.

<table><tr><td></td><td>December 2016 Minimum Ratio</td><td>December 2015 Minimum Ratio</td></tr><tr><td>CET1 ratio</td><td>6.549%</td><td>6.1%</td></tr><tr><td>Tier 1 capital ratio</td><td>8.530%</td><td>8.2%</td></tr><tr><td>Total capital ratio</td><td>11.163%</td><td>10.9%</td></tr></table>

The minimum ratios in the table above incorporate capital guidance received from the PRA and could change in the future. GSI’s future capital requirements may also be impacted by developments such as the introduction of capital buffers as described above in “Minimum Capital Ratios and Capital Buffers.”

As of December 2016, GSI had a CET1 ratio of 12.9%, a Tier 1 capital ratio of 12.9% and a Total capital ratio of 17.2%. Each of these ratios includes approximately 71 basis points attributable to profit for the year ended December 2016. These ratios will be finalized upon the completion of GSI’s 2016 audit. As of December 2015, GSI had a CET1 ratio of 12.9%, a Tier 1 capital ratio of 12.9% and a Total capital ratio of 17.6%.

In November 2016, the European Commission proposed amendments to the CRR to implement a 3% minimum leverage ratio requirement for certain E.U. financial institutions. This leverage ratio compares the CRR’s definition of Tier 1 capital to a measure of leverage exposure, defined as the sum of assets plus certain off-balance-sheet exposures (which include a measure of derivatives exposures, securities financing transactions and commitments), less Tier 1 capital deductions. Any required minimum ratio is expected to become effective for GSI no earlier than January 1, 2018. As of December 2016 and December 2015, GSI had a leverage ratio of 3.8% and 3.6%, respectively. The ratio as of December 2016 includes approximately 21 basis points attributable to profit for the year ended December 2016. This leverage ratio is based on our current interpretation and understanding of this rule and may evolve as we discuss the interpretation and application of this rule with GSI’s regulators.

Other Subsidiaries. The capital requirements of several of our subsidiaries may increase in the future due to the various developments arising from the Basel Committee, the Dodd-Frank Act, and other governmental entities and regulators. See Note 20 to the consolidated financial statements for information about the capital requirements of our other regulated subsidiaries.
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. In certain instances, Group Inc. may be limited in its ability to access capital held at certain subsidiaries as a result of regulatory, tax or other constraints. As of December 2016 and December 2015, Group Inc.'s equity investment in subsidiaries was $92.77 billion and $85.52 billion, respectively, compared with its total shareholders' equity of $86.89 billion and $86.73 billion, respectively.

Our capital invested in non-U.S. subsidiaries is generally 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 to the consolidated financial statements for information about our net investment hedges, which are used to hedge this risk.

Guarantees of Subsidiaries. Group Inc. has guaranteed the payment obligations of GS&Co. and GS Bank USA, in each case subject to certain exceptions.

## Regulatory Developments

Our businesses are subject to significant and evolving regulation. The Dodd-Frank Act, enacted in July 2010, significantly altered the financial regulatory regime within which we operate. In addition, other reforms have been adopted or are being considered by regulators and policy makers worldwide. Given that many of the new and proposed rules are highly complex, the full impact of regulatory reform will not be known until the rules are implemented and market practices develop under the final regulations.

There has been increased regulation of, and limitations on, our activities, including the Dodd-Frank Act prohibition on “proprietary trading” and the limitation on the sponsorship of, and investment in, “covered funds” (as defined in the Volcker Rule). In addition, there is increased regulation of, and restrictions on, OTC derivatives markets and transactions, particularly related to swaps and security-based swaps.



See “Business — Regulation” in Part I, Item 1 of this Form 10-K for more information about the laws, rules and regulations and proposed laws, rules and regulations that apply to us and our operations. In addition, see Note 20 to the consolidated financial statements for information about regulatory developments as they relate to our regulatory capital and leverage ratios.

## Volcker Rule

The provisions of the Dodd-Frank Act referred to as the “Volcker Rule” became effective in July 2015 (subject to a conformance period, as applicable). The Volcker Rule prohibits “proprietary trading,” but permits activities such as underwriting, market making and risk-mitigation hedging, requires an extensive compliance program and includes additional reporting and record-keeping requirements. The initial implementation of these rules did not have a material impact on our financial condition, results of operations or cash flows. However, the rule is highly complex, and its impact may change as market practices further develop.

In addition to the prohibition on proprietary trading, the Volcker Rule limits the sponsorship of, and investment in, covered funds by banking entities, including Group Inc. and its subsidiaries. It also limits certain types of transactions between us and our sponsored funds, similar to the limitations on transactions between depository institutions and their affiliates as described in “Business — Regulation” in Part I, Item 1 of this Form 10-K. Covered funds include our private equity funds, certain of our credit and real estate funds, our hedge funds and certain other investment structures. The limitation on investments in covered funds requires us to reduce our investment in each such fund to 3% or less of the fund’s net asset value, and to reduce our aggregate investment in all such funds to 3% or less of our Tier 1 capital.

Our investments in applicable covered funds purchased after December 2013 are required to be deducted from Tier 1 capital. See “Equity Capital Management and Regulatory Capital — Fully Phased-in Capital Ratios” for further information about our Tier 1 capital and the deduction for investments in covered funds.

We continue to manage our existing interests in such funds, taking into account the conformance period under the Volcker Rule. We plan to continue to conduct our investing and lending activities in ways that are permissible under the Volcker Rule.
Our current investment in funds at NAV is $6.47 billion. In order to be compliant with the Volcker Rule, we will be required to reduce most of our interests in these funds by the end of the conformance period. See Note 6 to the consolidated financial statements for further information about our investment in funds at NAV and the conformance period for covered funds.

Although our net revenues from our interests in private equity, credit, real estate and hedge funds may vary from period to period, our aggregate net revenues from these investments were approximately 3% and 5% of our aggregate total net revenues over the last 10 years and 5 years, respectively.

## Total Loss-Absorbing Capacity

In December 2016, the Federal Reserve Board adopted a final rule, which establishes new total loss-absorbing capacity (TLAC) and related requirements for U.S. bank holding companies designated as G-SIBs. The rule will be effective in January 2019, with no phase-in period, and has been designed so that, in the event of a G-SIB’s failure, there will be sufficient external loss-absorbing capacity available in order for authorities to implement an orderly resolution of the G-SIB. The rule (i) establishes minimum TLAC requirements, (ii) establishes minimum eligible long-term debt requirements, (iii) prohibits certain holding company transactions and (iv) caps the amount of G-SIB liabilities that are not eligible long-term debt.

We expect that we will be compliant with the TLAC requirements by the effective date. See “Business — Regulation” in Part I, Item 1 of this Form 10-K for further information about the Federal Reserve Board’s TLAC rule.



## Other Regulatory Developments

In September 2016, the final margin rules issued by the U.S. federal bank regulatory agencies and the CFTC for uncleared swaps became effective. These rules will phase in through March 2017 for variation margin requirements and through September 2020 for initial margin requirements depending on the level of swaps, security-based swaps and/or exempt foreign exchange derivative transaction activity of the swap dealer and the relevant counterparty. The final rules of the U.S. federal bank regulatory agencies generally apply to inter-affiliate transactions, with limited relief available from initial margin requirements for affiliates.

Under the CFTC final rules, inter-affiliate transactions are exempt from initial margin requirements with certain exceptions but variation margin requirements still apply. We expect that our margin requirements will continue to increase as the rules phase in. Japanese regulators have implemented broadly similar rules and regulators in other major jurisdictions are expected to do so over the next several quarters.

See “Business — Regulation” in Part I, Item 1 of this Form 10-K for further information about regulations that may impact us in the future.

## Off-Balance-Sheet Arrangements and Contractual Obligations

## Off-Balance-Sheet Arrangements

We have various types of off-balance-sheet arrangements that we enter into in the ordinary course of business. Our involvement in these arrangements can take many different forms, including:

• Purchasing or retaining residual and other interests in special purpose entities such as mortgage-backed and other asset-backed securitization vehicles;

• Holding senior and subordinated debt, interests in limited and general partnerships, and preferred and common stock in other nonconsolidated vehicles;

• Entering into interest rate, foreign currency, equity, commodity and credit derivatives, including total return swaps;

• Entering into operating leases; and

• Providing guarantees, indemnifications, commitments, letters of credit and representations and warranties.

We enter into these arrangements for a variety of business purposes, including securitizations. The securitization vehicles that purchase mortgages, corporate bonds, and other types of financial assets are critical to the functioning of several significant investor markets, including the mortgage-backed and other asset-backed securities markets, since they offer investors access to specific cash flows and risks created through the securitization process.

We also enter into these arrangements to underwrite client securitization transactions; provide secondary market liquidity; make investments in performing and nonperforming debt, equity, real estate and other assets; provide investors with credit-linked and asset-repackaged notes; and receive or provide letters of credit to satisfy margin requirements and to facilitate the clearance and settlement process.

Our financial interests in, and derivative transactions with, such nonconsolidated entities are generally accounted for at fair value, in the same manner as our other financial instruments, except in cases where we apply the equity method of accounting.



The table below presents where information about our various off-balance-sheet arrangements may be found in this Form 10-K. In addition, see Note 3 to the consolidated financial statements for information about our consolidation policies.

## Type of Off-Balance-Sheet

<table><tr><td>Arrangement</td><td>Disclosure in Form 10-K</td></tr><tr><td>Variable interests and other obligations, including contingent obligations, arising from variable interests in nonconsolidated VIEs</td><td>See Note 12 to the consolidated financial statements.</td></tr><tr><td>Leases, letters of credit, and lending and other commitments</td><td>See “Contractual Obligations” below and Note 18 to the consolidated financial statements.</td></tr><tr><td>Guarantees</td><td>See “Contractual Obligations” below and Note 18 to the consolidated financial statements</td></tr><tr><td>Derivatives</td><td>See “Credit Risk Management — Credit Exposures — OTC Derivatives” below and Notes 4, 5, 7 and 18 to the consolidated financial statements.</td></tr></table>

## Contractual Obligations

We have certain contractual obligations which require us to make future cash payments. These contractual obligations include our unsecured long-term borrowings, secured long-term financings, time deposits and contractual interest payments, all of which are included in our consolidated statements of financial condition.

Our obligations to make future cash payments also include certain off-balance-sheet contractual obligations such as purchase obligations, minimum rental payments under noncancelable leases and commitments and guarantees. The table below presents our contractual obligations, commitments and guarantees by type.

<table><tr><td rowspan="2">$ in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td colspan="3">Amounts related to on-balance-sheet obligations</td></tr><tr><td>Time deposits</td><td>$ 27,394</td><td>$ 25,748</td></tr><tr><td>Secured long-term financings</td><td>8,405</td><td>10,520</td></tr><tr><td>Unsecured long-term borrowings</td><td>189,086</td><td>175,422</td></tr><tr><td>Contractual interest payments</td><td>54,552</td><td>59,327</td></tr><tr><td>Subordinated liabilities of consolidated VIEs</td><td>584</td><td>501</td></tr><tr><td colspan="3">Amounts related to off-balance-sheet arrangements</td></tr><tr><td>Commitments to extend credit</td><td>112,056</td><td>117,158</td></tr><tr><td>Contingent and forward starting resale and securities borrowing agreements</td><td>25,348</td><td>28,874</td></tr><tr><td>Forward starting repurchase and secured lending agreements</td><td>8,939</td><td>5,878</td></tr><tr><td>Letters of credit</td><td>373</td><td>249</td></tr><tr><td>Investment commitments</td><td>8,444</td><td>6,054</td></tr><tr><td>Other commitments</td><td>6,014</td><td>6,944</td></tr><tr><td>Minimum rental payments</td><td>1,941</td><td>2,575</td></tr><tr><td>Derivative guarantees</td><td>816,774</td><td>926,443</td></tr><tr><td>Securities lending indemnifications</td><td>33,403</td><td>31,902</td></tr><tr><td>Other financial guarantees</td><td>3,662</td><td>4,461</td></tr></table>

The table below presents our contractual obligations, commitments and guarantees by period of expiration.

<table><tr><td rowspan="2">\( in millions</td><td colspan="4">As of December 2016</td></tr><tr><td>2017</td><td>2018 - 2019</td><td>2020 - 2021</td><td>2022 - Thereafter</td></tr><tr><td colspan="5">Amounts related to on-balance-sheet obligations</td></tr><tr><td>Time deposits</td><td>$ —</td><td>$ 11,896</td><td>$ 7,612</td><td>$ 7,886</td></tr><tr><td>Secured long-term financings</td><td>—</td><td>6,277</td><td>1,479</td><td>649</td></tr><tr><td>Unsecured long-term borrowings</td><td>—</td><td>52,298</td><td>39,154</td><td>97,634</td></tr><tr><td>Contractual interest payments</td><td>6,394</td><td>11,083</td><td>8,104</td><td>28,971</td></tr><tr><td>Subordinated liabilities of consolidated VIEs</td><td>—</td><td>—</td><td>—</td><td>584</td></tr><tr><td colspan="5">Amounts related to off-balance-sheet arrangements</td></tr><tr><td>Commitments to extend credit</td><td>22,358</td><td>24,905</td><td>58,412</td><td>6,381</td></tr><tr><td>Contingent and forward starting resale and securities borrowing agreements</td><td>25,348</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Forward starting repurchase and secured lending agreements</td><td>8,939</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Letters of credit</td><td>308</td><td>21</td><td>—</td><td>44</td></tr><tr><td>Investment commitments</td><td>6,713</td><td>415</td><td>108</td><td>1,208</td></tr><tr><td>Other commitments</td><td>5,756</td><td>200</td><td>15</td><td>43</td></tr><tr><td>Minimum rental payments</td><td>290</td><td>520</td><td>365</td><td>766</td></tr><tr><td>Derivative guarantees</td><td>432,328</td><td>261,676</td><td>71,264</td><td>51,506</td></tr><tr><td>Securities lending indemnifications</td><td>33,403</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Other financial guarantees</td><td>1,064</td><td>763</td><td>1,662</td><td>173</td></tr></table>



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

In the table above:

• The 2017 column includes a total of $1.49 billion of investment commitments to covered funds (as defined by the Volcker Rule) subject to the Volcker Rule conformance period. We expect that substantially all of these commitments will not be called. See Note 6 to the consolidated financial statements for information about the Volcker Rule conformance period.

• Obligations maturing within one year of our financial statement date or redeemable within one year of our financial statement date at the option of the holders are excluded as they are treated as short-term obligations.

• Obligations that are repayable prior to maturity at our option are reflected at their contractual maturity dates and obligations that are redeemable prior to maturity at the option of the holders are reflected at the earliest dates such options become exercisable.

• Amounts included in the table do not necessarily reflect the actual future cash flow requirements for these arrangements because commitments and guarantees represent notional amounts and may expire unused or be reduced or cancelled at the counterparty’s request.

• Due to the uncertainty of the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded. See Note 24 to the consolidated financial statements for further information about our unrecognized tax benefits.

• As of December 2016, unsecured long-term borrowings includes $7.43 billion of adjustments to the carrying value of certain unsecured long-term borrowings resulting from the application of hedge accounting.

• As of December 2016, the aggregate contractual principal amount of secured long-term financings and unsecured long-term borrowings for which the fair value option was elected exceeded the related fair value by $361 million and $1.56 billion, respectively.

• Contractual interest payments represent estimated future interest payments related to unsecured long-term borrowings, secured long-term financings and time deposits based on applicable interest rates as of December 2016, and includes stated coupons, if any, on structured notes.

See Notes 15 and 18 to the consolidated financial statements for further information about our short-term borrowings, and commitments and guarantees, respectively.
As of December 2016, our unsecured long-term borrowings were $189.09 billion, with maturities extending to 2056, and consisted principally of senior borrowings. See Note 16 to the consolidated financial statements for further information about our unsecured long-term borrowings.

As of December 2016, our future minimum rental payments, net of minimum sublease rentals under noncancelable leases, were $1.94 billion. These lease commitments for office space expire on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. See Note 18 to the consolidated financial statements for further information about our leases.

Our occupancy expenses include costs associated with office space held in excess of our current requirements. This excess space, the cost of which is charged to earnings as incurred, is being held for potential growth or to replace currently occupied space that we may exit in the future. We regularly evaluate our current and future space capacity in relation to current and projected staffing levels. For 2016, we incurred exit costs of approximately $68 million related to office space held in excess of our current requirements. Additional occupancy expenses for excess office space were not material for 2016. We may incur exit costs in the future to the extent we (i) reduce our space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate and, consequently, dispose of existing space that had been held for potential growth. These exit costs may be material to our results of operations in a given period.

## Risk Management

Risks are inherent in our business and include liquidity, market, credit, operational, model, legal, regulatory and reputational risks. For further information about our risk management processes, see “— Overview and Structure of Risk Management” below. Our risks include the risks across our risk categories, regions or global businesses, as well as those which have uncertain outcomes and have the potential to materially impact our financial results, our liquidity and our reputation. For further information about our areas of risk, see “— Liquidity Risk Management,” “— Market Risk Management,” “— Credit Risk Management,” “— Operational Risk Management” and “— Model Risk Management” below and “Risk Factors” in Part I, Item 1A of this Form 10-K.



## Overview and Structure of Risk Management

## Overview

We believe that effective risk management is of primary importance to our success. Accordingly, we have comprehensive risk management processes through which we monitor, evaluate and manage the risks we assume in conducting our activities. These include liquidity, market, credit, operational, model, legal, compliance, regulatory and reputational risk exposures. Our risk management framework is built around three core components: governance, processes and people.

Governance. Risk management governance starts with our Board, which plays an important role in reviewing and approving risk management policies and practices, both directly and through its committees, including its Risk Committee. The Board also receives regular briefings on firmwide risks, including market risk, liquidity risk, credit risk, operational risk and model risk from our independent control and support functions, including the chief risk officer, and on compliance risk from the head of Compliance, on legal and regulatory matters from the general counsel, and on other matters impacting our reputation from the chair of our Firmwide Client and Business Standards Committee. The chief risk officer, as part of the review of the firmwide risk portfolio, regularly advises the Risk Committee of the Board of relevant risk metrics and material exposures. Next, at our most senior levels, our leaders are experienced risk managers, with a sophisticated and detailed understanding of the risks we take. Our senior management, and senior managers in our revenue-producing units and independent control and support functions, lead and participate in risk-oriented committees. Independent control and support functions include Compliance, the Conflicts Resolution Group (Conflicts), Controllers, Credit Risk Management and Advisory (Credit Risk Management), Human Capital Management, Legal, Liquidity Risk Management and Analysis (Liquidity Risk Management), Market Risk Management and Analysis (Market Risk Management), Model Risk Management, Operations, Operational Risk Management and Analysis (Operational Risk Management), Tax, Technology and Treasury.

Our governance structure provides the protocol and responsibility for decision-making on risk management issues and ensures implementation of those decisions. We make extensive use of risk-related committees that meet regularly and serve as an important means to facilitate and foster ongoing discussions to identify, manage and mitigate risks.
We maintain strong communication about risk and we have a culture of collaboration in decision-making among the revenue-producing units, independent control and support functions, committees and senior management. While we believe that the first line of defense in managing risk rests with the managers in our revenue-producing units, we dedicate extensive resources to independent control and support functions in order to ensure a strong oversight structure and an appropriate segregation of duties. We regularly reinforce our strong culture of escalation and accountability across all divisions and functions.

Processes. We maintain various processes and procedures that are critical components of our risk management. First and foremost is our daily discipline of marking substantially all of our inventory to current market levels. We carry our inventory at fair value, with changes in valuation reflected immediately in our risk management systems and in net revenues. We do so because we believe this discipline is one of the most effective tools for assessing and managing risk and that it provides transparent and realistic insight into our financial exposures.

We also apply a rigorous framework of limits to control risk across transactions, products, businesses and markets. This includes approval of limits at firmwide, business and product levels by the Risk Committee of the Board. In addition, the Firmwide Risk Committee is responsible for approving our risk limits framework, subject to the overall limits approved by the Risk Committee of the Board, at a variety of levels and monitoring these limits on a daily basis. The Risk Governance Committee (through delegated authority from the Firmwide Risk Committee) is responsible for approving limits at firmwide, business and product levels. Certain limits may be set at levels that will require periodic adjustment, rather than at levels which reflect our maximum risk appetite. This fosters an ongoing dialogue on risk among revenue-producing units, independent control and support functions, committees and senior management, as well as rapid escalation of risk-related matters. See “Liquidity Risk Management,” “Market Risk Management” and “Credit Risk Management” for further information about our risk limits.



Active management of our positions is another important process. Proactive mitigation of our market and credit exposures minimizes the risk that we will be required to take outsized actions during periods of stress.

We also focus on the rigor and effectiveness of our risk systems. The goal of our risk management technology is to get the right information to the right people at the right time, which requires systems that are comprehensive, reliable and timely. We devote significant time and resources to our risk management technology to ensure that it consistently provides us with complete, accurate and timely information.

People. Even the best technology serves only as a tool for helping to make informed decisions in real time about the risks we are taking. Ultimately, effective risk management requires our people to interpret our risk data on an ongoing and timely basis and adjust risk positions accordingly. In both our revenue-producing units and our independent control and support functions, the experience of our professionals, and their understanding of the nuances and limitations of each risk measure, guide us in assessing exposures and maintaining them within prudent levels.

We reinforce a culture of effective risk management in our training and development programs as well as the way we evaluate performance, and recognize and reward our people. Our training and development programs, including certain sessions led by our most senior leaders, are focused on the importance of risk management, client relationships and reputational excellence. As part of our annual performance review process, we assess reputational excellence including how an employee exercises good risk management and reputational judgment, and adheres to our code of conduct and compliance policies. Our review and reward processes are designed to communicate and reinforce to our professionals the link between behavior and how people are recognized, the need to focus on our clients and our reputation, and the need to always act in accordance with the highest standards of the firm.

## Structure

Ultimate oversight of risk is the responsibility of our Board. The Board oversees risk both directly and through its committees, including its Risk Committee. Within the firm, a series of committees with specific risk management mandates have oversight or decision-making responsibilities for risk management activities. Committee membership generally consists of senior managers from both our revenue-producing units and our independent control and support functions. We have established procedures for these committees to ensure that appropriate information barriers are in place. Our primary risk committees, most of which also have additional sub-committees or working groups, are described below. In addition to these committees, we have other risk-oriented committees which provide oversight for different businesses, activities, products, regions and legal entities. All of our firmwide, regional and divisional committees have responsibility for considering the impact of transactions and activities which they oversee on our reputation.

Membership of our risk committees is reviewed regularly and updated to reflect changes in the responsibilities of the committee members. Accordingly, the length of time that members serve on the respective committees varies as determined by the committee chairs and based on the responsibilities of the members.

In addition, independent control and support functions, which report to the chief executive officer, the presidents and co-chief operating officers, the chief financial officer or the chief risk officer, are responsible for day-to-day oversight or monitoring of risk, as illustrated in the chart below and as described in greater detail in the following sections. Internal Audit, which reports to the Audit Committee of the Board and includes professionals with a broad range of audit and industry experience, including risk management expertise, is responsible for independently assessing and validating key controls within the risk management framework.



The chart below presents an overview of our risk management governance structure, including the reporting relationships of our independent control and support functions.



Management Committee. The Management Committee oversees our global activities, including all of our independent control and support functions. It provides this oversight directly and through authority delegated to committees it has established. This committee is comprised of our most senior leaders, and is chaired by our chief executive officer. Most members of the Management Committee are also members of other firmwide, divisional and regional committees. The following are the committees that are principally involved in firmwide risk management.

Firmwide Client and Business Standards Committee. The Firmwide Client and Business Standards Committee assesses and makes determinations regarding business standards and practices, reputational risk management, client relationships and client service, is chaired by one of our presidents and co-chief operating officers (who is appointed as chair by the chief executive officer), and reports to the Management Committee. This committee also has responsibility for overseeing recommendations of the Business Standards Committee. This committee periodically updates and receives guidance from the Public Responsibilities Committee of the Board. This committee has also established certain committees that report to it, including divisional Client and Business Standards Committees and risk-related committees.
The following are the risk-related committees that report to the Firmwide Client and Business Standards Committee:

• Firmwide New Activity Committee. The Firmwide New Activity Committee is responsible for reviewing new activities and for establishing a process to identify and review previously approved activities that are significant and that have changed in complexity and/or structure or present different reputational and suitability concerns over time to consider whether these activities remain appropriate. This committee is co-chaired by our global treasurer and the chief administrative officer of our Investment Management Division, who are appointed as co-chairs by the chair of the Firmwide Client and Business Standards Committee.

• Firmwide Reputational Risk Committee. The Firmwide Reputational Risk Committee is responsible for assessing reputational risks arising from transactions that have been identified as requiring mandatory escalation to the Firmwide Reputational Risk Committee or that otherwise have potential heightened reputational risk. This committee is chaired by one of our presidents and co-chief operating officers (who is appointed as chair by the chief executive officer), and the vice-chairs are the head of Compliance and the head of the Conflicts Resolution Group, who are appointed as vice-chairs by the chair of the Firmwide Client and Business Standards Committee.

• Firmwide Suitability Committee. The Firmwide Suitability Committee is responsible for setting standards and policies for product, transaction and client suitability and providing a forum for consistency across divisions, regions and products on suitability assessments. This committee also reviews suitability matters escalated from other committees. This committee is co-chaired by the deputy head of Compliance, and the chief strategy officer of the Securities Division and co-head of Fixed Income, Currency and Commodities Sales, who are appointed as co-chairs by the chair of the Firmwide Client and Business Standards Committee.



Firmwide Risk Committee. The Firmwide Risk Committee is globally responsible for the ongoing monitoring and management of our financial risks. The Firmwide Risk Committee approves our risk limits framework, metrics and methodologies, reviews results of stress tests and scenario analyses, and provides oversight over model risk. This committee is co-chaired by our chief financial officer and our chief risk officer (who are appointed as co-chairs by the chief executive officer), and reports to the Management Committee. The following are the primary committees that report to the Firmwide Risk Committee:

• Credit Policy Committee. The Credit Policy Committee establishes and reviews broad firmwide credit policies and parameters that are implemented by Credit Risk Management. This committee is co-chaired by a deputy chief risk officer and the head of Credit Risk Management for our Securities Division, who are appointed as co-chairs by our chief risk officer.

• Firmwide Finance Committee. The Firmwide Finance Committee has oversight responsibility for liquidity risk, the size and composition of our balance sheet and capital base, and credit ratings. This committee regularly reviews our liquidity, balance sheet, funding position and capitalization, approves related policies, and makes recommendations as to any adjustments to be made in light of current events, risks, exposures and regulatory requirements. As a part of such oversight, among other things, this committee reviews and approves balance sheet limits and the size of our GCLA. This committee is co-chaired by our chief risk officer and our global treasurer, who are appointed as co-chairs by the Firmwide Risk Committee.

• Firmwide Investment Policy Committee. The Firmwide Investment Policy Committee reviews, approves, sets policies, and provides oversight for certain illiquid principal investments, including review of risk management and controls for these types of investments. This committee is co-chaired by the head of our Merchant Banking Division, a co-head of our Securities Division and a deputy general counsel, who are appointed as co-chairs by our presidents and co-chief operating officers and our chief financial officer.

• Firmwide Model Risk Control Committee. The Firmwide Model Risk Control Committee is responsible for oversight of the development and implementation of model risk controls, which includes governance, policies and procedures related to our reliance on financial models. This committee is chaired by a deputy chief risk officer, who is appointed as chair by the Firmwide Risk Committee.
• Firmwide Operational Risk Committee. The Firmwide Operational Risk Committee provides oversight of the ongoing development and implementation of our operational risk policies, framework and methodologies, and monitors the effectiveness of operational risk management. This committee is co-chaired by managing directors in Credit Risk Management and Operational Risk Management, who are appointed as co-chairs by our chief risk officer.

• Firmwide Technology Risk Committee. The Firmwide Technology Risk Committee reviews matters related to the design, development, deployment and use of technology. This committee oversees cyber security matters, as well as technology risk management frameworks and methodologies, and monitors their effectiveness. This committee is co-chaired by our chief information officer and the head of Global Investment Research, who are appointed as co-chairs by the Firmwide Risk Committee.

• Firmwide Volcker Oversight Committee. The Firmwide Volcker Oversight Committee is responsible for the oversight and periodic review of the implementation of our Volcker Rule compliance program, as approved by the Board, and other Volcker Rule-related matters. This committee is co-chaired by a deputy chief risk officer and the deputy head of Compliance, who are appointed as co-chairs by the co-chairs of the Firmwide Risk Committee.

• Global Business Resilience Committee. The Global Business Resilience Committee is responsible for oversight of business resilience initiatives, promoting increased levels of security and resilience, and reviewing certain operating risks related to business resilience. This committee is chaired by our chief administrative officer, who is appointed as chair by the Firmwide Risk Committee.

• Risk Governance Committee. The Risk Governance Committee (through delegated authority from the Firmwide Risk Committee) is globally responsible for the ongoing approval and monitoring of risk frameworks, policies, parameters and limits, at firmwide, business and product levels. This committee is chaired by our chief risk officer, who is appointed as chair by the co-chairs of the Firmwide Risk Committee.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

The following committees report jointly to the Firmwide Risk Committee and the Firmwide Client and Business Standards Committee:

• Firmwide Capital Committee. The Firmwide Capital Committee provides approval and oversight of debt-related transactions, including principal commitments of our capital. This committee aims to ensure that business and reputational standards for underwriting and capital commitments are maintained on a global basis. This committee is co-chaired by the head of Credit Risk Management for our Investment Banking Division, Investment Management Division and Merchant Banking Division, and the head of the Europe, Middle East and Africa (EMEA) Financing Group. The co-chairs of the Firmwide Capital Committee are appointed by the co-chairs of the Firmwide Risk Committee.

• Firmwide Commitments Committee. The Firmwide Commitments Committee reviews our underwriting and distribution activities with respect to equity and equity-related product offerings, and sets and maintains policies and procedures designed to ensure that legal, reputational, regulatory and business standards are maintained on a global basis. In addition to reviewing specific transactions, this committee periodically conducts general strategic reviews of sectors and products and establishes policies in connection with transaction practices. This committee is co-chaired by the chairman of the Financial Institutions Group in our Investment Banking Division, the co-head of the Industrials group in our Investment Banking Division, our chief underwriting officer, and a managing director in Risk Management, who are appointed as co-chairs by the chair of the Firmwide Client and Business Standards Committee.

## Conflicts Management

Conflicts of interest and our approach to dealing with them are fundamental to our client relationships, our reputation and our long-term success. The term “conflict of interest” does not have a universally accepted meaning, and conflicts can arise in many forms within a business or between businesses. The responsibility for identifying potential conflicts, as well as complying with our policies and procedures, is shared by the entire firm.

We have a multilayered approach to resolving conflicts and addressing reputational risk. Our senior management oversees policies related to conflicts resolution, and, in conjunction with Conflicts, Legal and Compliance, the Firmwide Client and Business Standards Committee, and other internal committees, formulates policies, standards and principles, and assists in making judgments regarding the appropriate resolution of particular conflicts. Resolving potential conflicts necessarily depends on the facts and circumstances of a particular situation and the application of experienced and informed judgment.

As a general matter, Conflicts reviews financing and advisory assignments in Investment Banking and certain investing, lending and other activities of the firm. In addition, we have various transaction oversight committees, such as the Firmwide Capital, Commitments and Suitability Committees and other committees that also review new underwriting, loans, investments and structured products. These groups and committees work with internal and external counsel and Compliance to evaluate and address any actual or potential conflicts. Conflicts reports to one of our presidents and co-chief operating officers.

We regularly assess our policies and procedures that address conflicts of interest in an effort to conduct our business in accordance with the highest ethical standards and in compliance with all applicable laws, rules, and regulations.



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

## Liquidity Risk Management

## Overview

Liquidity risk is the risk that we will be unable to fund the firm or meet our liquidity needs in the event of firm-specific, broader industry, or market liquidity stress events. Liquidity is of critical importance to us, as most of the failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, we have in place a comprehensive and conservative set of liquidity and funding policies. Our principal objective is to be able to fund the firm and to enable our core businesses to continue to serve clients and generate revenues, even under adverse circumstances.

Treasury has the primary responsibility for assessing, monitoring and managing our liquidity and funding strategy. Treasury is independent of the revenue-producing units and reports to our chief financial officer.

Liquidity Risk Management is an independent risk management function responsible for control and oversight of our liquidity risk management framework, including stress testing and limit governance. Liquidity Risk Management is independent of the revenue-producing units and Treasury, and reports to our chief risk officer.

## Liquidity Risk Management Principles

We manage liquidity risk according to three principles (i) hold sufficient excess liquidity in the form of Global Core Liquid Assets (GCLA) to cover outflows during a stressed period, (ii) maintain appropriate Asset-Liability Management and (iii) maintain a viable Contingency Funding Plan.

Global Core Liquid Assets. GCLA is liquidity that we maintain to meet a broad range of potential cash outflows and collateral needs in a stressed environment. Our most important liquidity policy is to pre-fund our estimated potential cash and collateral needs during a liquidity crisis and hold this liquidity in the form of unencumbered, highly liquid securities and cash. We believe that the securities held in our GCLA would be readily convertible to cash in a matter of days, through liquidation, by entering into repurchase agreements or from maturities of resale agreements, and that this cash would allow us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets.
Our GCLA reflects the following principles:

• The first days or weeks of a liquidity crisis are the most critical to a company’s survival;

• Focus must be maintained on all potential cash and collateral outflows, not just disruptions to financing flows. Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment;

• During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change; and

• As a result of our policy to pre-fund liquidity that we estimate may be needed in a crisis, we hold more unencumbered securities and have larger debt balances than our businesses would otherwise require. We believe that our liquidity is stronger with greater balances of highly liquid unencumbered securities, even though it increases our total assets and our funding costs.

We maintain our GCLA across major broker-dealer and bank subsidiaries, asset types, and clearing agents to provide us with sufficient operating liquidity to ensure timely settlement in all major markets, even in a difficult funding environment. In addition to the GCLA, we maintain cash balances in several of our other entities, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.

We believe that our GCLA provides us with a resilient source of funds that would be available in advance of potential cash and collateral outflows and gives us significant flexibility in managing through a difficult funding environment.

Asset-Liability Management. Our liquidity risk management policies are designed to ensure we have a sufficient amount of financing, even when funding markets experience persistent stress. We manage the maturities and diversity of our funding across markets, products and counterparties, and seek to maintain a long-dated and diversified funding profile, taking into consideration the characteristics and liquidity profile of our assets.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

Our approach to asset-liability management includes:

• Conservatively managing the overall characteristics of our funding book, with a focus on maintaining long-term, diversified sources of funding in excess of our current requirements. See “Balance Sheet and Funding Sources — Funding Sources” for additional details;

• Actively managing and monitoring our asset base, with particular focus on the liquidity, holding period and our ability to fund assets on a secured basis. We assess our funding requirements and our ability to liquidate assets in a stressed environment while appropriately managing risk. This enables us to determine the most appropriate funding products and tenors. See “Balance Sheet and Funding Sources — Balance Sheet Management” for more detail on our balance sheet management process and “— Funding Sources — Secured Funding” for more detail on asset classes that may be harder to fund on a secured basis; and

• Raising secured and unsecured financing that has a long tenor relative to the liquidity profile of our assets. This reduces the risk that our liabilities will come due in advance of our ability to generate liquidity from the sale of our assets. Because we maintain a highly liquid balance sheet, the holding period of certain of our assets may be materially shorter than their contractual maturity dates.

Our goal is to ensure that we maintain sufficient liquidity to fund our assets and meet our contractual and contingent obligations in normal times as well as during periods of market stress. Through our dynamic balance sheet management process, we use actual and projected asset balances to determine secured and unsecured funding requirements. Funding plans are reviewed and approved by the Firmwide Finance Committee on a quarterly basis. In addition, senior managers in our independent control and support functions regularly analyze, and the Firmwide Finance Committee reviews, our consolidated total capital position (unsecured long-term borrowings plus total shareholders' equity) so that we maintain a level of long-term funding that is sufficient to meet our long-term financing requirements. In a liquidity crisis, we would first use our GCLA in order to avoid reliance on asset sales (other than our GCLA). However, we recognize that orderly asset sales may be prudent or necessary in a severe or persistent liquidity crisis.

## Subsidiary Funding Policies

The majority of our unsecured funding is raised by Group Inc. which lends the necessary funds to its subsidiaries, some of which are regulated, to meet their asset financing, liquidity and capital requirements. In addition, Group Inc. provides its regulated subsidiaries with the necessary capital to meet their regulatory requirements. The benefits of this approach to subsidiary funding are enhanced control and greater flexibility to meet the funding requirements of our subsidiaries. Funding is also raised at the subsidiary level through a variety of products, including secured funding, unsecured borrowings and deposits.

Our intercompany funding policies assume that, unless legally provided for, a subsidiary’s funds or securities are not freely available to its parent or other subsidiaries. In particular, many of our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Group Inc. Regulatory action of that kind could impede access to funds that Group Inc. needs to make payments on its obligations. Accordingly, we assume that the capital provided to our regulated subsidiaries is not available to Group Inc. or other subsidiaries and any other financing provided to our regulated subsidiaries is not available until the maturity of such financing.

Group Inc. has provided substantial amounts of equity and subordinated indebtedness, directly or indirectly, to its regulated subsidiaries. For example, as of December 2016, Group Inc. had $30.09 billion of equity and subordinated indebtedness invested in GS&Co., its principal U.S. registered broker-dealer; $36.94 billion invested in GSI, a regulated U.K. broker-dealer; $2.62 billion invested in Goldman Sachs Japan Co., Ltd. (GSJCL), a regulated Japanese broker-dealer; $26.61 billion invested in GS Bank USA, a regulated New York State-chartered bank; and $3.77 billion invested in GSIB, a regulated U.K. bank. Group Inc. also provided, directly or indirectly, $97.77 billion of unsubordinated loans (including secured loans of $49.90 billion), and $19.60 billion of collateral and cash deposits to these entities, substantially all of which was to GS&Co., GSI, GSJCL and GS Bank USA, as of December 2016. In addition, as of December 2016, Group Inc. had significant amounts of capital invested in and loans to its other regulated subsidiaries.



Contingency Funding Plan. We maintain a contingency funding plan to provide a framework for analyzing and responding to a liquidity crisis situation or periods of market stress. Our contingency funding plan outlines a list of potential risk factors, key reports and metrics that are reviewed on an ongoing basis to assist in assessing the severity of, and managing through, a liquidity crisis and/or market dislocation. The contingency funding plan also describes in detail our potential responses if our assessments indicate that we have entered a liquidity crisis, which include pre-funding for what we estimate will be our potential cash and collateral needs as well as utilizing secondary sources of liquidity. Mitigants and action items to address specific risks which may arise are also described and assigned to individuals responsible for execution.

The contingency funding plan identifies key groups of individuals to foster effective coordination, control and distribution of information, all of which are critical in the management of a crisis or period of market stress. The contingency funding plan also details the responsibilities of these groups and individuals, which include making and disseminating key decisions, coordinating all contingency activities throughout the duration of the crisis or period of market stress, implementing liquidity maintenance activities and managing internal and external communication.

## Liquidity Stress Tests

In order to determine the appropriate size of our GCLA, we use an internal liquidity model, referred to as the Modeled Liquidity Outflow, which captures and quantifies our liquidity risks. We also consider other factors including, but not limited to, an assessment of our potential intraday liquidity needs through an additional internal liquidity model, referred to as the Intraday Liquidity Model, the results of our long-term stress testing models, applicable regulatory requirements and a qualitative assessment of the condition of the financial markets and the firm. The results of the Modeled Liquidity Outflow, the Intraday Liquidity Model and the long-term stress testing models are reported to senior management on a regular basis.

Modeled Liquidity Outflow. Our Modeled Liquidity Outflow is based on conducting multiple scenarios that include combinations of market-wide and firm-specific stress. These scenarios are characterized by the following qualitative elements:

• Severely challenged market environments, including low consumer and corporate confidence, financial and political instability, adverse changes in market values, including potential declines in equity markets and widening of credit spreads; and
• A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade.

The following are the critical modeling parameters of the Modeled Liquidity Outflow:

• Liquidity needs over a 30-day scenario;

• A two-notch downgrade of our long-term senior unsecured credit ratings;

• A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a crisis;

• No issuance of equity or unsecured debt;

• No support from additional government funding facilities. Although we have access to various central bank funding programs, we do not assume reliance on additional sources of funding in a liquidity crisis; and

• No asset liquidation, other than the GCLA.

The potential contractual and contingent cash and collateral outflows covered in our Modeled Liquidity Outflow include:

## Unsecured Funding

• Contractual: All upcoming maturities of unsecured long-term debt, commercial paper, and other unsecured funding products. We assume that we will be unable to issue new unsecured debt or rollover any maturing debt.

• Contingent: Repurchases of our outstanding long-term debt, commercial paper and hybrid financial instruments in the ordinary course of business as a market maker.

## Deposits

• Contractual: All upcoming maturities of term deposits. We assume that we will be unable to raise new term deposits or rollover any maturing term deposits.

• Contingent: Partial withdrawals of deposits that have no contractual maturity. The withdrawal assumptions reflect, among other factors, the type of deposit, whether the deposit is insured or uninsured, and our relationship with the depositor.



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

## Secured Funding

• Contractual: A portion of upcoming contractual maturities of secured funding due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral, counterparty roll probabilities (our assessment of the counterparty’s likelihood of continuing to provide funding on a secured basis at the maturity of the trade) and counterparty concentration.

• Contingent: Adverse changes in the value of financial assets pledged as collateral for financing transactions, which would necessitate additional collateral postings under those transactions.

## OTC Derivatives

• Contingent: Collateral postings to counterparties due to adverse changes in the value of our OTC derivatives, excluding those that are cleared and settled through central counterparties (OTC-cleared).

• Contingent: Other outflows of cash or collateral related to OTC derivatives, excluding OTC-cleared, including the impact of trade terminations, collateral substitutions, collateral disputes, loss of rehypothecation rights, collateral calls or termination payments required by a two-notch downgrade in our credit ratings, and collateral that has not been called by counterparties, but is available to them.

## Exchange-Traded and OTC-cleared Derivatives

• Contingent: Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded and OTC-cleared derivatives.

• Contingent: An increase in initial margin and guaranty fund requirements by derivative clearing houses.

## Customer Cash and Securities

• Contingent: Liquidity outflows associated with our prime brokerage business, including withdrawals of customer credit balances, and a reduction in customer short positions, which may serve as a funding source for long positions.

## Firm Securities

• Contingent: Liquidity outflows associated with a reduction or composition change in firm short positions, which may serve as a funding source for long positions.

## Unfunded Commitments

• Contingent: Draws on our unfunded commitments. Draw assumptions reflect, among other things, the type of commitment and counterparty.

## Other

• Other upcoming large cash outflows, such as tax payments.

Intraday Liquidity Model. Our Intraday Liquidity Model measures our intraday liquidity needs using a scenario analysis characterized by the same qualitative elements as our Modeled Liquidity Outflow. The model assesses the risk of increased intraday liquidity requirements during a scenario where access to sources of intraday liquidity may become constrained.

The following are key modeling elements of the Intraday Liquidity Model:

• Liquidity needs over a one-day settlement period;

• Delays in receipt of counterparty cash payments;

• A reduction in the availability of intraday credit lines at our third-party clearing agents; and

• Higher settlement volumes due to an increase in activity.

Long-Term Stress Testing. We utilize a longer-term stress test to take a forward view on our liquidity position through a prolonged stress period in which we experience a severe liquidity stress and recover in an environment that continues to be challenging. We are focused on ensuring conservative asset-liability management to prepare for a prolonged period of potential stress, seeking to maintain a long-dated and diversified funding profile, taking into consideration the characteristics and liquidity profile of our assets.

We also perform stress tests on a regular basis as part of our routine risk management processes and conduct tailored stress tests on an ad hoc or product-specific basis in response to market developments.

## Model Review and Validation

Treasury regularly refines our Modeled Liquidity Outflow, Intraday Liquidity Model and our other stress testing models to reflect changes in market or economic conditions and our business mix. Any changes, including model assumptions, are assessed and approved by Liquidity Risk Management.

Model Risk Management is responsible for the independent review and validation of our liquidity models. See “Model Risk Management” for further information about the review and validation of these models.



## Limits

We use liquidity limits at various levels and across liquidity risk types to manage the size of our liquidity exposures. Limits are measured relative to acceptable levels of risk given our liquidity risk tolerance. The purpose of the firmwide limits is to assist senior management in monitoring and controlling our overall liquidity profile.

The Risk Committee of the Board and the Firmwide Finance Committee approve liquidity risk limits at the firmwide level. Limits are reviewed frequently and amended, with required approvals, on a permanent and temporary basis, as appropriate, to reflect changing market or business conditions.

Our liquidity risk limits are monitored by Treasury and Liquidity Risk Management. Treasury is responsible for identifying and escalating, on a timely basis, instances where limits have been exceeded.

## GCLA and Unencumbered Metrics

GCLA. Based on the results of our internal liquidity risk models, described above, as well as our consideration of other factors including, but not limited to, an assessment of our potential intraday liquidity needs and a qualitative assessment of the condition of the financial markets and the firm, we believe our liquidity position as of both December 2016 and December 2015 was appropriate. As of December 2016 and December 2015, the fair value of the securities and certain overnight cash deposits included in our GCLA totaled $226.07 billion and $199.12 billion, respectively. The increase in our GCLA from December 2015 to December 2016 is primarily a result of the acquisition of GE Capital Bank's online deposit platform in April 2016. See Note 14 to the consolidated financial statements for further information about this acquisition. The fair value of our GCLA averaged $211.10 billion and $187.75 billion for the years ended December 2016 and December 2015, respectively.

The table below presents the average fair value of the securities and certain overnight cash deposits that are included in our GCLA.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Average for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>U.S. dollar-denominated</td><td>$155,123</td><td>$132,415</td></tr><tr><td>Non-U.S. dollar-denominated</td><td>55,980</td><td>55,333</td></tr><tr><td>Total</td><td>$211,103</td><td>$187,748</td></tr></table>

The U.S. dollar-denominated GCLA is composed of (i) unencumbered U.S. government and federal agency obligations (including highly liquid U.S. federal agency mortgage-backed obligations), all of which are eligible as collateral in Federal Reserve open market operations and (ii) certain overnight U.S. dollar cash deposits. The non-U.S. dollar-denominated GCLA is composed of only unencumbered German, French, Japanese and U.K. government obligations and certain overnight cash deposits in highly liquid currencies. We strictly limit our GCLA to this narrowly defined list of securities and cash because they are highly liquid, even in a difficult funding environment. We do not include other potential sources of excess liquidity in our GCLA, such as less liquid unencumbered securities or committed credit facilities.

The table below presents the average fair value of our GCLA by asset class.

<table><tr><td rowspan="2">$ in millions</td><td colspan="2">Average for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Overnight cash deposits</td><td>$ 92,336</td><td>$ 61,407</td></tr><tr><td>U.S. government obligations</td><td>68,708</td><td>69,562</td></tr><tr><td>U.S. federal agency obligations</td><td>13,645</td><td>11,413</td></tr><tr><td>German, French, Japanese and U.K. government obligations</td><td>36,414</td><td>45,366</td></tr><tr><td>Total</td><td>$211,103</td><td>$187,748</td></tr></table>

We maintain our GCLA to enable us to meet current and potential liquidity requirements of our parent company, Group Inc., and its subsidiaries. Our Modeled Liquidity Outflow and Intraday Liquidity Model incorporate a consolidated requirement for Group Inc. as well as a standalone requirement for each of our major broker-dealer and bank subsidiaries. Liquidity held directly in each of these major subsidiaries is intended for use only by that subsidiary to meet its liquidity requirements and is assumed not to be available to Group Inc. unless (i) legally provided for and (ii) there are no additional regulatory, tax or other restrictions. In addition, the Modeled Liquidity Outflow and Intraday Liquidity Model also incorporate a broader assessment of standalone liquidity requirements for other subsidiaries and we hold a portion of our GCLA directly at Group Inc. to support such requirements.

The table below presents the average GCLA of Group Inc. and our major broker-dealer and bank subsidiaries.

<table><tr><td rowspan="2">$ in millions</td><td colspan="2">Average for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Group Inc.</td><td>$ 43,638</td><td>$ 41,284</td></tr><tr><td>Major broker-dealer subsidiaries</td><td>86,519</td><td>89,510</td></tr><tr><td>Major bank subsidiaries</td><td>80,946</td><td>56,954</td></tr><tr><td>Total</td><td>$211,103</td><td>$187,748</td></tr></table>



Other Unencumbered Assets. In addition to our GCLA, we have a significant amount of other unencumbered cash and financial instruments, including other government obligations, high-grade money market securities, corporate obligations, marginal balance equities, loans and cash deposits not included in our GCLA. Beginning in January 2016, to be consistent with changes in the manner in which management views unencumbered assets, we included certain loans within our unencumbered assets. The fair value of our unencumbered assets averaged $142.33 billion and $90.36 billion for the years ended December 2016 and December 2015, respectively. Had these loans been included as of December 2015, the fair value of our unencumbered assets would have increased by $44.45 billion. We do not consider these assets liquid enough to be eligible for our GCLA.

## Liquidity Regulatory Framework

The final rules on minimum liquidity standards approved by the U.S. federal bank regulatory agencies call for a liquidity coverage ratio (LCR) designed to ensure that banking organizations maintain an adequate level of unencumbered high-quality liquid assets (HQLA) based on expected net cash outflows under an acute short-term liquidity stress scenario. Our GCLA is substantially the same in composition as the assets that qualify as HQLA under these rules.

The LCR became effective in the U.S. on January 1, 2015, with a phase-in period whereby firms had an 80% minimum in 2015, which increased by 10% per year until 2017. In December 2016, the Federal Reserve Board issued a final rule that requires bank holding companies to disclose, on a quarterly basis beginning with the second quarter of 2017, LCR averages over the quarter, quantitative and qualitative information on certain components of the LCR calculation and projected net cash outflows. For the three months ended December 2016, our average LCR exceeded the fully phased-in minimum requirement, based on our interpretation and understanding of the finalized framework, which may evolve as we review our interpretation and application with our regulators.
In addition, in the second quarter of 2016, the U.S. federal bank regulatory agencies issued a proposed rule that calls for a net stable funding ratio (NSFR) for large U.S. banking organizations. The proposal would require banking organizations to ensure they have access to stable funding over a one-year time horizon. The proposed NSFR requirement has an effective date of January 1, 2018, including quarterly disclosure of the ratio, as well as a description of the banking organization's stable funding sources. Based on our interpretation of the current proposal, we estimate that as of December 2016, our NSFR was slightly lower than the proposed requirement; however, we expect that we will be compliant with the requirement by the effective date.

The following is information on our subsidiary liquidity regulatory requirements:

• GS Bank USA. GS Bank USA is subject to minimum liquidity standards under the LCR rule approved by the U.S. federal bank regulatory agencies that became effective on January 1, 2015, with the same phase-in through 2017 described above. The U.S. federal bank regulatory agencies’ proposed rule on the NSFR described above would also apply to GS Bank USA.

• GSI. The LCR rule issued by the U.K. regulatory authorities became effective in the U.K. on October 1, 2015, with a phase-in period whereby certain financial institutions, including GSI, were required to have an 80% minimum ratio initially, increasing to 90% on January 1, 2017 and 100% on January 1, 2018.

• Other Subsidiaries. We monitor the local regulatory liquidity requirements of our subsidiaries to ensure compliance. For many of our subsidiaries, these requirements either have changed or are likely to change in the future due to the implementation of the Basel Committee’s framework for liquidity risk measurement, standards and monitoring, as well as other regulatory developments.

The implementation of these rules, and any amendments adopted by the applicable regulatory authorities, could impact our liquidity and funding requirements and practices in the future.



## Credit Ratings

We rely on the short-term and long-term debt capital markets to fund a significant portion of our day-to-day operations and the cost and availability of debt financing is influenced by our credit ratings. Credit ratings are also important when we are competing in certain markets, such as OTC derivatives, and when we seek to engage in longer-term transactions. See “Risk Factors” in Part I, Item 1A of this Form 10-K for information about the risks associated with a reduction in our credit ratings.

The table below presents the unsecured credit ratings and outlook of Group Inc. by DBRS, Inc. (DBRS), Fitch, Inc. (Fitch), Moody’s Investors Service (Moody’s), Standard & Poor’s Ratings Services (S&P), and Rating and Investment Information, Inc. (R&I).

As of December 2016

<table><tr><td></td><td>DBRS</td><td>Fitch</td><td>Moody&#x27;s</td><td>S&amp;P</td><td>R&amp;I</td></tr><tr><td>Short-term Debt</td><td>R-1 (middle)</td><td>F1</td><td>P-2</td><td>A-2</td><td>a-1</td></tr><tr><td>Long-term Debt</td><td>A (high)</td><td>A</td><td>A3</td><td>BBB+</td><td>A</td></tr><tr><td>Subordinated Debt</td><td>A</td><td>A-</td><td>Baa2</td><td>BBB-</td><td>A-</td></tr><tr><td>Trust Preferred</td><td>A</td><td>BBB-</td><td>Baa3</td><td>BB</td><td>N/A</td></tr><tr><td>Preferred Stock</td><td>BBB (high)</td><td>BB+</td><td>Ba1</td><td>BB</td><td>N/A</td></tr><tr><td>Ratings Outlook</td><td>Stable</td><td>Stable</td><td>Stable</td><td>Stable</td><td>Stable</td></tr></table>

In the table above:

• The ratings for Trust Preferred relate to the guaranteed preferred beneficial interests issued by Goldman Sachs Capital I.

• The DBRS, Fitch, Moody’s and S&P ratings for Preferred Stock include the APEX issued by Goldman Sachs Capital II and Goldman Sachs Capital III.

The table below presents the unsecured credit ratings and outlook of GS Bank USA, GSIB, GS&Co. and GSI, by Fitch, Moody’s and S&P.

As of December 2016

<table><tr><td></td><td>Fitch</td><td>Moody&#x27;s</td><td>S&amp;P</td></tr><tr><td>GS Bank USA</td><td></td><td></td><td></td></tr><tr><td>Short-term Debt</td><td>F1</td><td>P-1</td><td>A-1</td></tr><tr><td>Long-term Debt</td><td>A+</td><td>A1</td><td>A+</td></tr><tr><td>Short-term Bank Deposits</td><td>F1+</td><td>P-1</td><td>N/A</td></tr><tr><td>Long-term Bank Deposits</td><td>AA-</td><td>A1</td><td>N/A</td></tr><tr><td>Ratings Outlook</td><td>Stable</td><td>Stable</td><td>Stable</td></tr><tr><td>GSIB</td><td></td><td></td><td></td></tr><tr><td>Short-term Debt</td><td>F1</td><td>P-1</td><td>A-1</td></tr><tr><td>Long-term Debt</td><td>A</td><td>A1</td><td>A+</td></tr><tr><td>Short-term Bank Deposits</td><td>F1</td><td>P-1</td><td>N/A</td></tr><tr><td>Long-term Bank Deposits</td><td>A</td><td>A1</td><td>N/A</td></tr><tr><td>Ratings Outlook</td><td>Stable</td><td>Stable</td><td>Stable</td></tr><tr><td>GS&amp;Co.</td><td></td><td></td><td></td></tr><tr><td>Short-term Debt</td><td>F1</td><td>N/A</td><td>A-1</td></tr><tr><td>Long-term Debt</td><td>A+</td><td>N/A</td><td>A+</td></tr><tr><td>Ratings Outlook</td><td>Stable</td><td>N/A</td><td>Stable</td></tr><tr><td>GSI</td><td></td><td></td><td></td></tr><tr><td>Short-term Debt</td><td>F1</td><td>P-1</td><td>A-1</td></tr><tr><td>Long-term Debt</td><td>A</td><td>A1</td><td>A+</td></tr><tr><td>Ratings Outlook</td><td>Stable</td><td>Stable</td><td>Stable</td></tr></table>

During the fourth quarter of 2016, Fitch changed the outlook of GSIB and GSI from positive to stable. Additionally, S&P upgraded the long-term debt ratings of GS Bank USA, GSIB, GS&Co. and GSI from A to A+, and changed the outlook from watch positive to stable.

We believe our credit ratings are primarily based on the credit rating agencies' assessment of:

• Our liquidity, market, credit and operational risk management practices;

• The level and variability of our earnings;

• Our capital base;

• Our franchise, reputation and management;

• Our corporate governance; and

• The external operating and economic environment, including, in some cases, the assumed level of government support or other systemic considerations, such as potential resolution.

Certain of our derivatives have been transacted under bilateral agreements with counterparties who may require us to post collateral or terminate the transactions based on changes in our credit ratings. We assess the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of us at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. We manage our GCLA to ensure we would, among other potential requirements, be able to make the additional collateral or termination payments that may be required in the event of a two-notch reduction in our long-term credit ratings, as well as collateral that has not been called by counterparties, but is available to them.

The table below presents the additional collateral or termination payments related to our net derivative liabilities under bilateral agreements that could have been called at the reporting date by counterparties in the event of a one-notch and two-notch downgrade in our credit ratings.

<table><tr><td rowspan="2">$ in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Additional collateral or termination payments:</td><td></td><td></td></tr><tr><td>One-notch downgrade</td><td>$ 677</td><td>$1,061</td></tr><tr><td>Two-notch downgrade</td><td>2,216</td><td>2,689</td></tr></table>



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

## Cash Flows

As a global financial institution, our cash flows are complex and bear little relation to our net earnings and net assets. Consequently, we believe that traditional cash flow analysis is less meaningful in evaluating our liquidity position than the liquidity and asset-liability management policies described above. Cash flow analysis may, however, be helpful in highlighting certain macro trends and strategic initiatives in our businesses.

Year Ended December 2016. Our cash and cash equivalents increased by $28.27 billion to $121.71 billion at the end of 2016. We generated $9.27 billion in net cash from investing activities, primarily from net cash acquired in business acquisitions. We generated $19.00 billion in net cash from financing activities and operating activities, primarily from increases in deposits and from net issuances of unsecured long-term borrowings, partially offset by repurchases of common stock.

Year Ended December 2015. Our cash and cash equivalents increased by $18.41 billion to $93.44 billion at the end of 2015. We used $18.57 billion in net cash for investing activities, primarily due to funding of loans receivable. We generated $36.99 billion in net cash from financing activities and operating activities primarily from net issuances of long-term borrowings and bank deposits, partially offset by repurchases of common stock.

Year Ended December 2014. Our cash and cash equivalents decreased by $3.84 billion to $75.03 billion at the end of 2014. We used $22.84 billion in net cash for operating and investing activities, which reflects an initiative to reduce our balance sheet, and the funding of loans receivable. We generated $19.00 billion in net cash from financing activities from an increase in bank deposits and net proceeds from issuances of unsecured long-term borrowings, partially offset by repurchases of common stock.

## Market Risk Management

## Overview

Market risk is the risk of loss in the value of our inventory, as well as certain other financial assets and financial liabilities, due to changes in market conditions. We employ a variety of risk measures, each described in the respective sections below, to monitor market risk. We hold inventory primarily for market making for our clients and for our investing and lending activities. Our inventory therefore changes based on client demands and our investment opportunities. Our inventory is accounted for at fair value and therefore fluctuates on a daily basis, with the related gains and losses included in “Market making” and “Other principal transactions.” Categories of market risk include the following:

• Interest rate risk: results from exposures to changes in the level, slope and curvature of yield curves, the volatilities of interest rates, mortgage prepayment speeds and credit spreads;

• Equity price risk: results from exposures to changes in prices and volatilities of individual equities, baskets of equities and equity indices;

• Currency rate risk: results from exposures to changes in spot prices, forward prices and volatilities of currency rates; and

• Commodity price risk: results from exposures to changes in spot prices, forward prices and volatilities of commodities, such as crude oil, petroleum products, natural gas, electricity, and precious and base metals.

Market Risk Management, which is independent of the revenue-producing units and reports to our chief risk officer, has primary responsibility for assessing, monitoring and managing our market risk. We monitor and control risks through strong firmwide oversight and independent control and support functions across our global businesses.

Managers in revenue-producing units and Market Risk Management discuss market information, positions and estimated risk and loss scenarios on an ongoing basis. Managers in revenue-producing units are accountable for managing risk within prescribed limits. These managers have in-depth knowledge of their positions, markets and the instruments available to hedge their exposures.



## Market Risk Management Process

We manage our market risk by diversifying exposures, controlling position sizes and establishing economic hedges in related securities or derivatives. This process includes:

• Accurate and timely exposure information incorporating multiple risk metrics;

• A dynamic limit setting framework; and

• Constant communication among revenue-producing units, risk managers and senior management.

## Risk Measures

Market Risk Management produces risk measures and monitors them against established market risk limits. These measures reflect an extensive range of scenarios and the results are aggregated at product, business and firmwide levels.

We use a variety of risk measures to estimate the size of potential losses for both moderate and more extreme market moves over both short-term and long-term time horizons. Our primary risk measures are VaR, which is used for shorter-term periods, and stress tests. Our risk reports detail key risks, drivers and changes for each desk and business, and are distributed daily to senior management of both our revenue-producing units and our independent control and support functions.

Value-at-Risk. VaR is the potential loss in value due to adverse market movements over a defined time horizon with a specified confidence level. For assets and liabilities included in VaR, see “Financial Statement Linkages to Market Risk Measures.” We typically employ a one-day time horizon with a 95% confidence level. We use a single VaR model which captures risks including interest rates, equity prices, currency rates and commodity prices. As such, VaR facilitates comparison across portfolios of different risk characteristics. VaR also captures the diversification of aggregated risk at the firmwide level.

We are aware of the inherent limitations to VaR and therefore use a variety of risk measures in our market risk management process. Inherent limitations to VaR include:

• VaR does not estimate potential losses over longer time horizons where moves may be extreme;

• VaR does not take account of the relative liquidity of different risk positions; and

• Previous moves in market risk factors may not produce accurate predictions of all future market moves.
When calculating VaR, we use historical simulations with full valuation of approximately 70,000 market factors. VaR is calculated at a position level based on simultaneously shocking the relevant market risk factors for that position. We sample from five years of historical data to generate the scenarios for our VaR calculation. The historical data is weighted so that the relative importance of the data reduces over time. This gives greater importance to more recent observations and reflects current asset volatilities, which improves the accuracy of our estimates of potential loss. As a result, even if our positions included in VaR were unchanged, our VaR would increase with increasing market volatility and vice versa.

Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions.

Our VaR measure does not include:

• Positions that are best measured and monitored using sensitivity measures; and

• The impact of changes in counterparty and our own credit spreads on derivatives, as well as changes in our own credit spreads on unsecured borrowings for which the fair value option was elected.

We perform daily backtesting of our VaR model (i.e., comparing daily trading net revenues to the VaR measure calculated as of the prior business day) at the firmwide level and for each of our businesses and major regulated subsidiaries.

Stress Testing. Stress testing is a method of determining the effect of various hypothetical stress scenarios on the firm. We use stress testing to examine risks of specific portfolios as well as the potential impact of significant risk exposures across the firm. We use a variety of stress testing techniques to calculate the potential loss from a wide range of market moves on our portfolios, including sensitivity analysis, scenario analysis and firmwide stress tests. The results of our various stress tests are analyzed together for risk management purposes.

Sensitivity analysis is used to quantify the impact of a market move in a single risk factor across all positions (e.g., equity prices or credit spreads) using a variety of defined market shocks, ranging from those that could be expected over a one-day time horizon up to those that could take many months to occur. We also use sensitivity analysis to quantify the impact of the default of any single entity, which captures the risk of large or concentrated exposures.



Scenario analysis is used to quantify the impact of a specified event, including how the event impacts multiple risk factors simultaneously. For example, for sovereign stress testing we calculate potential direct exposure associated with our sovereign inventory as well as the corresponding debt, equity and currency exposures associated with our non-sovereign inventory that may be impacted by the sovereign distress. When conducting scenario analysis, we typically consider a number of possible outcomes for each scenario, ranging from moderate to severely adverse market impacts. In addition, these stress tests are constructed using both historical events and forward-looking hypothetical scenarios.

Firmwide stress testing combines market, credit, operational and liquidity risks into a single combined scenario. Firmwide stress tests are primarily used to assess capital adequacy as part of our capital planning and stress testing process; however, we also ensure that firmwide stress testing is integrated into our risk governance framework. This includes selecting appropriate scenarios to use for our capital planning and stress testing process. See “Equity Capital Management and Regulatory Capital — Equity Capital Management” above for further information.

Unlike VaR measures, which have an implied probability because they are calculated at a specified confidence level, there is generally no implied probability that our stress test scenarios will occur. Instead, stress tests are used to model both moderate and more extreme moves in underlying market factors. When estimating potential loss, we generally assume that our positions cannot be reduced or hedged (although experience demonstrates that we are generally able to do so).

Stress test scenarios are conducted on a regular basis as part of our routine risk management process and on an ad hoc basis in response to market events or concerns. Stress testing is an important part of our risk management process because it allows us to quantify our exposure to tail risks, highlight potential loss concentrations, undertake risk/reward analysis, and assess and mitigate our risk positions.

Limits. We use risk limits at various levels (including firmwide, business and product) to govern risk appetite by controlling the size of our exposures to market risk. Limits are set based on VaR and on a range of stress tests relevant to our exposures. Limits are reviewed frequently and amended on a permanent or temporary basis to reflect changing market conditions, business conditions or tolerance for risk.
The Risk Committee of the Board and the Risk Governance Committee (through delegated authority from the Firmwide Risk Committee) approve market risk limits and sub-limits at firmwide, business and product levels, consistent with our risk appetite. In addition, Market Risk Management (through delegated authority from the Risk Governance Committee) sets market risk limits and sub-limits at certain product and desk levels.

The purpose of the firmwide limits is to assist senior management in controlling our overall risk profile. Sub-limits are set below the approved level of risk limits. Sub-limits set the desired maximum amount of exposure that may be managed by any particular business on a day-to-day basis without additional levels of senior management approval, effectively leaving day-to-day decisions to individual desk managers and traders. Accordingly, sub-limits are a management tool designed to ensure appropriate escalation rather than to establish maximum risk tolerance. Sub-limits also distribute risk among various businesses in a manner that is consistent with their level of activity and client demand, taking into account the relative performance of each area.

Our market risk limits are monitored daily by Market Risk Management, which is responsible for identifying and escalating, on a timely basis, instances where limits have been exceeded.

When a risk limit has been exceeded (e.g., due to positional changes or changes in market conditions, such as increased volatilities or changes in correlations), it is escalated to senior managers in Market Risk Management and/or the appropriate risk committee. Such instances are remediated by an inventory reduction and/or a temporary or permanent increase to the risk limit.

## Model Review and Validation

Our VaR and stress testing models are regularly reviewed by Market Risk Management and enhanced in order to incorporate changes in the composition of positions included in our market risk measures, as well as variations in market conditions. Prior to implementing significant changes to our assumptions and/or models, Model Risk Management performs model validations. Significant changes to our VaR and stress testing models are reviewed with our chief risk officer and chief financial officer, and approved by the Firmwide Risk Committee.

See “Model Risk Management” for further information about the review and validation of these models.



## Systems

We have made a significant investment in technology to monitor market risk including:

• An independent calculation of VaR and stress measures;

• Risk measures calculated at individual position levels;

• Attribution of risk measures to individual risk factors of each position;

• The ability to report many different views of the risk measures (e.g., by desk, business, product type or legal entity); and

• The ability to produce ad hoc analyses in a timely manner.

## Metrics

We analyze VaR at the firmwide level and a variety of more detailed levels, including by risk category, business, and region. The tables below present, by risk category, average daily VaR and period-end VaR, as well as the high and low VaR for the period. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.

The table below presents average daily VaR.

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Risk Categories</td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 45</td><td>$ 47</td><td>$ 51</td></tr><tr><td>Equity prices</td><td>25</td><td>26</td><td>26</td></tr><tr><td>Currency rates</td><td>21</td><td>30</td><td>19</td></tr><tr><td>Commodity prices</td><td>17</td><td>20</td><td>21</td></tr><tr><td>Diversification effect</td><td>(45)</td><td>(47)</td><td>(45)</td></tr><tr><td>Total</td><td>$ 63</td><td>$ 76</td><td>$ 72</td></tr></table>

Our average daily VaR decreased to $63 million in 2016 from $76 million in 2015, primarily reflecting a decrease in the currency rates category, principally due to reduced exposures, and a decrease in the commodity prices category due to lower levels of volatility and reduced exposures.

Our average daily VaR increased to $76 million in 2015 from $72 million in 2014, reflecting an increase in the currency rates category due to higher levels of volatility, partially offset by a decrease in the interest rates category due to decreased exposures.
The table below presents period-end VaR.

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="3">As of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Risk Categories</td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 45</td><td>$ 43</td><td>$ 53</td></tr><tr><td>Equity prices</td><td>34</td><td>24</td><td>19</td></tr><tr><td>Currency rates</td><td>23</td><td>31</td><td>24</td></tr><tr><td>Commodity prices</td><td>19</td><td>17</td><td>23</td></tr><tr><td>Diversification effect</td><td>(39)</td><td>(48)</td><td>(42)</td></tr><tr><td>Total</td><td>$ 82</td><td>$ 67</td><td>$ 77</td></tr></table>

Our daily VaR increased to $82 million as of December 2016 from $67 million as of December 2015, primarily reflecting an increase in the equity prices category, principally due to increased exposures, and a decrease in the diversification benefit across risk categories, partially offset by a decrease in the currency rates category, principally due to lower levels of volatility.

Our daily VaR decreased to $67 million as of December 2015 from $77 million as of December 2014, primarily reflecting decreases in the interest rates and commodity prices categories due to decreased exposures, and an increase in the diversification benefit across risk categories. In addition, the currency rates and equity prices categories increased due to higher levels of volatility.

During 2016 and 2014, the firmwide VaR risk limit was not exceeded, raised or reduced. During 2015, the firmwide VaR risk limit was temporarily raised on two occasions in order to facilitate client transactions. Separately, in March 2015, the firmwide VaR risk limit was reduced, reflecting lower risk utilization over the last year.

The table below presents high and low VaR by risk category.

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="2">Year Ended December 2016</td></tr><tr><td>High</td><td>Low</td></tr><tr><td>Risk Categories</td><td></td><td></td></tr><tr><td>Interest rates</td><td>$64</td><td>$34</td></tr><tr><td>Equity prices</td><td>36</td><td>19</td></tr><tr><td>Currency rates</td><td>40</td><td>10</td></tr><tr><td>Commodity prices</td><td>28</td><td>13</td></tr></table>

The high and low total VaR was $83 million and $47 million, respectively, for the year ended December 2016.



The chart below reflects our daily VaR over the last four quarters.



The chart below presents the frequency distribution of our daily trading net revenues for substantially all positions included in VaR for 2016.



Daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day did not exceed our 95% one-day VaR during 2016 and 2015 (i.e., a VaR exception) and exceeded our 95% one-day VaR on one occasion during 2014.

During periods in which we have significantly more positive net revenue days than net revenue loss days, we expect to have fewer VaR exceptions because, under normal conditions, our business model generally produces positive net revenues. In periods in which our franchise revenues are adversely affected, we generally have more loss days, resulting in more VaR exceptions. The daily market-making revenues used to determine VaR exceptions reflect the impact of any intraday activity, including bid/offer net revenues, which are more likely than not to be positive by their nature.

## Sensitivity Measures

Certain portfolios and individual positions are not included in VaR because VaR is not the most appropriate risk measure. Other sensitivity measures we use to analyze market risk are described below.

10% Sensitivity Measures. The table below presents market risk for positions that are not included in VaR. The market risk of these positions is determined by estimating the potential reduction in net revenues of a 10% decline in the value of these positions. Equity positions below relate to private and restricted public equity securities, including interests in funds that invest in corporate equities and real estate and interests in hedge funds. Debt positions include interests in funds that invest in corporate mezzanine and senior debt instruments, loans backed by commercial and residential real estate, corporate bank loans and other corporate debt, including acquired portfolios of distressed loans. These equity and debt positions in our consolidated statements of financial condition are included in “Financial instruments owned, at fair value.” See Note 6 to the consolidated financial statements for further information about cash instruments. These measures do not reflect diversification benefits across asset categories or across other market risk measures.

<table><tr><td rowspan="2">\( in \text{ millions} \)</td><td colspan="3">As of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Asset Categories</td><td></td><td></td><td></td></tr><tr><td>Equity</td><td>2,085</td><td>2,157</td><td>2,132</td></tr><tr><td>Debt</td><td>1,702</td><td>1,479</td><td>1,686</td></tr><tr><td>Total</td><td>3,787</td><td>3,636</td><td>3,818</td></tr></table>

Credit Spread Sensitivity on Derivatives and Financial Liabilities. VaR excludes the impact of changes in counterparty and our own credit spreads on derivatives as well as changes in our own credit spreads on financial liabilities for which the fair value option was elected. The estimated sensitivity to a one basis point increase in credit spreads (counterparty and our own) on derivatives was a gain of $2 million and $3 million (including hedges) as of December 2016 and December 2015, respectively. In addition, the estimated sensitivity to a one basis point increase in our own credit spreads on financial liabilities for which the fair value option was elected was a gain of $25 million and $17 million as of December 2016 and December 2015, respectively. However, the actual net impact of a change in our own credit spreads is also affected by the liquidity, duration and convexity (as the sensitivity is not linear to changes in yields) of those financial liabilities for which the fair value option was elected, as well as the relative performance of any hedges undertaken.



Interest Rate Sensitivity. “Loans receivable” as of December 2016 and December 2015 were $49.67 billion and $45.41 billion, respectively, substantially all of which had floating interest rates. As of December 2016 and December 2015, the estimated sensitivity to a 100 basis point increase in interest rates on such loans was $405 million and $396 million, respectively, of additional interest income over a twelve-month period, which does not take into account the potential impact of an increase in costs to fund such loans. See Note 9 to the consolidated financial statements for further information about loans receivable.

## Other Market Risk Considerations

As of December 2016 and December 2015, we had commitments and held loans for which we have obtained credit loss protection from Sumitomo Mitsui Financial Group, Inc. See Note 18 to the consolidated financial statements for further information about such lending commitments.

In addition, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in “Other assets.” Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 13 to the consolidated financial statements for further information about “Other assets.”

## Financial Statement Linkages to Market Risk Measures

We employ a variety of risk measures, each described in the respective sections above, to monitor market risk across the consolidated statements of financial condition and consolidated statements of earnings. The related gains and losses on these positions are included in “Market making,” “Other principal transactions,” “Interest income” and “Interest expense” in the consolidated statements of earnings, and “Debt valuation adjustment” in the consolidated statements of comprehensive income.
The table below presents certain categories in our consolidated statements of financial condition and the market risk measures used to assess those assets and liabilities. Certain categories on the consolidated statements of financial condition are incorporated in more than one risk measure.

<table><tr><td>Categories on the Consolidated Statements of Financial Condition Included in Market Risk Measures</td><td>Market Risk Measures</td></tr><tr><td>Collateralized agreements• Securities purchased under agreements to resell, at fair value• Securities borrowed, at fair value</td><td>• VaR</td></tr><tr><td>Receivables• Certain secured loans, at fair value• Loans receivable</td><td>• VaR• Interest Rate Sensitivity</td></tr><tr><td>Financial instruments owned, at fair value</td><td>• VaR• 10% Sensitivity Measures• Credit Spread Sensitivity — Derivatives</td></tr><tr><td>Deposits, at fair value</td><td>• Credit Spread Sensitivity — Financial Liabilities</td></tr><tr><td>Collateralized financings• Securities sold under agreements to repurchase, at fair value• Securities loaned, at fair value• Other secured financings, at fair value</td><td>• VaR</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>• VaR• Credit Spread Sensitivity — Derivatives</td></tr><tr><td>Unsecured short-term borrowings and unsecured long-term borrowings, at fair value</td><td>• VaR• Credit Spread Sensitivity — Financial Liabilities</td></tr></table>

## Credit Risk Management

## 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 we hold. Our exposure to credit risk comes mostly from client transactions in OTC derivatives and loans and lending commitments. Credit risk also comes from cash placed with banks, securities financing transactions (i.e., resale and repurchase agreements and securities borrowing and lending activities) and receivables from brokers, dealers, clearing organizations, customers and counterparties.



Credit Risk Management, which is independent of the revenue-producing units and reports to our chief risk officer, has primary responsibility for assessing, monitoring and managing credit risk. The Credit Policy Committee and the Firmwide Risk Committee establish and review credit policies and parameters. In addition, we hold other positions that give rise to credit risk (e.g., bonds held in our inventory and secondary bank loans). These credit risks are captured as a component of market risk measures, which are monitored and managed by Market Risk Management, consistent with other inventory positions. We also enter into derivatives to manage market risk exposures. Such derivatives also give rise to credit risk, which is monitored and managed by Credit Risk Management.

## Credit Risk Management Process

Effective management of credit risk requires accurate and timely information, a high level of communication and knowledge of customers, countries, industries and products. Our process for managing credit risk includes:

• Approving transactions and setting and communicating credit exposure limits;

• Establishing or approving underwriting standards;

• Monitoring compliance with established credit exposure limits;

• Assessing the likelihood that a counterparty will default on its payment obligations;

• Measuring our current and potential credit exposure and losses resulting from counterparty default;

• Reporting of credit exposures to senior management, the Board and regulators;

• Using credit risk mitigants, including collateral and hedging; and

• Communicating and collaborating with other independent control and support functions such as operations, legal and compliance.

As part of the risk assessment process, Credit Risk Management performs credit reviews, which include initial and ongoing analyses of our counterparties. For substantially all of our credit exposures, the core of our 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 within Credit Risk Management, with expertise in specific industries, inspect and approve credit reviews and internal credit ratings.
Our risk assessment process may also include, where applicable, reviewing certain key metrics, such as delinquency status, collateral values, credit scores and other risk factors.

Our global credit risk management systems capture credit exposure to individual counterparties and on an aggregate basis to counterparties and their subsidiaries (economic groups). These systems also provide management with comprehensive information on our aggregate credit risk by product, internal credit rating, industry, country and region.

## Risk Measures and Limits

We measure our 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 us after taking into account applicable netting and collateral arrangements while potential exposure represents our 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.

We use credit limits at various levels (e.g., counterparty, economic group, industry and country) as well as underwriting standards to control the size and nature of our credit exposures. Limits for counterparties and economic groups are reviewed regularly and revised to reflect changing risk appetites for a given counterparty or group of counterparties. Limits for industries and countries are based on our risk tolerance and are designed to allow for regular monitoring, review, escalation and management of credit risk concentrations. The Risk Committee of the Board and the Risk Governance Committee (through delegated authority from the Firmwide Risk Committee) approve credit risk limits at firmwide, business and product levels. Credit Risk Management (through delegated authority from the Risk Governance Committee) sets credit limits for individual counterparties, economic groups, industries and countries. Policies authorized by the Firmwide Risk Committee, the Risk Governance Committee and the Credit Policy Committee prescribe the level of formal approval required for us to assume credit exposure to a counterparty across all product areas, taking into account any applicable netting provisions, collateral or other credit risk mitigants.



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

## Stress Tests

We use regular stress tests to calculate the credit exposures, including potential concentrations that would result from applying shocks to counterparty credit ratings or credit risk factors (e.g., currency rates, interest rates, equity prices). These shocks include a wide range of moderate and more extreme market movements. Some of our stress tests include shocks to multiple risk factors, consistent with the occurrence of a severe market or economic event. In the case of sovereign default, we estimate the direct impact of the default on our sovereign credit exposures, changes to our credit exposures arising from potential market moves in response to the default, and the impact of credit market deterioration on corporate borrowers and counterparties that may result from the sovereign default. Unlike potential exposure, which is calculated within a specified confidence level, with a stress test there is generally no assumed probability of these events occurring.

We perform stress tests on a regular basis as part of our routine risk management processes and conduct tailored stress tests on an ad hoc basis in response to market developments. Stress tests are conducted jointly with our market and liquidity risk functions.

## Model Review and Validation

Our potential credit exposure and stress testing models, and any changes to such models or assumptions, are reviewed by Model Risk Management. See “Model Risk Management” for further information about the review and validation of these models.

## Risk Mitigants

To reduce our credit exposures on derivatives and securities financing transactions, we may enter into netting agreements with counterparties that permit us to offset receivables and payables with such counterparties. We may also reduce credit risk with counterparties by entering into agreements that enable us to obtain collateral from them on an upfront or contingent basis and/or to terminate transactions if the counterparty's credit rating falls below a specified level. We monitor the fair value of the collateral on a daily basis to ensure that our credit exposures are appropriately collateralized. We seek to minimize exposures where there is a significant positive correlation between the creditworthiness of our counterparties and the market value of collateral we receive.
For loans and lending commitments, depending on the credit quality of the borrower and other characteristics of the transaction, we employ a variety of potential risk mitigants. Risk mitigants include collateral provisions, guarantees, covenants, structural seniority of the bank loan claims and, for certain lending commitments, provisions in the legal documentation that allow us to adjust loan amounts, pricing, structure and other terms as market conditions change. The type and structure of risk mitigants employed can significantly influence the degree of credit risk involved in a loan or lending commitment.

When we do not have sufficient visibility into a counterparty’s financial strength or when we believe a counterparty requires support from its parent, we may obtain third-party guarantees of the counterparty’s obligations. We may also mitigate our credit risk using credit derivatives or participation agreements.

## Credit Exposures

As of December 2016, our credit exposures increased as compared with December 2015, primarily reflecting an increase in cash deposits with central banks. The percentage of our credit exposures arising from non-investment-grade counterparties (based on our internally determined public rating agency equivalents) decreased as compared with December 2015, reflecting an increase in investment-grade credit exposure related to cash deposits with central banks and a decrease in non-investment-grade loans and lending commitments. During 2016, the number of counterparty defaults increased as compared with 2015 and such defaults primarily occurred within loans and lending commitments. The total number of counterparty defaults remained low, representing less than 0.5% of all counterparties. Estimated losses associated with counterparty defaults were higher compared with 2015 and were not material. Our credit exposures are described further below.

Cash and Cash Equivalents. Our credit exposure on cash and cash equivalents arises from our unrestricted cash, and includes both interest-bearing and non-interest-bearing deposits. To mitigate the risk of credit loss, we place substantially all of our deposits with highly-rated banks and central banks. Unrestricted cash was $107.06 billion and $75.11 billion as of December 2016 and December 2015, respectively, and excludes cash segregated for regulatory and other purposes of $14.65 billion and $18.33 billion as of December 2016 and December 2015, respectively.



OTC Derivatives. Our credit exposure on OTC derivatives arises primarily from our market-making activities. As a market maker, we enter into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. We also enter into derivatives to manage market risk exposures. We manage our credit exposure on OTC derivatives using the credit risk process, measures, limits and risk mitigants described above.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement. Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements. We generally enter into OTC derivatives transactions under bilateral collateral arrangements that require the daily exchange of collateral. As credit risk is an essential component of fair value, we include a credit valuation adjustment (CVA) in the fair value of derivatives to reflect counterparty credit risk, as described in Note 7 to the consolidated financial statements. CVA is a function of the present value of expected exposure, the probability of counterparty default and the assumed recovery upon default.

The table below presents the distribution of our exposure to OTC derivatives by tenor, both before and after the effect of collateral and netting agreements.

<table><tr><td>$ in millions</td><td>Investment-Grade</td><td>Non-Investment-Grade / Unrated</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Less than 1 year</td><td>$ 24,840</td><td>$ 3,983</td><td>$ 28,823</td></tr><tr><td>1 - 5 years</td><td>30,801</td><td>3,676</td><td>34,477</td></tr><tr><td>Greater than 5 years</td><td>85,951</td><td>4,599</td><td>90,550</td></tr><tr><td>Total</td><td>141,592</td><td>12,258</td><td>153,850</td></tr><tr><td>Netting</td><td>(96,493)</td><td>(6,232)</td><td>(102,725)</td></tr><tr><td>OTC derivative assets</td><td>$ 45,099</td><td>$ 6,026</td><td>$ 51,125</td></tr><tr><td>Net credit exposure</td><td>$ 28,879</td><td>$ 4,922</td><td>$ 33,801</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Less than 1 year</td><td>$ 23,950</td><td>$ 3,965</td><td>$ 27,915</td></tr><tr><td>1 - 5 years</td><td>35,249</td><td>6,749</td><td>41,998</td></tr><tr><td>Greater than 5 years</td><td>85,394</td><td>4,713</td><td>90,107</td></tr><tr><td>Total</td><td>144,593</td><td>15,427</td><td>160,020</td></tr><tr><td>Netting</td><td>(103,087)</td><td>(6,507)</td><td>(109,594)</td></tr><tr><td>OTC derivative assets</td><td>$ 41,506</td><td>$ 8,920</td><td>$ 50,426</td></tr><tr><td>Net credit exposure</td><td>$ 27,001</td><td>$ 7,368</td><td>$ 34,369</td></tr></table>

In the table above:

• Tenor is based on expected duration for mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives.

• Receivable and payable balances with the same counterparty in the same tenor category are netted within such tenor category.
• Receivable and payable balances for the same counterparty across tenor categories are netted under enforceable netting agreements, and cash collateral received is netted under enforceable credit support agreements.

• Net credit exposure represents OTC derivative assets, included in “Financial instruments owned, at fair value,” less cash collateral and the fair value of securities collateral, primarily U.S. government and federal agency obligations and non-U.S. government and agency obligations, received under credit support agreements, which management considers when determining credit risk, but such collateral is not eligible for netting under U.S. GAAP.

The tables below present the distribution of our exposure to OTC derivatives by tenor and our internally determined public rating agency equivalents.

<table><tr><td rowspan="2">\( in millions</td><td colspan="5">Investment-Grade</td></tr><tr><td>AAA</td><td>AA</td><td>A</td><td>BBB</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Less than 1 year</td><td>$ 332</td><td>$ 4,907</td><td>$ 12,595</td><td>$ 7,006</td><td>$ 24,840</td></tr><tr><td>1 - 5 years</td><td>862</td><td>6,898</td><td>12,814</td><td>10,227</td><td>30,801</td></tr><tr><td>Greater than 5 years</td><td>3,182</td><td>42,400</td><td>19,682</td><td>20,687</td><td>85,951</td></tr><tr><td>Total</td><td>4,376</td><td>54,205</td><td>45,091</td><td>37,920</td><td>141,592</td></tr><tr><td>Netting</td><td>(1,860)</td><td>(40,095)</td><td>(31,644)</td><td>(22,894)</td><td>(96,493)</td></tr><tr><td>OTC derivative assets</td><td>$ 2,516</td><td>$ 14,110</td><td>$ 13,447</td><td>$ 15,026</td><td>$ 45,099</td></tr><tr><td>Net credit exposure</td><td>$ 2,283</td><td>$ 8,366</td><td>$ 8,401</td><td>$ 9,829</td><td>$ 28,879</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Less than 1 year</td><td>$ 411</td><td>$ 6,059</td><td>$ 10,051</td><td>$ 7,429</td><td>$ 23,950</td></tr><tr><td>1 - 5 years</td><td>1,214</td><td>10,374</td><td>16,995</td><td>6,666</td><td>35,249</td></tr><tr><td>Greater than 5 years</td><td>3,205</td><td>40,879</td><td>20,507</td><td>20,803</td><td>85,394</td></tr><tr><td>Total</td><td>4,830</td><td>57,312</td><td>47,553</td><td>34,898</td><td>144,593</td></tr><tr><td>Netting</td><td>(2,202)</td><td>(40,872)</td><td>(36,847)</td><td>(23,166)</td><td>(103,087)</td></tr><tr><td>OTC derivative assets</td><td>$ 2,628</td><td>$ 16,440</td><td>$ 10,706</td><td>$ 11,732</td><td>$ 41,506</td></tr><tr><td>Net credit exposure</td><td>$ 2,427</td><td>$ 10,269</td><td>$ 6,652</td><td>$ 7,653</td><td>$ 27,001</td></tr></table>

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Non-Investment-Grade / Unrated</td></tr><tr><td>BB or lower</td><td>Unrated</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Less than 1 year</td><td>$ 3,661</td><td>$322</td><td>$ 3,983</td></tr><tr><td>1 - 5 years</td><td>3,653</td><td>23</td><td>3,676</td></tr><tr><td>Greater than 5 years</td><td>4,437</td><td>162</td><td>4,599</td></tr><tr><td>Total</td><td>11,751</td><td>507</td><td>12,258</td></tr><tr><td>Netting</td><td>(6,207)</td><td>(25)</td><td>(6,232)</td></tr><tr><td>OTC derivative assets</td><td>$ 5,544</td><td>$482</td><td>$ 6,026</td></tr><tr><td>Net credit exposure</td><td>$ 4,569</td><td>$353</td><td>$ 4,922</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Less than 1 year</td><td>$ 3,657</td><td>$308</td><td>$ 3,965</td></tr><tr><td>1 - 5 years</td><td>6,505</td><td>244</td><td>6,749</td></tr><tr><td>Greater than 5 years</td><td>4,434</td><td>279</td><td>4,713</td></tr><tr><td>Total</td><td>14,596</td><td>831</td><td>15,427</td></tr><tr><td>Netting</td><td>(6,472)</td><td>(35)</td><td>(6,507)</td></tr><tr><td>OTC derivative assets</td><td>$ 8,124</td><td>$796</td><td>$ 8,920</td></tr><tr><td>Net credit exposure</td><td>$ 6,769</td><td>$599</td><td>$ 7,368</td></tr></table>



Lending and Financing Activities. We manage our lending and financing activities using the credit risk process, measures, limits and risk mitigants described above. Other lending positions, including secondary trading positions, are risk-managed as a component of market risk.

• Lending Activities. Our lending activities include lending to investment-grade and non-investment-grade corporate borrowers. Loans and lending commitments associated with these activities are principally used for operating liquidity and general corporate purposes or in connection with contingent acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors. Our lending activities also include extending loans to borrowers that are secured by commercial and other real estate. See the tables below for further information about our credit exposures associated with these lending activities.

• Securities Financing Transactions. We enter into securities financing transactions in order to, among other things, facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities. We bear credit risk related to resale agreements and securities borrowed only to the extent that cash advanced or the value of securities pledged or delivered to the counterparty exceeds the value of the collateral received. We also have credit exposure on repurchase agreements and securities loaned to the extent that the value of securities pledged or delivered to the counterparty for these transactions exceeds the amount of cash or collateral received. Securities collateral obtained for securities financing transactions primarily includes U.S. government and federal agency obligations and non-U.S. government and agency obligations. We had approximately $29 billion and $27 billion as of December 2016 and December 2015, respectively, of credit exposure related to securities financing transactions reflecting both netting agreements and collateral that management considers when determining credit risk. As of both December 2016 and December 2015, substantially all of our credit exposure related to securities financing transactions was with investment-grade financial institutions, funds and governments, primarily located in the Americas and EMEA.
• Other Credit Exposures. We are exposed to credit risk from our receivables from brokers, dealers and clearing organizations and customers and counterparties. Receivables from brokers, dealers and clearing organizations are primarily comprised of initial margin placed with clearing organizations and receivables related to sales of securities which have traded, but not yet settled. These receivables generally have minimal credit risk due to the low probability of clearing organization default and the short-term nature of receivables related to securities settlements. Receivables from customers and counterparties are generally comprised of collateralized receivables related to customer securities transactions and generally have minimal credit risk due to both the value of the collateral received and the short-term nature of these receivables. Our net credit exposure related to these activities was approximately $31 billion and $33 billion as of December 2016 and December 2015, respectively, and was primarily comprised of initial margin (both cash and securities) placed with investment-grade clearing organizations. The regional breakdown of our net credit exposure related to these activities was approximately 44% and 44% in the Americas, approximately 42% and 45% in EMEA, and approximately 14% and 11% in Asia as of December 2016 and December 2015, respectively.

In addition, we extend other loans and lending commitments to our private wealth management clients that are primarily secured by residential real estate, securities or other assets. We also purchase performing and distressed loans backed by residential real estate and consumer loans. The gross exposure related to such loans and lending commitments was approximately $28 billion as of both December 2016 and December 2015. The regional breakdown of our net credit exposure related to these activities was approximately 90% and 84% in the Americas, approximately 8% and 14% in EMEA, and approximately 2% and 2% in Asia as of December 2016 and December 2015, respectively. The fair value of the collateral received against such loans and lending commitments generally exceeded the gross carrying amount as of both December 2016 and December 2015.



## Credit Exposure by Industry, Region and Credit Quality

The tables below present our credit exposure related to cash, OTC derivatives, and loans and lending commitments (excluding credit exposures described above in “Securities Financing Transactions” and “Other Credit Exposures”) broken down by industry, region and credit quality.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Cash as of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Credit Exposure by Industry</td><td></td><td></td></tr><tr><td>Funds</td><td>$ 138</td><td>$ 176</td></tr><tr><td>Financial Institutions</td><td>11,836</td><td>12,799</td></tr><tr><td>Sovereign</td><td>95,092</td><td>62,130</td></tr><tr><td>Total</td><td>$107,066</td><td>$75,105</td></tr><tr><td>Credit Exposure by Region</td><td></td><td></td></tr><tr><td>Americas</td><td>$ 80,381</td><td>$54,846</td></tr><tr><td>EMEA</td><td>16,099</td><td>8,496</td></tr><tr><td>Asia</td><td>10,586</td><td>11,763</td></tr><tr><td>Total</td><td>$107,066</td><td>$75,105</td></tr><tr><td>Credit Exposure by Credit Quality (Credit Rating Equivalent)</td><td></td><td></td></tr><tr><td>AAA</td><td>$ 83,899</td><td>$55,626</td></tr><tr><td>AA</td><td>8,784</td><td>4,286</td></tr><tr><td>A</td><td>13,344</td><td>14,243</td></tr><tr><td>BBB</td><td>971</td><td>855</td></tr><tr><td>BB or lower</td><td>68</td><td>95</td></tr><tr><td>Total</td><td>$107,066</td><td>$75,105</td></tr></table>

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">OTC Derivatives as of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Credit Exposure by Industry</td><td></td><td></td></tr><tr><td>Funds</td><td>$ 13,294</td><td>$10,899</td></tr><tr><td>Financial Institutions</td><td>14,116</td><td>11,314</td></tr><tr><td>Consumer, Retail &amp; Healthcare</td><td>773</td><td>1,553</td></tr><tr><td>Sovereign</td><td>7,019</td><td>7,566</td></tr><tr><td>Municipalities &amp; Nonprofit</td><td>2,959</td><td>3,984</td></tr><tr><td>Natural Resources &amp; Utilities</td><td>3,707</td><td>4,846</td></tr><tr><td>Real Estate</td><td>85</td><td>205</td></tr><tr><td>Technology, Media &amp; Telecommunications</td><td>4,188</td><td>1,839</td></tr><tr><td>Diversified Industrials</td><td>2,529</td><td>5,008</td></tr><tr><td>Other (including Special Purpose Vehicles)</td><td>2,455</td><td>3,212</td></tr><tr><td>Total</td><td>$ 51,125</td><td>$50,426</td></tr></table>

<table><tr><td>Credit Exposure by Region</td><td></td><td></td></tr><tr><td>Americas</td><td>$ 19,629</td><td>$17,724</td></tr><tr><td>EMEA</td><td>26,536</td><td>27,113</td></tr><tr><td>Asia</td><td>4,960</td><td>5,589</td></tr><tr><td>Total</td><td>$ 51,125</td><td>$50,426</td></tr></table>

<table><tr><td colspan="3">Credit Exposure by Credit Quality (Credit Rating Equivalent)</td></tr><tr><td>AAA</td><td>$ 2,516</td><td>$ 2,628</td></tr><tr><td>AA</td><td>14,110</td><td>16,440</td></tr><tr><td>A</td><td>13,447</td><td>10,706</td></tr><tr><td>BBB</td><td>15,026</td><td>11,732</td></tr><tr><td>BB or lower</td><td>5,544</td><td>8,124</td></tr><tr><td>Unrated</td><td>482</td><td>796</td></tr><tr><td>Total</td><td>$ 51,125</td><td>$50,426</td></tr></table>

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Loans and Lending Commitments as of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Credit Exposure by Industry</td><td></td><td></td></tr><tr><td>Funds</td><td>$ 3,854</td><td>$ 2,595</td></tr><tr><td>Financial Institutions</td><td>13,630</td><td>14,063</td></tr><tr><td>Consumer, Retail &amp; Healthcare</td><td>30,007</td><td>31,944</td></tr><tr><td>Sovereign</td><td>902</td><td>419</td></tr><tr><td>Municipalities &amp; Nonprofit</td><td>709</td><td>628</td></tr><tr><td>Natural Resources &amp; Utilities</td><td>25,694</td><td>24,476</td></tr><tr><td>Real Estate</td><td>13,034</td><td>15,045</td></tr><tr><td>Technology, Media &amp; Telecommunications</td><td>33,232</td><td>36,444</td></tr><tr><td>Diversified Industrials</td><td>20,847</td><td>20,047</td></tr><tr><td>Other (including Special Purpose Vehicles)</td><td>12,301</td><td>13,941</td></tr><tr><td>Total</td><td>$154,210</td><td>$159,602</td></tr></table>

<table><tr><td colspan="3">Credit Exposure by Region</td></tr><tr><td>Americas</td><td>$115,145</td><td>$121,271</td></tr><tr><td>EMEA</td><td>35,044</td><td>33,061</td></tr><tr><td>Asia</td><td>4,021</td><td>5,270</td></tr><tr><td>Total</td><td>$154,210</td><td>$159,602</td></tr></table>

<table><tr><td colspan="3">Credit Exposure by Credit Quality (Credit Rating Equivalent)</td></tr><tr><td>AAA</td><td>$ 3,135</td><td>$ 4,148</td></tr><tr><td>AA</td><td>8,375</td><td>7,716</td></tr><tr><td>A</td><td>29,227</td><td>27,212</td></tr><tr><td>BBB</td><td>43,151</td><td>43,937</td></tr><tr><td>BB or lower</td><td>69,745</td><td>76,049</td></tr><tr><td>Unrated</td><td>577</td><td>540</td></tr><tr><td>Total</td><td>$154,210</td><td>$159,602</td></tr></table>

## Selected Exposures

The section below provides information about our credit and market exposure to certain countries that have had heightened focus due to recent events and broad market concerns. Credit exposure represents the potential for loss due to the default or deterioration in credit quality of a counterparty or borrower. Market exposure represents the potential for loss in value of our long and short inventory due to changes in market prices.

Current levels of oil prices continue to raise concerns about Venezuela and Nigeria, and their sovereign debt. The political situation in Iraq has led to ongoing concerns about its economic stability. The debt crisis in Mozambique has resulted in the suspension of its funding by the International Monetary Fund and the World Bank, as well as credit rating downgrades. In addition, currency trading restrictions in Malaysia have negatively impacted investor confidence and raised concerns about the potential for further restrictions.

Our total credit and market exposure to each of Iraq, Venezuela, Nigeria, Mozambique and Malaysia as of December 2016 was not material.



We have a comprehensive framework to monitor, measure and assess our country exposures and to determine our risk appetite. We determine the country of risk by the location of the counterparty, issuer or underlier's assets, where they generate revenue, the country in which they are headquartered, the jurisdiction where a claim against them could be enforced, and/or the government whose policies affect their ability to repay their obligations. We monitor our credit exposure to a specific country both at the individual counterparty level as well as at the aggregate country level.

We use regular stress tests, described above, to calculate the credit exposures, including potential concentrations that would result from applying shocks to counterparty credit ratings or credit risk factors. To supplement these regular stress tests, we also conduct tailored stress tests on an ad hoc basis in response to specific market events that we deem significant. These stress tests are designed to estimate the direct impact of the event on our credit and market exposures resulting from shocks to risk factors including, but not limited to, currency rates, interest rates, and equity prices. We also utilize these stress tests to estimate the indirect impact of certain hypothetical events on our country exposures, such as the impact of credit market deterioration on corporate borrowers and counterparties along with the shocks to the risk factors described above. The parameters of these shocks vary based on the scenario reflected in each stress test. We review estimated losses produced by the stress tests in order to understand their magnitude, highlight potential loss concentrations, and assess and mitigate our exposures where necessary.

See “Stress Tests” above, “Liquidity Risk Management — Liquidity Stress Tests” and “Market Risk Management — Market Risk Management Process — Stress Testing” for further information about stress tests.

## Operational Risk Management

## Overview

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Our exposure to operational risk arises from routine processing errors as well as extraordinary incidents, such as major systems failures or legal and regulatory matters.

Potential types of loss events related to internal and external operational risk include:

• Clients, products and business practices;

• Execution, delivery and process management;

• Business disruption and system failures;

• Employment practices and workplace safety;

• Damage to physical assets;

• Internal fraud; and

• External fraud.

We maintain a comprehensive control framework designed to provide a well-controlled environment to minimize operational risks. The Firmwide Operational Risk Committee provides oversight of the ongoing development and implementation of our operational risk policies and framework. Operational Risk Management is a risk management function independent of our revenue-producing units, reports to our chief risk officer, and is responsible for developing and implementing policies, methodologies and a formalized framework for operational risk management with the goal of minimizing our exposure to operational risk.

## Operational Risk Management Process

Managing operational risk requires timely and accurate information as well as a strong control culture. We seek to manage our operational risk through:

• Training, supervision and development of our people;

• Active participation of senior management in identifying and mitigating our key operational risks;

• Independent control and support functions that monitor operational risk on a daily basis, and implementation of extensive policies and procedures, and controls designed to prevent the occurrence of operational risk events;

• Proactive communication between our revenue producing units and our independent control and support functions; and

• A network of systems to facilitate the collection of data used to analyze and assess our operational risk exposure.

We combine top-down and bottom-up approaches to manage and measure operational risk. From a top-down perspective, our senior management assesses firmwide and business-level operational risk profiles. From a bottom-up perspective, revenue-producing units and independent control and support functions are responsible for risk identification and risk management on a day-to-day basis, including escalating operational risks to senior management.

Our operational risk management framework is in part designed to comply with the operational risk measurement rules under the Revised Capital Framework and has evolved based on the changing needs of our businesses and regulatory guidance.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis

Our operational risk management framework comprises the following practices:

• Risk identification and assessment;

• Risk measurement; and

• Risk monitoring and reporting.

Internal Audit performs an independent review of our operational risk management framework, including our key controls, processes and applications, on an annual basis to assess the effectiveness of our framework.

## Risk Identification and Assessment

The core of our operational risk management framework is risk identification and assessment. We have a comprehensive data collection process, including firmware policies and procedures, for operational risk events.

We have established policies that require our revenue-producing units and our independent control and support functions to report and escalate operational risk events. When operational risk events are identified, our policies require that the events be documented and analyzed to determine whether changes are required in our systems and/or processes to further mitigate the risk of future events.

In addition, our systems capture internal operational risk event data, key metrics such as transaction volumes, and statistical information such as performance trends. We use an internally developed operational risk management application to aggregate and organize this information. One of our key risk identification and assessment tools is an operational risk and control self-assessment process which is performed by managers from both revenue-producing units and independent control and support functions. This process consists of the identification and rating of operational risks, on a forward-looking basis, and the related controls. The results from this process are analyzed to evaluate operational risk exposures and identify businesses, activities or products with heightened levels of operational risk.

## Risk Measurement

We measure our operational risk exposure over a twelve-month time horizon using both statistical modeling and scenario analyses, which involve qualitative assessments of the potential frequency and extent of potential operational risk losses, for each of our businesses. Operational risk measurement incorporates qualitative and quantitative assessments of factors including:

• Internal and external operational risk event data;

• Assessments of our internal controls;

• Evaluations of the complexity of our business activities;

• The degree of and potential for automation in our processes;

• New activity information;

• The legal and regulatory environment;

• Changes in the markets for our products and services, including the diversity and sophistication of our customers and counterparties; and

• Liquidity of the capital markets and the reliability of the infrastructure that supports the capital markets.

The results from these scenarios analyses are used to monitor changes in operational risk and to determine business lines that may have heightened exposure to operational risk. These analyses ultimately are used in the determination of the appropriate level of operational risk capital to hold.

## Risk Monitoring and Reporting

We evaluate changes in the operational risk profile of the firm and its businesses, including changes in business mix or jurisdictions in which we operate, by monitoring the factors noted above at a firmwide level. We have both preventive and detective internal controls, which are designed to reduce the frequency and severity of operational risk losses and the probability of operational risk events. We monitor the results of assessments and independent internal audits of these internal controls.

We also provide periodic operational risk reports to senior management, risk committees and the Board. In addition, we have established thresholds to monitor the impact of an operational risk event, including single loss events and cumulative losses over a twelve-month period, as well as escalation protocols. We also provide periodic operational risk reports, which include incidents that breach escalation thresholds, to senior management, firmwide and divisional risk committees and the Risk Committee of the Board.

## Model Review and Validation

The statistical models utilized by Operational Risk Management are subject to independent review and validation by Model Risk Management. See “Model Risk Management” for further information about the review and validation of these models.



## Model Risk Management

## Overview

Model risk is the potential for adverse consequences from decisions made based on model outputs that may be incorrect or used inappropriately. We rely on quantitative models across our business activities primarily to value certain financial assets and liabilities, to monitor and manage our risk, and to measure and monitor our regulatory capital.

Our model risk management framework is managed through a governance structure and risk management controls, which encompass standards designed to ensure we maintain a comprehensive model inventory, including risk assessment and classification, sound model development practices, independent review and model-specific usage controls. The Firmwide Risk Committee and the Firmwide Model Risk Control Committee oversee our model risk management framework. Model Risk Management, which is independent of model developers, model owners and model users, reports to our chief risk officer, is responsible for identifying and reporting significant risks associated with models, and provides periodic updates to senior management, risk committees and the Risk Committee of the Board.

## Model Review and Validation

Model Risk Management consists of quantitative professionals who perform an independent review, validation and approval of our models. This review includes an analysis of the model documentation, independent testing, an assessment of the appropriateness of the methodology used, and verification of compliance with model development and implementation standards. Model Risk Management reviews all existing models on an annual basis, as well as new models or significant changes to models.
The model validation process incorporates a review of models and trade and risk parameters across a broad range of scenarios (including extreme conditions) in order to critically evaluate and verify:

• The model’s conceptual soundness, including the reasonableness of model assumptions, and suitability for intended use;

• The testing strategy utilized by the model developers to ensure that the models function as intended;

• The suitability of the calculation techniques incorporated in the model;

• The model’s accuracy in reflecting the characteristics of the related product and its significant risks;

• The model’s consistency with models for similar products; and

• The model’s sensitivity to input parameters and assumptions.

See “Critical Accounting Policies — Fair Value — Review of Valuation Models,” “Liquidity Risk Management,” “Market Risk Management,” “Credit Risk Management” and “Operational Risk Management” for further information about our use of models within these areas.

## Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Structure of Risk Management” in Part II, Item 7 of this Form 10-K.



## Item 8. Financial Statements and Supplementary Data

## Management’s Report on Internal Control over Financial Reporting

Management of The Goldman Sachs Group, Inc., together with its consolidated subsidiaries (the firm), is responsible for establishing and maintaining adequate internal control over financial reporting. The firm’s internal control over financial reporting is a process designed under the supervision of the firm’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the firm’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As of December 31, 2016, management conducted an assessment of the firm’s internal control over financial reporting based on the framework established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the firm’s internal control over financial reporting as of December 31, 2016 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the firm; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the firm’s assets that could have a material effect on our financial statements.

The firm’s internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page 109, which expresses an unqualified opinion on the effectiveness of the firm’s internal control over financial reporting as of December 31, 2016.



## Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Shareholders of The Goldman Sachs Group, Inc.:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of earnings, statements of comprehensive income, statements of changes in shareholders' equity and statements of cash flows present fairly, in all material respects, the financial position of The Goldman Sachs Group, Inc. and its subsidiaries (the Company) at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing on page 108. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York
February 24, 2017



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings

<table><tr><td rowspan="2">in millions, except per share amounts</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Revenues</td><td></td><td></td><td></td></tr><tr><td>Investment banking</td><td>$ 6,273</td><td>$ 7,027</td><td>$ 6,464</td></tr><tr><td>Investment management</td><td>5,407</td><td>5,868</td><td>5,748</td></tr><tr><td>Commissions and fees</td><td>3,208</td><td>3,320</td><td>3,316</td></tr><tr><td>Market making</td><td>9,933</td><td>9,523</td><td>8,365</td></tr><tr><td>Other principal transactions</td><td>3,200</td><td>5,018</td><td>6,588</td></tr><tr><td>Total non-interest revenues</td><td>28,021</td><td>30,756</td><td>30,481</td></tr><tr><td>Interest income</td><td>9,691</td><td>8,452</td><td>9,604</td></tr><tr><td>Interest expense</td><td>7,104</td><td>5,388</td><td>5,557</td></tr><tr><td>Net interest income</td><td>2,587</td><td>3,064</td><td>4,047</td></tr><tr><td>Net revenues, including net interest income</td><td>30,608</td><td>33,820</td><td>34,528</td></tr><tr><td>Operating expenses</td><td></td><td></td><td></td></tr><tr><td>Compensation and benefits</td><td>11,647</td><td>12,678</td><td>12,691</td></tr><tr><td>Brokerage, clearing, exchange and distribution fees</td><td>2,555</td><td>2,576</td><td>2,501</td></tr><tr><td>Market development</td><td>457</td><td>557</td><td>549</td></tr><tr><td>Communications and technology</td><td>809</td><td>806</td><td>779</td></tr><tr><td>Depreciation and amortization</td><td>998</td><td>991</td><td>1,337</td></tr><tr><td>Occupancy</td><td>788</td><td>772</td><td>827</td></tr><tr><td>Professional fees</td><td>882</td><td>963</td><td>902</td></tr><tr><td>Other expenses</td><td>2,168</td><td>5,699</td><td>2,585</td></tr><tr><td>Total non-compensation expenses</td><td>8,657</td><td>12,364</td><td>9,480</td></tr><tr><td>Total operating expenses</td><td>20,304</td><td>25,042</td><td>22,171</td></tr><tr><td>Pre-tax earnings</td><td>10,304</td><td>8,778</td><td>12,357</td></tr><tr><td>Provision for taxes</td><td>2,906</td><td>2,695</td><td>3,880</td></tr><tr><td>Net earnings</td><td>7,398</td><td>6,083</td><td>8,477</td></tr><tr><td>Preferred stock dividends</td><td>311</td><td>515</td><td>400</td></tr><tr><td>Net earnings applicable to common shareholders</td><td>$ 7,087</td><td>$ 5,568</td><td>$ 8,077</td></tr><tr><td>Earnings per common share</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 16.53</td><td>$ 12.35</td><td>$ 17.55</td></tr><tr><td>Diluted</td><td>16.29</td><td>12.14</td><td>17.07</td></tr><tr><td>Average common shares</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>427.4</td><td>448.9</td><td>458.9</td></tr><tr><td>Diluted</td><td>435.1</td><td>458.6</td><td>473.2</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

<table><tr><td rowspan="2">$ in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Net earnings</td><td>$7,398</td><td>$6,083</td><td>$8,477</td></tr><tr><td>Other comprehensive income/(loss) adjustments, net of tax:</td><td></td><td></td><td></td></tr><tr><td>Currency translation</td><td>(60)</td><td>(114)</td><td>(109)</td></tr><tr><td>Debt valuation adjustment</td><td>(544)</td><td>—</td><td>—</td></tr><tr><td>Pension and postretirement liabilities</td><td>(199)</td><td>139</td><td>(102)</td></tr><tr><td>Cash flow hedges</td><td>—</td><td>—</td><td>(8)</td></tr><tr><td>Other comprehensive income/(loss)</td><td>(803)</td><td>25</td><td>(219)</td></tr><tr><td>Comprehensive income</td><td>$6,595</td><td>$6,108</td><td>$8,258</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition

<table><tr><td rowspan="2">$ in millions, except per share amounts</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$121,711</td><td>$ 93,439</td></tr><tr><td>Collateralized agreements:</td><td></td><td></td></tr><tr><td>Securities purchased under agreements to resell and federal funds sold (includes $116,077 as of December 2016 and $132,853 as of December 2015, at fair value)</td><td>116,925</td><td>134,308</td></tr><tr><td>Securities borrowed (includes $82,398 as of December 2016 and $75,340 as of December 2015, at fair value)</td><td>184,600</td><td>177,638</td></tr><tr><td>Receivables:</td><td></td><td></td></tr><tr><td>Brokers, dealers and clearing organizations</td><td>18,044</td><td>25,453</td></tr><tr><td>Customers and counterparties (includes $3,266 as of December 2016 and $4,992 as of December 2015, at fair value)</td><td>47,780</td><td>46,430</td></tr><tr><td>Loans receivable</td><td>49,672</td><td>45,407</td></tr><tr><td>Financial instruments owned, at fair value (includes $51,278 as of December 2016 and $54,426 as of December 2015, pledged as collateral)</td><td>295,952</td><td>313,502</td></tr><tr><td>Other assets</td><td>25,481</td><td>25,218</td></tr><tr><td>Total assets</td><td>$860,165</td><td>$861,395</td></tr><tr><td>Liabilities and shareholders&#x27; equity</td><td></td><td></td></tr><tr><td>Deposits (includes $13,782 as of December 2016 and $14,680 as of December 2015, at fair value)</td><td>$124,098</td><td>$ 97,519</td></tr><tr><td>Collateralized financings:</td><td></td><td></td></tr><tr><td>Securities sold under agreements to repurchase, at fair value</td><td>71,816</td><td>86,069</td></tr><tr><td>Securities loaned (includes $2,647 as of December 2016 and $466 as of December 2015, at fair value)</td><td>7,524</td><td>3,614</td></tr><tr><td>Other secured financings (includes $21,073 as of December 2016 and $23,207 as of December 2015, at fair value)</td><td>21,523</td><td>24,753</td></tr><tr><td>Payables:</td><td></td><td></td></tr><tr><td>Brokers, dealers and clearing organizations</td><td>4,386</td><td>5,406</td></tr><tr><td>Customers and counterparties</td><td>184,069</td><td>204,956</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>117,143</td><td>115,248</td></tr><tr><td>Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $14,792 as of December 2016 and $17,743 as of December 2015, at fair value)</td><td>39,265</td><td>42,787</td></tr><tr><td>Unsecured long-term borrowings (includes $29,410 as of December 2016 and $22,273 as of December 2015, at fair value)</td><td>189,086</td><td>175,422</td></tr><tr><td>Other liabilities and accrued expenses (includes $621 as of December 2016 and $1,253 as of December 2015, at fair value)</td><td>14,362</td><td>18,893</td></tr><tr><td>Total liabilities</td><td>773,272</td><td>774,667</td></tr><tr><td>Commitments, contingencies and guarantees</td><td></td><td></td></tr><tr><td>Shareholders&#x27; equity</td><td></td><td></td></tr><tr><td>Preferred stock, par value $0.01 per share; aggregate liquidation preference of $11,203 as of December 2016 and $11,200 as of December 2015</td><td>11,203</td><td>11,200</td></tr><tr><td>Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 873,608,100 shares issued as of December 2016 and 863,976,731 shares issued as of December 2015, and 392,632,230 shares outstanding as of December 2016 and 419,480,736 shares outstanding as of December 2015</td><td>9</td><td>9</td></tr><tr><td>Share-based awards</td><td>3,914</td><td>4,151</td></tr><tr><td>Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding</td><td>—</td><td>—</td></tr><tr><td>Additional paid-in capital</td><td>52,638</td><td>51,340</td></tr><tr><td>Retained earnings</td><td>89,039</td><td>83,386</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(1,216)</td><td>(718)</td></tr><tr><td>Stock held in treasury, at cost, par value $0.01 per share; 480,975,872 shares as of December 2016 and 444,495,997 shares as of December 2015</td><td>(68,694)</td><td>(62,640)</td></tr><tr><td>Total shareholders&#x27; equity</td><td>86,893</td><td>86,728</td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$860,165</td><td>$861,395</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

## Consolidated Statements of Changes in Shareholders' Equity

<table><tr><td rowspan="2">$ in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Preferred stock</td><td></td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 11,200</td><td>$ 9,200</td><td>$ 7,200</td></tr><tr><td>Issued</td><td>1,325</td><td>2,000</td><td>2,000</td></tr><tr><td>Redeemed</td><td>(1,322)</td><td>—</td><td>—</td></tr><tr><td>Ending balance</td><td>11,203</td><td>11,200</td><td>9,200</td></tr><tr><td>Common stock</td><td></td><td></td><td></td></tr><tr><td>Beginning balance</td><td>9</td><td>9</td><td>8</td></tr><tr><td>Issued</td><td>—</td><td>—</td><td>1</td></tr><tr><td>Ending balance</td><td>9</td><td>9</td><td>9</td></tr><tr><td>Share-based awards</td><td></td><td></td><td></td></tr><tr><td>Beginning balance</td><td>4,151</td><td>3,766</td><td>3,839</td></tr><tr><td>Issuance and amortization of share-based awards</td><td>2,143</td><td>2,308</td><td>2,079</td></tr><tr><td>Delivery of common stock underlying share-based awards</td><td>(2,068)</td><td>(1,742)</td><td>(1,725)</td></tr><tr><td>Forfeiture of share-based awards</td><td>(102)</td><td>(72)</td><td>(92)</td></tr><tr><td>Exercise of share-based awards</td><td>(210)</td><td>(109)</td><td>(335)</td></tr><tr><td>Ending balance</td><td>3,914</td><td>4,151</td><td>3,766</td></tr><tr><td>Additional paid-in capital</td><td></td><td></td><td></td></tr><tr><td>Beginning balance</td><td>51,340</td><td>50,049</td><td>48,998</td></tr><tr><td>Delivery of common stock underlying share-based awards</td><td>2,282</td><td>2,092</td><td>2,206</td></tr><tr><td>Cancellation of share-based awards in satisfaction of withholding tax requirements</td><td>(1,121)</td><td>(1,198)</td><td>(1,922)</td></tr><tr><td>Preferred stock issuance costs, net</td><td>(10)</td><td>(7)</td><td>(20)</td></tr><tr><td>Excess net tax benefit related to share-based awards</td><td>147</td><td>406</td><td>788</td></tr><tr><td>Cash settlement of share-based awards</td><td>—</td><td>(2)</td><td>(1)</td></tr><tr><td>Ending balance</td><td>52,638</td><td>51,340</td><td>50,049</td></tr><tr><td>Retained earnings</td><td></td><td></td><td></td></tr><tr><td>Beginning balance, as previously reported</td><td>83,386</td><td>78,984</td><td>71,961</td></tr><tr><td>Reclassification of cumulative debt valuation adjustment, net of tax, to accumulated other comprehensive loss</td><td>(305)</td><td>—</td><td>—</td></tr><tr><td>Beginning balance, adjusted</td><td>83,081</td><td>78,984</td><td>71,961</td></tr><tr><td>Net earnings</td><td>7,398</td><td>6,083</td><td>8,477</td></tr><tr><td>Dividends and dividend equivalents declared on common stock and share-based awards</td><td>(1,129)</td><td>(1,166)</td><td>(1,054)</td></tr><tr><td>Dividends declared on preferred stock</td><td>(577)</td><td>(515)</td><td>(400)</td></tr><tr><td>Preferred stock redemption discount</td><td>266</td><td>—</td><td>—</td></tr><tr><td>Ending balance</td><td>89,039</td><td>83,386</td><td>78,984</td></tr><tr><td>Accumulated other comprehensive loss</td><td></td><td></td><td></td></tr><tr><td>Beginning balance, as previously reported</td><td>(718)</td><td>(743)</td><td>(524)</td></tr><tr><td>Reclassification of cumulative debt valuation adjustment, net of tax, from retained earnings</td><td>305</td><td>—</td><td>—</td></tr><tr><td>Beginning balance, adjusted</td><td>(413)</td><td>(743)</td><td>(524)</td></tr><tr><td>Other comprehensive income/(loss)</td><td>(803)</td><td>25</td><td>(219)</td></tr><tr><td>Ending balance</td><td>(1,216)</td><td>(718)</td><td>(743)</td></tr><tr><td>Stock held in treasury, at cost</td><td></td><td></td><td></td></tr><tr><td>Beginning balance</td><td>(62,640)</td><td>(58,468)</td><td>(53,015)</td></tr><tr><td>Repurchased</td><td>(6,069)</td><td>(4,195)</td><td>(5,469)</td></tr><tr><td>Reissued</td><td>22</td><td>32</td><td>49</td></tr><tr><td>Other</td><td>(7)</td><td>(9)</td><td>(33)</td></tr><tr><td>Ending balance</td><td>(68,694)</td><td>(62,640)</td><td>(58,468)</td></tr><tr><td>Total shareholders&#x27; equity</td><td>$ 86,893</td><td>$ 86,728</td><td>$ 82,797</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

<table><tr><td rowspan="2">$ in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Cash flows from operating activities</td><td></td><td></td><td></td></tr><tr><td>Net earnings</td><td>$ 7,398</td><td>$ 6,083</td><td>$ 8,477</td></tr><tr><td>Adjustments to reconcile net earnings to net cash provided by/(used for) operating activities:</td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>998</td><td>991</td><td>1,337</td></tr><tr><td>Deferred income taxes</td><td>551</td><td>425</td><td>495</td></tr><tr><td>Share-based compensation</td><td>2,111</td><td>2,272</td><td>2,085</td></tr><tr><td>Loss/(gain) related to extinguishment of junior subordinated debt</td><td>3</td><td>(34)</td><td>(289)</td></tr><tr><td>Changes in operating assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>Receivables and payables (excluding loans receivable), net</td><td>(15,813)</td><td>19,132</td><td>12,328</td></tr><tr><td>Collateralized transactions (excluding other secured financings), net</td><td>78</td><td>(14,825)</td><td>(52,793)</td></tr><tr><td>Financial instruments owned, at fair value</td><td>15,253</td><td>16,078</td><td>25,881</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>1,960</td><td>(16,835)</td><td>4,642</td></tr><tr><td>Other, net</td><td>(6,969)</td><td>(5,417)</td><td>(10,095)</td></tr><tr><td>Net cash provided by/(used for) operating activities</td><td>5,570</td><td>7,870</td><td>(7,932)</td></tr><tr><td>Cash flows from investing activities</td><td></td><td></td><td></td></tr><tr><td>Purchase of property, leasehold improvements and equipment</td><td>(2,876)</td><td>(1,833)</td><td>(678)</td></tr><tr><td>Proceeds from sales of property, leasehold improvements and equipment</td><td>381</td><td>228</td><td>30</td></tr><tr><td>Net cash acquired in/(used for) business acquisitions</td><td>14,922</td><td>(1,808)</td><td>(1,732)</td></tr><tr><td>Proceeds from sales of investments</td><td>1,512</td><td>1,019</td><td>1,514</td></tr><tr><td>Loans receivable, net</td><td>(4,669)</td><td>(16,180)</td><td>(14,043)</td></tr><tr><td>Net cash provided by/(used for) investing activities</td><td>9,270</td><td>(18,574)</td><td>(14,909)</td></tr><tr><td>Cash flows from financing activities</td><td></td><td></td><td></td></tr><tr><td>Unsecured short-term borrowings, net</td><td>(1,506)</td><td>(369)</td><td>1,659</td></tr><tr><td>Other secured financings (short-term), net</td><td>(808)</td><td>(867)</td><td>(837)</td></tr><tr><td>Proceeds from issuance of other secured financings (long-term)</td><td>4,186</td><td>10,349</td><td>6,900</td></tr><tr><td>Repayment of other secured financings (long-term), including the current portion</td><td>(7,375)</td><td>(6,502)</td><td>(7,636)</td></tr><tr><td>Purchase of APEX, senior guaranteed securities and trust preferred securities</td><td>(1,171)</td><td>(1)</td><td>(1,611)</td></tr><tr><td>Proceeds from issuance of unsecured long-term borrowings</td><td>50,763</td><td>44,595</td><td>39,857</td></tr><tr><td>Repayment of unsecured long-term borrowings, including the current portion</td><td>(36,557)</td><td>(29,520)</td><td>(28,138)</td></tr><tr><td>Derivative contracts with a financing element, net</td><td>2,115</td><td>(47)</td><td>643</td></tr><tr><td>Deposits, net</td><td>10,058</td><td>14,639</td><td>12,201</td></tr><tr><td>Common stock repurchased</td><td>(6,078)</td><td>(4,135)</td><td>(5,469)</td></tr><tr><td>Dividends and dividend equivalents paid on common stock, preferred stock and share-based awards</td><td>(1,706)</td><td>(1,681)</td><td>(1,454)</td></tr><tr><td>Proceeds from issuance of preferred stock, net of issuance costs</td><td>1,303</td><td>1,993</td><td>1,980</td></tr><tr><td>Proceeds from issuance of common stock, including exercise of share-based awards</td><td>6</td><td>259</td><td>123</td></tr><tr><td>Excess tax benefit related to share-based awards</td><td>202</td><td>407</td><td>782</td></tr><tr><td>Cash settlement of share-based awards</td><td>—</td><td>(2)</td><td>(1)</td></tr><tr><td>Net cash provided by financing activities</td><td>13,432</td><td>29,118</td><td>18,999</td></tr><tr><td>Net increase/(decrease) in cash and cash equivalents</td><td>28,272</td><td>18,414</td><td>(3,842)</td></tr><tr><td>Cash and cash equivalents, beginning balance</td><td>93,439</td><td>75,025</td><td>78,867</td></tr><tr><td>Cash and cash equivalents, ending balance</td><td>$121,711</td><td>$93,439</td><td>$75,025</td></tr></table>

## SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $7.14 billion, $4.82 billion and $6.43 billion, and cash payments for income taxes, net of refunds, were $1.06 billion, $2.65 billion and $3.05 billion for 2016, 2015 and 2014, respectively.

Cash flows related to common stock repurchased includes common stock repurchased in the prior period for which settlement occurred during the current period and excludes common stock repurchased during the current period for which settlement occurred in the following period.

Non-cash activities during 2016:

• The impact of adoption of ASU No. 2015-02 was a net reduction to both total assets and liabilities of approximately $200 million. See Note 3 for further information.

- The firm sold assets and liabilities of $1.81 billion and $697 million, respectively, that were previously classified as held for sale, in exchange for $1.11 billion of financial instruments.

• The firm exchanged $1.04 billion of APEX for $1.31 billion of Series E and Series F Preferred Stock. See Note 19 for further information.

• The firm exchanged $127 million of senior guaranteed trust securities for $124 million of the firm’s junior subordinated debt.

Non-cash activities during 2015:

• The firm exchanged $262 million of Trust Preferred Securities and common beneficial interests for $296 million of the firm’s junior subordinated debt.

Non-cash activities during 2014:

• The firm exchanged $1.58 billion of Trust Preferred Securities, common beneficial interests and senior guaranteed trust securities for $1.87 billion of the firm’s junior subordinated debt.

• The firm sold certain consolidated investments and provided seller financing, which resulted in a non-cash increase to loans receivable of $115 million.



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

## Note 1.

## Description of Business

The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

The firm reports its activities in the following four business segments:

## Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management, and debt and equity underwriting of public offerings and private placements, including local and cross-border transactions and acquisition financing, as well as derivative transactions directly related to these activities.

## Institutional Client Services

The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other prime brokerage services to institutional clients.

## Investing & Lending

The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, some of which are consolidated, directly and indirectly through funds that the firm manages, in debt securities and loans, public and private equity securities, infrastructure and real estate entities. The firm also makes unsecured loans to individuals through its online platform.

## Investment Management

The firm provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. The firm also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.

## Note 2.

## Basis of Presentation

These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.

All references to 2016, 2015 and 2014 refer to the firm’s years ended, or the dates, as the context requires, December 31, 2016, December 31, 2015 and December 31, 2014, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.



## Note 3.

## Significant Accounting Policies

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 12 for policies on consolidation accounting. All other significant accounting policies are either described below or included in the following footnotes:

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value Note 4
Fair Value Measurements Note 5
Cash Instruments Note 6
Derivatives and Hedging Activities Note 7
Fair Value Option Note 8
Loans Receivable Note 9
Collateralized Agreements and Financings Note 10
Securitization Activities Note 11
Variable Interest Entities Note 12
Other Assets Note 13
Deposits Note 14
Short-Term Borrowings Note 15
Long-Term Borrowings Note 16
Other Liabilities and Accrued Expenses Note 17
Commitments, Contingencies and Guarantees Note 18
Shareholders' Equity Note 19
Regulation and Capital Adequacy Note 20
Earnings Per Common Share Note 21
Transactions with Affiliated Funds Note 22
Interest Income and Interest Expense Note 23
Income Taxes Note 24
Business Segments Note 25
Credit Concentrations Note 26
Legal Proceedings Note 27
Employee Benefit Plans Note 28
Employee Incentive Plans Note 29
Parent Company Note 30

## Consolidation

The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a controlling majority voting interest in a voting interest entity, the entity is consolidated.

Variable Interest Entities. A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 12 for further information about VIEs.

Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

In general, the firm accounts for investments acquired after the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 13 for further information about equity-method investments.



Investment Funds. The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are generally measured at net asset value (NAV) and are included in “Financial instruments owned, at fair value.” See Notes 6, 18 and 22 for further information about investments in funds.

## Use of Estimates

Preparation of these consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, the provisions for losses that may arise from litigation, regulatory proceedings (including governmental investigations) and tax audits, and the allowance for losses on loans and lending commitments held for investment. These estimates and assumptions are based on the best available information but actual results could be materially different.

## Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. 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. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.
Investment Banking. Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.

Investment Management. The firm earns management fees and incentive fees for investment management services. Management fees for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of month-end net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or commitments and are received quarterly, semi-annually or annually, depending on the fund. All management fees are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund's or separately managed account's return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in “Investment management” revenues.

The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds. These payments are calculated based on either a percentage of the management fee or the investment fund’s net asset value. Where the firm is principal to the arrangement, such costs are recorded on a gross basis and included in “Brokerage, clearing, exchange and distribution fees,” and where the firm is agent to the arrangement, such costs are recorded on a net basis in “Investment management” revenues.



Commissions and Fees. The firm earns “Commissions and fees” from executing and clearing client transactions on stock, options and futures markets, as well as over-the-counter (OTC) transactions. Commissions and fees are recognized on the day the trade is executed.

## Transfers of Assets

Transfers of assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of assets accounted for as sales, any gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred assets are initially recognized at fair value. For transfers of assets that are not accounted for as sales, the assets generally remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 10 for further information about transfers of assets accounted for as collateralized financings and Note 11 for further information about transfers of assets accounted for as sales.

## Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of December 2016 and December 2015, “Cash and cash equivalents” included $11.15 billion and $14.71 billion, respectively, of cash and due from banks, and $110.56 billion and $78.73 billion, respectively, of interest-bearing deposits with banks. The firm segregates cash for regulatory and other purposes related to client activity. As of December 2016 and December 2015, $14.65 billion and $18.33 billion, respectively, of “Cash and cash equivalents” were segregated for regulatory and other purposes. See “Recent Accounting Developments” for further information.

In addition, the firm segregates securities for regulatory and other purposes related to client activity. See Note 10 for further information about segregated securities.

## Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Receivables from and payables to brokers, dealers and clearing organizations are accounted for at cost plus accrued interest, which generally approximates fair value. While these receivables and payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6 through 8. Had these receivables and payables been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2016 and December 2015.
Receivables from Customers and Counterparties
Receivables from customers and counterparties generally relate to collateralized transactions. Such receivables are primarily comprised of customer margin loans, certain transfers of assets accounted for as secured loans rather than purchases at fair value and collateral posted in connection with certain derivative transactions. Substantially all of these receivables are accounted for at amortized cost net of estimated uncollectible amounts. Certain of the firm's receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in "Market making" revenues. See Note 8 for further information about receivables from customers and counterparties accounted for at fair value under the fair value option. In addition, as of December 2016 and December 2015, the firm's receivables from customers and counterparties included $2.60 billion and $2.35 billion, respectively, of loans held for sale, accounted for at the lower of cost or fair value. See Note 5 for an overview of the firm's fair value measurement policies.

As of December 2016 and December 2015, the carrying value of receivables not accounted for at fair value generally approximated fair value. While these receivables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6 through 8. Had these receivables been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2016 and December 2015. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in "Interest income."

## Payables to Customers and Counterparties

Payables to customers and counterparties primarily consist of customer credit balances related to the firm’s prime brokerage activities. Payables to customers and counterparties are accounted for at cost plus accrued interest, which generally approximates fair value. While these payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of December 2016 and December 2015. Interest on payables to customers and counterparties is recognized over the life of the transaction and included in “Interest expense.”



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

## Offsetting Assets and Liabilities

To reduce credit exposures on derivatives and securities financing transactions, the firm may enter into master netting agreements or similar arrangements (collectively, netting agreements) with counterparties that permit it to offset receivables and payables with such counterparties. A netting agreement is a contract with a counterparty that permits net settlement of multiple transactions with that counterparty, including upon the exercise of termination rights by a non-defaulting party. Upon exercise of such termination rights, all transactions governed by the netting agreement are terminated and a net settlement amount is calculated. In addition, the firm receives and posts cash and securities collateral with respect to its derivatives and securities financing transactions, subject to the terms of the related credit support agreements or similar arrangements (collectively, credit support agreements). An enforceable credit support agreement grants the non-defaulting party exercising termination rights the right to liquidate the collateral and apply the proceeds to any amounts owed. In order to assess enforceability of the firm's right of setoff under netting and credit support agreements, the firm evaluates various factors including applicable bankruptcy laws, local statutes and regulatory provisions in the jurisdiction of the parties to the agreement.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) in the consolidated statements of financial condition when a legal right of setoff exists under an enforceable netting agreement. Resale and repurchase agreements and securities borrowed and loaned transactions with the same term and currency are presented on a net-by-counterparty basis in the consolidated statements of financial condition when such transactions meet certain settlement criteria and are subject to netting agreements.

In the consolidated statements of financial condition, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the consolidated statements of financial condition, resale and repurchase agreements, and securities borrowed and loaned, are not reported net of the related cash and securities received or posted as collateral. See Note 10 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 10 for further information about offsetting.

## Foreign Currency Translation

Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the consolidated statements of comprehensive income.

## Recent Accounting Developments

Revenue from Contracts with Customers (ASC 606). In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU, as amended, provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services, guidance on accounting for certain contract costs, and new disclosures.

The ASU is effective for the firm in January 2018 under a modified retrospective approach or retrospectively to all periods presented. The firm’s implementation efforts include identifying revenues and costs within the scope of the ASU, reviewing contracts, and analyzing any changes to its existing revenue recognition policies. As a result of adopting this ASU, the firm may, among other things, be required to recognize incentive fees earlier than under the firm’s current revenue recognition policy, which defers recognition until all contingencies are resolved. The firm may also be required to change the current presentation of certain costs from a net presentation within net revenues to a gross basis, or vice versa. Based on implementation work to date, the firm does not currently expect that the ASU will have a material impact on its financial condition, results of operations or cash flows on the date of adoption.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASC 810). In August 2014, the FASB issued ASU No. 2014-13, “Consolidation (Topic 810) — Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (CFE).” This ASU provides an alternative to reflect changes in the fair value of the financial assets and the financial liabilities of the CFE by measuring either the fair value of the assets or liabilities, whichever is more observable, and provides new disclosure requirements for those electing this approach.

The firm adopted the ASU in January 2016. Adoption of the ASU did not materially affect the firm’s financial condition, results of operations or cash flows.



Amendments to the Consolidation Analysis (ASC 810). In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) — Amendments to the Consolidation Analysis.” This ASU eliminates the deferral of the requirements of ASU No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” for certain interests in investment funds and provides a scope exception for certain investments in money market funds. It also makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities.

The firm adopted the ASU in January 2016, using a modified retrospective approach. The impact of adoption was a net reduction to both total assets and total liabilities of approximately $200 million, substantially all included in “Financial instruments owned, at fair value” and in “Other liabilities and accrued expenses,” respectively. Adoption of this ASU did not have an impact on the firm’s results of operations. See Note 12 for further information about the adoption.

Simplifying the Presentation of Debt Issuance Costs (ASC 835). In April 2015, the FASB issued ASU No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs.” This ASU simplifies the presentation of debt issuance costs by requiring that these costs related to a recognized debt liability be presented in the statements of financial condition as a direct reduction from the carrying amount of that liability.

The firm early adopted the ASU in September 2015, using a modified retrospective approach. Adoption of the ASU did not materially affect the firm’s financial condition, results of operations or cash flows.
Improvements to Employee Share-Based Payment Accounting (ASC 718). In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment Accounting.” This ASU includes a requirement that the tax effect related to the settlement of share-based awards be recorded in income tax benefit or expense in the statements of earnings rather than directly to additional paid-in-capital. This change has no impact on total shareholders’ equity and is required to be adopted prospectively. In addition, the ASU modifies the classification of certain share-based payment activities within the statements of cash flows and this change is generally required to be applied retrospectively. The ASU also allows for forfeitures to be recorded when they occur rather than estimated over the vesting period. This change is required to be applied on a modified retrospective basis.

The firm adopted the ASU in January 2017 and the impact of the restricted stock unit (RSU) deliveries and option exercises in the first quarter of 2017 is estimated to be a reduction to the provision for taxes of approximately $450 million that will be recognized in the condensed consolidated statements of earnings. This amount may vary in future periods depending upon, among other things, the number of RSUs delivered and their change in value since grant. Prior to the adoption of this ASU, this amount would have been recorded directly to additional paid-in-capital. Other provisions of the ASU will not have a material impact on the firm’s financial condition, results of operations or cash flows.

Simplifying the Accounting for Measurement-Period Adjustments (ASC 805). In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805) — Simplifying the Accounting for Measurement-Period Adjustments.” This ASU eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively.

The firm adopted the ASU in January 2016. Adoption of the ASU did not materially affect the firm’s financial condition, results of operations or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 825). In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments (Topic 825) — Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. It includes a requirement to present separately in other comprehensive income changes in fair value attributable to a firm’s own credit spreads (debt valuation adjustment or DVA), net of tax, on financial liabilities for which the fair value option was elected.



The ASU is effective for the firm in January 2018. Early adoption is permitted under a modified retrospective approach for the requirements related to DVA. In January 2016, the firm early adopted this ASU for the requirements related to DVA, and reclassified the cumulative DVA, a gain of $305 million (net of tax), from retained earnings to accumulated other comprehensive loss. The firm does not expect the adoption of the remaining provisions of the ASU to have a material impact on its financial condition, results of operations or cash flows.

Leases (ASC 842). In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires that, for leases longer than one year, a lessee recognize in the statements of financial condition a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the liability to make lease payments. It also requires that for finance leases, a lessee recognize interest expense on the lease liability, separately from the amortization of the right-of-use asset in the statements of earnings, while for operating leases, such amounts should be recognized as a combined expense. In addition, this ASU requires expanded disclosures about the nature and terms of lease agreements.

The ASU is effective for the firm in January 2019 under a modified retrospective approach. Early adoption is permitted. The firm’s implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. The firm expects a gross up on its consolidated statements of financial condition upon recognition of the right-of-use assets and lease liabilities and does not expect the amount of the gross up to have a material impact on its financial condition.

Measurement of Credit Losses on Financial Instruments (ASC 326). In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” This ASU amends several aspects of the measurement of credit losses on financial instruments, including replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (CECL) model and amending certain aspects of accounting for purchased financial assets with deterioration in credit quality since origination.
Under CECL, the allowance for losses for financial assets that are measured at amortized cost should reflect management’s estimate of credit losses over the remaining expected life of the financial assets. Expected credit losses for newly recognized financial assets, as well as changes to expected credit losses during the period, would be recognized in earnings. For certain purchased financial assets with deterioration in credit quality since origination, an initial allowance would be recorded for expected credit losses and recognized as an increase to the purchase price rather than as an expense. Expected credit losses, including losses on off-balance-sheet exposures such as lending commitments, will be measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount.

The ASU is effective for the firm in January 2020 under a modified retrospective approach. Early adoption is permitted in January 2019. Adoption of the ASU will result in earlier recognition of credit losses and an increase in the recorded allowance for certain purchased loans with deterioration in credit quality since origination with a corresponding increase to their gross carrying value. The impact of adoption of this ASU on the firm’s financial condition, results of operations and cash flows will depend on, among other things, the economic environment and the type of financial assets held by the firm on the date of adoption.

Classification of Certain Cash Receipts and Cash Payments (ASC 230). In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments.” This ASU provides guidance on the disclosure and classification of certain items within the statement of cash flows.

The ASU is effective for the firm in January 2018 under a retrospective approach. Early adoption is permitted. Since the ASU only impacts classification in the statements of cash flows, adoption will not affect the firm’s cash and cash equivalents.

Clarifying the Definition of a Business (ASC 805). In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) — Clarifying the Definition of a Business.” The ASU amends the definition of a business and provides a threshold which must be considered to determine whether a transaction is an asset acquisition or a business combination. The ASU is effective for the firm in January 2018 under a prospective approach. Early adoption is permitted. The firm is still evaluating the effect of the ASU on its financial condition, results of operations and cash flows.



Restricted Cash (ASC 230). In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230) — Restricted Cash.” This ASU requires that cash segregated for regulatory and other purposes be included in cash and cash equivalents disclosed in the statements of cash flows and is required to be applied retrospectively.

The firm early adopted the ASU in December 2016 and reclassified cash segregated for regulatory and other purposes into “Cash and cash equivalents” disclosed in the consolidated statements of cash flows. The impact of adoption was a decrease of $3.69 billion, an increase of $909 million and a decrease of $309 million for the years ended December 2016, December 2015 and December 2014, respectively, to “Net cash provided by/ (used for) operating activities.”

In December 2016, to be consistent with the presentation of segregated cash in the consolidated statements of cash flows under the ASU, the firm reclassified amounts previously included in “Cash and securities segregated for regulatory and other purposes” into “Cash and cash equivalents,” “Securities purchased under agreements to resell and federal funds sold,” “Securities borrowed” and “Financial instruments owned, at fair value,” in the consolidated statements of financial condition. Previously reported amounts in the consolidated statements of financial condition and notes to the consolidated financial statements have been conformed to the current presentation.

## Note 4.

## Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about other financial assets and financial liabilities accounted for at fair value primarily under the fair value option.

The table below presents the firm’s financial instruments owned, at fair value, and financial instruments sold, but not yet purchased, at fair value.

<table><tr><td>$ in millions</td><td>Financial Instruments Owned</td><td>Financial Instruments Sold, But Not Yet Purchased</td></tr><tr><td>As of December 2016</td><td></td><td></td></tr><tr><td>Money market instruments</td><td>$ 1,319</td><td>$ —</td></tr><tr><td>U.S. government and federal agency obligations</td><td>57,657</td><td>16,627</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>29,381</td><td>20,502</td></tr><tr><td>Loans and securities backed by:</td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>3,842</td><td>—</td></tr><tr><td>Residential real estate</td><td>12,195</td><td>3</td></tr><tr><td>Corporate loans and debt securities</td><td>28,659</td><td>6,570</td></tr><tr><td>State and municipal obligations</td><td>1,059</td><td>—</td></tr><tr><td>Other debt obligations</td><td>1,358</td><td>1</td></tr><tr><td>Equities and convertible debentures</td><td>94,692</td><td>25,941</td></tr><tr><td>Commodities</td><td>5,653</td><td>—</td></tr><tr><td>Investments in funds at NAV</td><td>6,465</td><td>—</td></tr><tr><td>Subtotal</td><td>242,280</td><td>69,644</td></tr><tr><td>Derivatives</td><td>53,672</td><td>47,499</td></tr><tr><td>Total</td><td>$295,952</td><td>$117,143</td></tr><tr><td>As of December 2015</td><td></td><td></td></tr><tr><td>Money market instruments</td><td>$ 4,683</td><td>$ —</td></tr><tr><td>U.S. government and federal agency obligations</td><td>63,844</td><td>15,516</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>31,772</td><td>14,973</td></tr><tr><td>Loans and securities backed by:</td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>4,975</td><td>4</td></tr><tr><td>Residential real estate</td><td>13,183</td><td>2</td></tr><tr><td>Corporate loans and debt securities</td><td>28,804</td><td>6,584</td></tr><tr><td>State and municipal obligations</td><td>992</td><td>2</td></tr><tr><td>Other debt obligations</td><td>1,595</td><td>2</td></tr><tr><td>Equities and convertible debentures</td><td>98,072</td><td>31,394</td></tr><tr><td>Commodities</td><td>3,935</td><td>—</td></tr><tr><td>Investments in funds at NAV</td><td>7,757</td><td>—</td></tr><tr><td>Subtotal</td><td>259,612</td><td>68,477</td></tr><tr><td>Derivatives</td><td>53,890</td><td>46,771</td></tr><tr><td>Total</td><td>$313,502</td><td>$115,248</td></tr></table>

In the table above, money market instruments include commercial paper, certificates of deposit and time deposits. Substantially all money market instruments have a maturity of less than one year.

## Gains and Losses from Market Making and Other Principal Transactions

The table below presents “Market making” revenues by major product type, as well as “Other principal transactions” revenues.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Product Type</td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ (1,979)</td><td>$ (1,360)</td><td>$ (5,316)</td></tr><tr><td>Credit</td><td>1,854</td><td>920</td><td>2,982</td></tr><tr><td>Currencies</td><td>6,158</td><td>3,345</td><td>6,566</td></tr><tr><td>Equities</td><td>2,873</td><td>5,515</td><td>2,683</td></tr><tr><td>Commodities</td><td>1,027</td><td>1,103</td><td>1,450</td></tr><tr><td>Market making</td><td>9,933</td><td>9,523</td><td>8,365</td></tr><tr><td>Other principal transactions</td><td>3,200</td><td>5,018</td><td>6,588</td></tr><tr><td>Total</td><td>$13,133</td><td>$14,541</td><td>$14,953</td></tr></table>



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

In the table above:

• Gains/(losses) include both realized and unrealized gains and losses, and are primarily related to the firm’s financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments.

• Gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.

• Gains/(losses) on other principal transactions are included in the firm’s Investing & Lending segment. See Note 25 for net revenues, including net interest income, by product type for Investing & Lending, as well as the amount of net interest income included in Investing & Lending.

• Gains/(losses) are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making and client facilitation strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm’s longer-term derivatives across product types are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.

## Note 5.

## Fair Value Measurements

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. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).
The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread or difference between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).

U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. This hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in this hierarchy is based on the lowest level of input that is significant to its fair value measurement. In evaluating the significance of a valuation input, the firm considers, among other factors, a portfolio’s net risk exposure to that input. The fair value hierarchy is as follows:

Level 1. Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs to valuation techniques are observable, either directly or indirectly.

Level 3. One or more inputs to valuation techniques are significant and unobservable.

The fair values for substantially all of the firm’s financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.

See Notes 6 through 8 for further information about fair value measurements of cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value primarily under the fair value option (including information about unrealized gains and losses related to level 3 financial assets and financial liabilities, and transfers in and out of level 3), respectively.



The table below presents financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP. Counterparty and cash collateral netting represents the impact on derivatives of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Total level 1 financial assets</td><td>$135,401</td><td>$153,051</td></tr><tr><td>Total level 2 financial assets</td><td>419,585</td><td>432,445</td></tr><tr><td>Total level 3 financial assets</td><td>23,280</td><td>24,046</td></tr><tr><td>Investments in funds at NAV</td><td>6,465</td><td>7,757</td></tr><tr><td>Counterparty and cash collateral netting</td><td>(87,038)</td><td>(90,612)</td></tr><tr><td>Total financial assets at fair value</td><td>$497,693</td><td>$526,687</td></tr><tr><td>Total assets</td><td>$860,165</td><td>$861,395</td></tr><tr><td>Total level 3 financial assets divided by:</td><td></td><td></td></tr><tr><td>Total assets</td><td>2.7%</td><td>2.8%</td></tr><tr><td>Total financial assets at fair value</td><td>4.7%</td><td>4.6%</td></tr><tr><td>Total level 1 financial liabilities</td><td>$62,504</td><td>$59,798</td></tr><tr><td>Total level 2 financial liabilities</td><td>232,027</td><td>245,759</td></tr><tr><td>Total level 3 financial liabilities</td><td>21,448</td><td>16,812</td></tr><tr><td>Counterparty and cash collateral netting</td><td>(44,695)</td><td>(41,430)</td></tr><tr><td>Total financial liabilities at fair value</td><td>$271,284</td><td>$280,939</td></tr><tr><td>Total level 3 financial liabilities divided by total financial liabilities at fair value</td><td>7.9%</td><td>6.0%</td></tr></table>

In the table above, total assets includes $835 billion and $836 billion as of December 2016 and December 2015, respectively, that is carried at fair value or at amounts that generally approximate fair value.

The table below presents a summary of level 3 financial assets.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Cash instruments</td><td>$ 18,035</td><td>$ 18,131</td></tr><tr><td>Derivatives</td><td>5,190</td><td>5,870</td></tr><tr><td>Other financial assets</td><td>55</td><td>45</td></tr><tr><td>Total</td><td>$ 23,280</td><td>$ 24,046</td></tr></table>

Level 3 financial assets as of December 2016 slightly decreased compared with December 2015, primarily reflecting a decrease in level 3 derivative assets. The decrease in level 3 derivative assets was primarily attributable to settlements and transfers out of level 3 of certain credit derivative assets. See Notes 6 through 8 for further information about level 3 financial assets.

## Note 6.

## Cash Instruments

Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency obligations, mortgage-backed loans and securities, corporate loans and debt securities, equities and convertible debentures, investments in funds at NAV, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies.

## Level 1 Cash Instruments

Level 1 cash instruments include certain money market instruments, U.S. government obligations, most non-U.S. government obligations, certain government agency obligations, certain corporate debt securities and actively traded listed equities. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.

The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.

## Level 2 Cash Instruments

Level 2 cash instruments include most money market instruments, most government agency obligations, certain non-U.S. government obligations, most mortgage-backed loans and securities, most corporate loans and debt securities, most state and municipal obligations, most other debt obligations, restricted or less liquid listed equities, commodities and certain lending commitments.

Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.



Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

## Level 3 Cash Instruments

Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of financial assets.

## Valuation Techniques and Significant Inputs of Level 3 Cash Instruments

Valuation techniques of level 3 cash instruments vary by instrument, but are generally based on discounted cash flow techniques. The valuation techniques and the nature of significant inputs used to determine the fair values of each type of level 3 cash instrument are described below:

Loans and Securities Backed by Commercial Real Estate. Loans and securities backed by commercial real estate are directly or indirectly collateralized by a single commercial real estate property or a portfolio of properties, and may include tranches of varying levels of subordination. Significant inputs are generally determined based on relative value analyses and include:

• Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral and the basis, or price difference, to such prices;

• Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds);

• A measure of expected future cash flows in a default scenario (recovery rates) implied by the value of the underlying collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and multiples. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments; and

• Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds).
Loans and Securities Backed by Residential Real Estate. Loans and securities backed by residential real estate are directly or indirectly collateralized by portfolios of residential real estate and may include tranches of varying levels of subordination. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Significant inputs include:

• Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral;

• Market yields implied by transactions of similar or related assets;

• Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines, related costs and subsequent recoveries; and

• Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines.

Corporate Loans and Debt Securities. Corporate loans and debt securities includes bank loans and bridge loans and corporate debt securities. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

• Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively);

• Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation; and

• Duration.

Equities and Convertible Debentures. Equities and convertible debentures include private equity investments and investments in real estate. Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate:

• Industry multiples (primarily EBITDA multiples) and public comparables;

• Transactions in similar instruments;



• Discounted cash flow techniques; and

• Third-party appraisals.

The firm also considers changes in the outlook for the relevant industry and financial performance of the issuer as compared to projected performance. Significant inputs include:

• Market and transaction multiples;

• Discount rates, growth rates and capitalization rates; and

• For equity instruments with debt-like features, market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration.

Other Cash Instruments. Other cash instruments consists of non-U.S. government and agency obligations, state and municipal obligations, and other debt obligations. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

• Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices;

• Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation; and

• Duration.

## Fair Value of Cash Instruments by Level

The tables below present cash instrument assets and liabilities at fair value by level within the fair value hierarchy. In the tables below:

• Cash instrument assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

• Cash instrument assets are shown as positive amounts and cash instrument liabilities are shown as negative amounts.

As of December 2016

<table><tr><td>$ in millions</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Money market instruments</td><td>$ 188</td><td>$ 1,131</td><td>$ —</td><td>$ 1,319</td></tr><tr><td>U.S. government and federal agency obligations</td><td>35,254</td><td>22,403</td><td>—</td><td>57,657</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>22,433</td><td>6,933</td><td>15</td><td>29,381</td></tr><tr><td>Loans and securities backed by:</td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>—</td><td>2,197</td><td>1,645</td><td>3,842</td></tr><tr><td>Residential real estate</td><td>—</td><td>11,350</td><td>845</td><td>12,195</td></tr><tr><td>Corporate loans and debt securities</td><td>215</td><td>23,804</td><td>4,640</td><td>28,659</td></tr><tr><td>State and municipal obligations</td><td>—</td><td>960</td><td>99</td><td>1,059</td></tr><tr><td>Other debt obligations</td><td>—</td><td>830</td><td>528</td><td>1,358</td></tr><tr><td>Equities and convertible debentures</td><td>77,276</td><td>7,153</td><td>10,263</td><td>94,692</td></tr><tr><td>Commodities</td><td>—</td><td>5,653</td><td>—</td><td>5,653</td></tr><tr><td>Subtotal</td><td>$135,366</td><td>$82,414</td><td>$18,035</td><td>$235,815</td></tr><tr><td>Investments in funds at NAV</td><td></td><td></td><td></td><td>6,465</td></tr><tr><td>Total cash instrument assets</td><td></td><td></td><td></td><td>$242,280</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. government and federal agency obligations</td><td>$ (16,615)</td><td>$ (12)</td><td>$ —</td><td>$ (16,627)</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>(19,137)</td><td>(1,364)</td><td>(1)</td><td>(20,502)</td></tr><tr><td>Loans and securities backed by:</td><td></td><td></td><td></td><td></td></tr><tr><td>residential real estate</td><td>—</td><td>(3)</td><td>—</td><td>(3)</td></tr><tr><td>Corporate loans and debt securities</td><td>(2)</td><td>(6,524)</td><td>(44)</td><td>(6,570)</td></tr><tr><td>Other debt obligations</td><td>—</td><td>(1)</td><td>—</td><td>(1)</td></tr><tr><td>Equities and convertible debentures</td><td>(25,768)</td><td>(156)</td><td>(17)</td><td>(25,941)</td></tr><tr><td>Total cash instrument liabilities</td><td>$ (61,522)</td><td>$ (8,060)</td><td>$ (62)</td><td>$ (69,644)</td></tr></table>

<table><tr><td rowspan="2">\( in millions</td><td colspan="4">As of December 2015</td></tr><tr><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Money market instruments</td><td>$ 2,725</td><td>$ 1,958</td><td>$ —</td><td>$ 4,683</td></tr><tr><td>U.S. government and federal agency obligations</td><td>42,306</td><td>21,538</td><td>—</td><td>63,844</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>26,500</td><td>5,260</td><td>12</td><td>31,772</td></tr><tr><td>Loans and securities backed by:</td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>—</td><td>3,051</td><td>1,924</td><td>4,975</td></tr><tr><td>Residential real estate</td><td>—</td><td>11,418</td><td>1,765</td><td>13,183</td></tr><tr><td>Corporate loans and debt securities</td><td>218</td><td>23,344</td><td>5,242</td><td>28,804</td></tr><tr><td>State and municipal obligations</td><td>—</td><td>891</td><td>101</td><td>992</td></tr><tr><td>Other debt obligations</td><td>—</td><td>1,057</td><td>538</td><td>1,595</td></tr><tr><td>Equities and convertible debentures</td><td>81,252</td><td>8,271</td><td>8,549</td><td>98,072</td></tr><tr><td>Commodities</td><td>—</td><td>3,935</td><td>—</td><td>3,935</td></tr><tr><td>Subtotal</td><td>$153,001</td><td>$80,723</td><td>$18,131</td><td>$251,855</td></tr><tr><td>Investments in funds at NAV</td><td></td><td></td><td></td><td>7,757</td></tr><tr><td>Total cash instrument assets</td><td></td><td></td><td></td><td>$259,612</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. government and federal agency obligations</td><td>$ (15,455)</td><td>$ (61)</td><td>$ —</td><td>$ (15,516)</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>(13,522)</td><td>(1,451)</td><td>—</td><td>(14,973)</td></tr><tr><td>Loans and securities backed by:</td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>—</td><td>(4)</td><td>—</td><td>(4)</td></tr><tr><td>Residential real estate</td><td>—</td><td>(2)</td><td>—</td><td>(2)</td></tr><tr><td>Corporate loans and debt securities</td><td>(2)</td><td>(6,456)</td><td>(126)</td><td>(6,584)</td></tr><tr><td>State and municipal obligations</td><td>—</td><td>(2)</td><td>—</td><td>(2)</td></tr><tr><td>Other debt obligations</td><td>—</td><td>(1)</td><td>(1)</td><td>(2)</td></tr><tr><td>Equities and convertible debentures</td><td>(30,790)</td><td>(538)</td><td>(66)</td><td>(31,394)</td></tr><tr><td>Total cash instrument liabilities</td><td>$ (59,769)</td><td>$ (8,515)</td><td>$ (193)</td><td>$ (68,477)</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

In the tables above:

• Total cash instrument assets include collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) backed by real estate and corporate obligations of $461 million and $405 million in level 2, and $624 million and $774 million in level 3 as of December 2016 and December 2015, respectively.

• Level 3 equities and convertible debenture assets include $9.44 billion and $7.69 billion of private equity investments, $374 million and $308 million of investments in real estate entities, and $451 million and $552 million of convertible debentures as of December 2016 and December 2015, respectively.

• Money market instruments include commercial paper, certificates of deposit and time deposits.

## Significant Unobservable Inputs

The table below presents the amount of level 3 assets, and ranges and weighted averages of significant unobservable inputs used to value the firm’s level 3 cash instruments.

Level 3 Assets and Range of Significant Unobservable Inputs (Weighted Average) as of December

<table><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td colspan="3">Loans and securities backed by commercial real estate</td></tr><tr><td>Level 3 assets</td><td>$1,645</td><td>$1,924</td></tr><tr><td>Yield</td><td>3.7% to 23.0% (13.0%)</td><td>3.5% to 22.0% (11.8%)</td></tr><tr><td>Recovery rate</td><td>8.9% to 99.0% (60.6%)</td><td>19.6% to 96.5% (59.4%)</td></tr><tr><td>Duration (years)</td><td>0.8 to 6.2 (2.1)</td><td>0.3 to 5.3 (2.3)</td></tr><tr><td>Basis (points)</td><td>N/A</td><td>(11) to 4 (2))</td></tr><tr><td colspan="3">Loans and securities backed by residential real estate</td></tr><tr><td>Level 3 assets</td><td>$845</td><td>$1,765</td></tr><tr><td>Yield</td><td>0.8% to 15.6% (8.7%)</td><td>3.2% to 17.0% (7.9%)</td></tr><tr><td>Cumulative loss rate</td><td>8.9% to 47.1% (24.2%)</td><td>4.6% to 44.2% (27.3%)</td></tr><tr><td>Duration (years)</td><td>1.1 to 16.1 (7.3)</td><td>1.5 to 13.8 (7.0)</td></tr><tr><td colspan="3">Corporate loans and debt securities</td></tr><tr><td>Level 3 assets</td><td>$4,640</td><td>$5,242</td></tr><tr><td>Yield</td><td>2.5% to 25.0% (10.3%)</td><td>1.6% to 36.6% (10.7%)</td></tr><tr><td>Recovery rate</td><td>0.0% to 85.0% (56.5%)</td><td>0.0% to 85.6% (54.8%)</td></tr><tr><td>Duration (years)</td><td>0.6 to 15.7 (2.9)</td><td>0.7 to 6.1 (2.5)</td></tr><tr><td colspan="3">Equities and convertible debentures</td></tr><tr><td>Level 3 assets</td><td>$10,263</td><td>$8,549</td></tr><tr><td>Multiples</td><td>0.8x to 19.7x (6.8x)</td><td>0.7x to 21.4x (6.4x)</td></tr><tr><td>Discount rate/yield</td><td>6.5% to 25.0% (16.0%)</td><td>7.1% to 20.0% (14.8%)</td></tr><tr><td>Growth rate</td><td>N/A</td><td>3.0% to 5.2% (4.5%)</td></tr><tr><td>Capitalization rate</td><td>4.2% to 12.5% (6.8%)</td><td>5.5% to 12.5% (7.6%)</td></tr><tr><td colspan="3">Other cash instruments</td></tr><tr><td>Level 3 assets</td><td>$642</td><td>$651</td></tr><tr><td>Yield</td><td>1.9% to 14.0% (8.8%)</td><td>0.9% to 17.9% (8.7%)</td></tr><tr><td>Recovery rate</td><td>0.0% to 93.0% (61.4%)</td><td>2.7% to 35.5% (25.0%)</td></tr><tr><td>Duration (years)</td><td>0.9 to 12.0 (4.3)</td><td>1.1 to 11.4 (7.0)</td></tr></table>

In the table above:

• Ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument.
• Weighted averages are calculated by weighting each input by the relative fair value of the cash instruments.

• The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one cash instrument. For example, the highest multiple for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 cash instruments.

• Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm’s level 3 cash instruments would result in a lower fair value measurement, while increases in recovery rate, basis, multiples or growth rate would result in a higher fair value measurement. Due to the distinctive nature of each of the firm’s level 3 cash instruments, the interrelationship of inputs is not necessarily uniform within each product type.

• Equities and convertible debentures include private equity investments and investments in real estate entities. Growth rate includes long-term growth rate and compound annual growth rate.

• Basis (points) and growth rate were not significant to the valuation of level 3 assets as of December 2016.

• Loans and securities backed by commercial and residential real estate, corporate loans and debt securities and other cash instruments are valued using discounted cash flows, and equities and convertible debentures are valued using market comparables and discounted cash flows.

• The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

Transfers Between Levels of the Fair Value Hierarchy
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. See “Level 3 Rollforward” below for information about transfers between level 2 and level 3.

During 2016, transfers into level 2 from level 1 of cash instruments were $135 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. Transfers into level 1 from level 2 of cash instruments during 2016 were $267 million, reflecting transfers of public equity securities due to increased market activity in these instruments.



During 2015, transfers into level 2 from level 1 of cash instruments were $260 million, reflecting transfers of public equity securities primarily due to decreased market activity in these instruments. Transfers into level 1 from level 2 of cash instruments during 2015 were $283 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

## Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 cash instrument assets and liabilities. In the table below:

• Changes in fair value are presented for all cash instrument assets and liabilities that are categorized as level 3 as of the end of the period.

• Net unrealized gains/(losses) relate to instruments that were still held at period-end.

• Purchases include originations and secondary purchases.

• If a cash instrument asset or liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. For level 3 cash instrument assets, increases are shown as positive amounts, while decreases are shown as negative amounts. For level 3 cash instrument liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.

• Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Total cash instrument assets</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$18,131</td><td>$28,650</td></tr><tr><td>Net realized gains/(losses)</td><td>574</td><td>957</td></tr><tr><td>Net unrealized gains/(losses)</td><td>397</td><td>701</td></tr><tr><td>Purchases</td><td>3,072</td><td>3,840</td></tr><tr><td>Sales</td><td>(2,326)</td><td>(3,842)</td></tr><tr><td>Settlements</td><td>(3,503)</td><td>(6,472)</td></tr><tr><td>Transfers into level 3</td><td>3,405</td><td>1,798</td></tr><tr><td>Transfers out of level 3</td><td>(1,715)</td><td>(7,501)</td></tr><tr><td>Ending balance</td><td>$18,035</td><td>$18,131</td></tr><tr><td>Total cash instrument liabilities</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (193)</td><td>$ (244)</td></tr><tr><td>Net realized gains/(losses)</td><td>20</td><td>(28)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>19</td><td>(21)</td></tr><tr><td>Purchases</td><td>91</td><td>205</td></tr><tr><td>Sales</td><td>(49)</td><td>(38)</td></tr><tr><td>Settlements</td><td>(7)</td><td>(14)</td></tr><tr><td>Transfers into level 3</td><td>(12)</td><td>(116)</td></tr><tr><td>Transfers out of level 3</td><td>69</td><td>63</td></tr><tr><td>Ending balance</td><td>$ (62)</td><td>$ (193)</td></tr></table>

The table below disaggregates, by product type, the information for cash instrument assets included in the summary table above.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Loans and securities backed by commercial real estate</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 1,924</td><td>$ 3,275</td></tr><tr><td>Net realized gains/(losses)</td><td>60</td><td>120</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(19)</td><td>44</td></tr><tr><td>Purchases</td><td>331</td><td>566</td></tr><tr><td>Sales</td><td>(320)</td><td>(598)</td></tr><tr><td>Settlements</td><td>(617)</td><td>(1,569)</td></tr><tr><td>Transfers into level 3</td><td>510</td><td>351</td></tr><tr><td>Transfers out of level 3</td><td>(224)</td><td>(265)</td></tr><tr><td>Ending balance</td><td>$ 1,645</td><td>$ 1,924</td></tr><tr><td>Loans and securities backed by residential real estate</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 1,765</td><td>$ 2,545</td></tr><tr><td>Net realized gains/(losses)</td><td>60</td><td>150</td></tr><tr><td>Net unrealized gains/(losses)</td><td>26</td><td>34</td></tr><tr><td>Purchases</td><td>298</td><td>564</td></tr><tr><td>Sales</td><td>(791)</td><td>(609)</td></tr><tr><td>Settlements</td><td>(278)</td><td>(327)</td></tr><tr><td>Transfers into level 3</td><td>73</td><td>188</td></tr><tr><td>Transfers out of level 3</td><td>(308)</td><td>(780)</td></tr><tr><td>Ending balance</td><td>$ 845</td><td>$ 1,765</td></tr><tr><td>Corporate loans and debt securities</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 5,242</td><td>$10,606</td></tr><tr><td>Net realized gains/(losses)</td><td>261</td><td>406</td></tr><tr><td>Net unrealized gains/(losses)</td><td>34</td><td>(234)</td></tr><tr><td>Purchases</td><td>1,078</td><td>1,279</td></tr><tr><td>Sales</td><td>(645)</td><td>(1,668)</td></tr><tr><td>Settlements</td><td>(1,823)</td><td>(3,152)</td></tr><tr><td>Transfers into level 3</td><td>1,023</td><td>752</td></tr><tr><td>Transfers out of level 3</td><td>(530)</td><td>(2,747)</td></tr><tr><td>Ending balance</td><td>$ 4,640</td><td>$ 5,242</td></tr><tr><td>Equities and convertible debentures</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 8,549</td><td>$11,108</td></tr><tr><td>Net realized gains/(losses)</td><td>158</td><td>251</td></tr><tr><td>Net unrealized gains/(losses)</td><td>371</td><td>844</td></tr><tr><td>Purchases</td><td>1,122</td><td>1,295</td></tr><tr><td>Sales</td><td>(412)</td><td>(744)</td></tr><tr><td>Settlements</td><td>(634)</td><td>(1,193)</td></tr><tr><td>Transfers into level 3</td><td>1,732</td><td>466</td></tr><tr><td>Transfers out of level 3</td><td>(623)</td><td>(3,478)</td></tr><tr><td>Ending balance</td><td>$10,263</td><td>$ 8,549</td></tr><tr><td>Other cash instruments</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 651</td><td>$ 1,116</td></tr><tr><td>Net realized gains/(losses)</td><td>35</td><td>30</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(15)</td><td>13</td></tr><tr><td>Purchases</td><td>243</td><td>136</td></tr><tr><td>Sales</td><td>(158)</td><td>(223)</td></tr><tr><td>Settlements</td><td>(151)</td><td>(231)</td></tr><tr><td>Transfers into level 3</td><td>67</td><td>41</td></tr><tr><td>Transfers out of level 3</td><td>(30)</td><td>(231)</td></tr><tr><td>Ending balance</td><td>$ 642</td><td>$ 651</td></tr></table>



## Level 3 Rollforward Commentary

Year Ended December 2016. The net realized and unrealized gains on level 3 cash instrument assets of $971 million (reflecting $574 million of net realized gains and $397 million of net unrealized gains) for 2016 include gains/(losses) of approximately ($311) million, $625 million and $657 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instrument assets of $397 million for 2016 primarily reflected gains on private equity investments, principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during 2016 primarily reflected transfers of certain private equity investments, corporate loans and debt securities, and loans and securities backed by commercial real estate from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during 2016 primarily reflected transfers of certain private equity investments, corporate loans and debt securities, and loans and securities backed by residential real estate to level 2, principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

Year Ended December 2015. The net realized and unrealized gains on level 3 cash instrument assets of $1.66 billion (reflecting $957 million of net realized gains and $701 million of net unrealized gains) for 2015 include gains/(losses) of approximately (142) million, $1.08 billion and $718 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instrument assets of $701 million for 2015 primarily reflected gains on private equity investments, principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during 2015 primarily reflected transfers of certain corporate loans and debt securities, private equity investments and loans and securities backed by commercial real estate from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.
Transfers out of level 3 during 2015 primarily reflected transfers of certain private equity investments, corporate loans and debt securities, and loans and securities backed by residential real estate to level 2, principally due to increased price transparency as a result of market evidence, including market transactions in these instruments, and transfers of certain corporate loans and debt securities to level 2 principally due to certain unobservable yield and duration inputs not being significant to the valuation of these instruments.

## Investments in Funds at Net Asset Value Per Share

Cash instruments at fair value include investments in funds that are measured at NAV of the investment fund. The firm uses NAV to measure the fair value of its fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.

The firm’s investments in funds at NAV primarily consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm co-invests with third-party investors.

Private equity funds primarily invest in a broad range of industries worldwide, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. The private equity, credit and real estate funds are primarily closed-end funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed.

The firm also invests in hedge funds, primarily multidisciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies. The firm’s investments in hedge funds primarily include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be received until the underlying assets are liquidated or distributed.



Many of the funds described above are “covered funds” as defined by the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Board of Governors of the Federal Reserve System (Federal Reserve Board) extended the conformance period for investments in, and relationships with, covered funds that were in place prior to December 2013 through July 2017, and in December 2016 permitted banking entities to apply for an extension of up to an additional five years for legacy “illiquid funds” (as defined by the Volcker Rule). The firm has applied for this extension for substantially all of its investments in, and relationships with, covered funds in the table below. To the extent that the firm does not receive an extension, the firm will be required to sell its interests in such funds by July 2017. If that occurs, the firm will likely receive a value for its interests that is significantly less than the then carrying value as there could be a limited secondary market for these investments and the firm may be unable to sell them in orderly transactions.

The table below presents the fair value of the firm’s investments in funds at NAV and related unfunded commitments.

<table><tr><td>$ in millions</td><td>Fair Value of Investments</td><td>Unfunded Commitments</td></tr><tr><td>As of December 2016</td><td></td><td></td></tr><tr><td>Private equity funds</td><td>$4,628</td><td>$1,393</td></tr><tr><td>Credit funds</td><td>421</td><td>166</td></tr><tr><td>Hedge funds</td><td>410</td><td>—</td></tr><tr><td>Real estate funds</td><td>1,006</td><td>272</td></tr><tr><td>Total</td><td>$6,465</td><td>$1,831</td></tr><tr><td>As of December 2015</td><td></td><td></td></tr><tr><td>Private equity funds</td><td>$5,414</td><td>$2,057</td></tr><tr><td>Credit funds</td><td>611</td><td>344</td></tr><tr><td>Hedge funds</td><td>560</td><td>—</td></tr><tr><td>Real estate funds</td><td>1,172</td><td>296</td></tr><tr><td>Total</td><td>$7,757</td><td>$2,697</td></tr></table>

## Note 7.

## Derivatives and Hedging Activities

## Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as OTC derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC).
Market-Making. As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. In this role, the firm typically acts as principal and is required to commit capital to provide execution, and maintains inventory in response to, or in anticipation of, client demand.

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and lending activities in derivative and cash instruments. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits, and to manage foreign currency exposure on the net investment in certain non-U.S. operations.

The firm enters into various types of derivatives, including:

• Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.

• Swaps. Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.

• Options. Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively. Realized and unrealized gains and losses on derivatives not designated as hedges under ASC 815 are included in “Market making” and “Other principal transactions” in Note 4.



The tables below present the gross fair value and the notional amount of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the consolidated statements of financial condition, as well as cash and securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December 2016</td><td colspan="2">As of December 2015</td></tr><tr><td>Derivative Assets</td><td>Derivative Liabilities</td><td>Derivative Assets</td><td>Derivative Liabilities</td></tr><tr><td colspan="5">Not accounted for as hedges</td></tr><tr><td>Exchange-traded</td><td>$ 443</td><td>$ 382</td><td>$ 310</td><td>$ 280</td></tr><tr><td>OTC-cleared</td><td>189,471</td><td>168,946</td><td>211,272</td><td>192,401</td></tr><tr><td>Bilateral OTC</td><td>309,037</td><td>289,491</td><td>345,516</td><td>321,458</td></tr><tr><td>Total interest rates</td><td>498,951</td><td>458,819</td><td>557,098</td><td>514,139</td></tr><tr><td>OTC-cleared</td><td>4,837</td><td>4,811</td><td>5,203</td><td>5,596</td></tr><tr><td>Bilateral OTC</td><td>21,530</td><td>18,770</td><td>35,679</td><td>31,179</td></tr><tr><td>Total credit</td><td>26,367</td><td>23,581</td><td>40,882</td><td>36,775</td></tr><tr><td>Exchange-traded</td><td>36</td><td>176</td><td>183</td><td>204</td></tr><tr><td>OTC-cleared</td><td>796</td><td>798</td><td>165</td><td>128</td></tr><tr><td>Bilateral OTC</td><td>111,032</td><td>106,318</td><td>96,660</td><td>99,235</td></tr><tr><td>Total currencies</td><td>111,864</td><td>107,292</td><td>97,008</td><td>99,567</td></tr><tr><td>Exchange-traded</td><td>3,219</td><td>3,187</td><td>2,997</td><td>3,623</td></tr><tr><td>OTC-cleared</td><td>189</td><td>197</td><td>232</td><td>233</td></tr><tr><td>Bilateral OTC</td><td>8,945</td><td>10,487</td><td>17,445</td><td>17,215</td></tr><tr><td>Total commodities</td><td>12,353</td><td>13,871</td><td>20,674</td><td>21,071</td></tr><tr><td>Exchange-traded</td><td>8,576</td><td>8,064</td><td>9,372</td><td>7,908</td></tr><tr><td>Bilateral OTC</td><td>39,516</td><td>45,826</td><td>37,788</td><td>38,290</td></tr><tr><td>Total equities</td><td>48,092</td><td>53,890</td><td>47,160</td><td>46,198</td></tr><tr><td>Subtotal</td><td>697,627</td><td>657,453</td><td>762,822</td><td>717,750</td></tr><tr><td colspan="5">Accounted for as hedges</td></tr><tr><td>OTC-cleared</td><td>4,347</td><td>156</td><td>4,567</td><td>85</td></tr><tr><td>Bilateral OTC</td><td>4,180</td><td>10</td><td>6,660</td><td>20</td></tr><tr><td>Total interest rates</td><td>8,527</td><td>166</td><td>11,227</td><td>105</td></tr><tr><td>OTC-cleared</td><td>30</td><td>40</td><td>24</td><td>6</td></tr><tr><td>Bilateral OTC</td><td>55</td><td>64</td><td>116</td><td>27</td></tr><tr><td>Total currencies</td><td>85</td><td>104</td><td>140</td><td>33</td></tr><tr><td>Subtotal</td><td>8,612</td><td>270</td><td>11,367</td><td>138</td></tr><tr><td colspan="5">Total gross fair value $ 706,239 $ 657,723 $ 774,189 $ 717,888</td></tr><tr><td colspan="5">Offset in the consolidated statements of financial condition</td></tr><tr><td>Exchange-traded</td><td>$ (9,727) \)  $ (9,727) \)  $ (9,398) \)  $ (9,398) \)</td><td></td><td></td><td></td></tr><tr><td>OTC-cleared</td><td>(171,864)</td><td>(171,864)</td><td>(194,928)</td><td>(194,928)</td></tr><tr><td>Bilateral OTC</td><td>(385,647)</td><td>(385,647)</td><td>(426,841)</td><td>(426,841)</td></tr><tr><td>Total counterparty netting</td><td>(567,238)</td><td>(567,238)</td><td>(631,167)</td><td>(631,167)</td></tr><tr><td>OTC-cleared</td><td>(27,560)</td><td>(2,940)</td><td>(26,151)</td><td>(3,305)</td></tr><tr><td>Bilateral OTC</td><td>(57,769)</td><td>(40,046)</td><td>(62,981)</td><td>(36,645)</td></tr><tr><td>Total cash collateral netting</td><td>(85,329)</td><td>(42,986)</td><td>(89,132)</td><td>(39,950)</td></tr><tr><td colspan="5">Total amounts offset $(652,567) $ (610,224) \)  $ (720,299) \)  $ (671,117) \)</td></tr><tr><td colspan="5">Included in the consolidated statements of financial condition</td></tr><tr><td>Exchange-traded</td><td>$ 2,547</td><td>$ 2,082</td><td>$ 3,464</td><td>$ 2,617</td></tr><tr><td>OTC-cleared</td><td>246</td><td>144</td><td>384</td><td>216</td></tr><tr><td>Bilateral OTC</td><td>50,879</td><td>45,273</td><td>50,042</td><td>43,938</td></tr><tr><td>Total</td><td>$ 53,672</td><td>$ 47,499</td><td>$ 53,890</td><td>$ 46,771</td></tr><tr><td colspan="5">Not offset in the consolidated statements of financial condition</td></tr><tr><td>Cash collateral</td><td>$ (535)</td><td>$ (2,085)</td><td>$ (498)</td><td>$ (1,935)</td></tr><tr><td>Securities collateral</td><td>(15,518)</td><td>(10,224)</td><td>(14,008)</td><td>(10,044)</td></tr><tr><td>Total</td><td>$ 37,619</td><td>$ 35,190</td><td>$ 39,384</td><td>$ 34,792</td></tr></table>

<table><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td>Not accounted for as hedges</td><td></td><td></td></tr><tr><td>Exchange-traded</td><td>$ 4,425,532</td><td>$ 4,402,843</td></tr><tr><td>OTC-cleared</td><td>16,646,145</td><td>20,738,687</td></tr><tr><td>Bilateral OTC</td><td>11,131,442</td><td>12,953,830</td></tr><tr><td>Total interest rates</td><td>32,203,119</td><td>38,095,360</td></tr><tr><td>OTC-cleared</td><td>378,432</td><td>339,244</td></tr><tr><td>Bilateral OTC</td><td>1,045,913</td><td>1,552,806</td></tr><tr><td>Total credit</td><td>1,424,345</td><td>1,892,050</td></tr><tr><td>Exchange-traded</td><td>13,800</td><td>13,073</td></tr><tr><td>OTC-cleared</td><td>62,799</td><td>14,617</td></tr><tr><td>Bilateral OTC</td><td>5,576,748</td><td>5,461,940</td></tr><tr><td>Total currencies</td><td>5,653,347</td><td>5,489,630</td></tr><tr><td>Exchange-traded</td><td>227,707</td><td>203,465</td></tr><tr><td>OTC-cleared</td><td>3,506</td><td>2,839</td></tr><tr><td>Bilateral OTC</td><td>196,899</td><td>230,750</td></tr><tr><td>Total commodities</td><td>428,112</td><td>437,054</td></tr><tr><td>Exchange-traded</td><td>605,335</td><td>528,419</td></tr><tr><td>Bilateral OTC</td><td>959,112</td><td>927,078</td></tr><tr><td>Total equities</td><td>1,564,447</td><td>1,455,497</td></tr><tr><td>Subtotal</td><td>41,273,370</td><td>47,369,591</td></tr><tr><td>Accounted for as hedges</td><td></td><td></td></tr><tr><td>OTC-cleared</td><td>55,328</td><td>51,446</td></tr><tr><td>Bilateral OTC</td><td>36,607</td><td>62,022</td></tr><tr><td>Total interest rates</td><td>91,935</td><td>113,468</td></tr><tr><td>OTC-cleared</td><td>1,703</td><td>1,333</td></tr><tr><td>Bilateral OTC</td><td>8,544</td><td>8,615</td></tr><tr><td>Total currencies</td><td>10,247</td><td>9,948</td></tr><tr><td>Subtotal</td><td>102,182</td><td>123,416</td></tr><tr><td>Total notional amount</td><td>$41,375,552</td><td>$47,493,007</td></tr></table>

In the tables above:

• Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure.

• Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted.

• Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.

• Total gross fair value of derivatives includes derivative assets and derivative liabilities of $19.92 billion and $20.79 billion, respectively, as of December 2016, and derivative assets and derivative liabilities of $17.09 billion and $18.16 billion, respectively, as of December 2015, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.



A clearing organization adopted a rule change in the first quarter of 2017 that requires transactions to be considered settled each day. Certain other clearing organizations allow for similar treatment. To the extent transactions with these clearing organizations are considered settled, the impact would be a reduction in gross interest rate and credit derivative assets and liabilities, and a corresponding decrease in counterparty and cash collateral netting, with no impact to the consolidated statements of financial condition.

## Valuation Techniques for Derivatives

The firm’s level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models, and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type, as described below.

• Interest Rate. In general, the key inputs used to value interest rate derivatives are transparent, even for most long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate) are more complex, but the key inputs are generally observable.

• Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to have less price transparency than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.
• Currency. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the price transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.

• Commodity. Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.

• Equity. Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.

Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs. See Note 5 for an overview of the firm’s fair value measurement policies.

## Level 1 Derivatives

Level 1 derivatives include short-term contracts for future delivery of securities when the underlying security is a level 1 instrument, and exchange-traded derivatives if they are actively traded and are valued at their quoted market price.

## Level 2 Derivatives

Level 2 derivatives include OTC derivatives for which all significant valuation inputs are corroborated by market evidence and exchange-traded derivatives that are not actively traded and/or that are valued using models that calibrate to market-clearing levels of OTC derivatives.



The selection of a particular model to value a derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. For derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.

Valuation models require a variety of inputs, such as contractual terms, market prices, yield curves, discount rates (including those derived from interest rates on collateral received and posted as specified in credit support agreements for collateralized derivatives), credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. Significant inputs to the valuations of level 2 derivatives can be verified to market transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

## Level 3 Derivatives

Level 3 derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs. The significant unobservable inputs used to value the firm’s level 3 derivatives are described below.

• For the majority of the firm’s interest rate and currency derivatives classified within level 3, significant unobservable inputs include correlations of certain currencies and interest rates (e.g., the correlation between Euro inflation and Euro interest rates) and specific interest rate volatilities.

• For level 3 credit derivatives, significant unobservable inputs include illiquid credit spreads and upfront credit points, which are unique to specific reference obligations and reference entities, recovery rates and certain correlations required to value credit derivatives (e.g., the likelihood of default of the underlying reference obligation relative to one another).

• For level 3 commodity derivatives, significant unobservable inputs include volatilities for options with strike prices that differ significantly from current market prices and prices or spreads for certain products for which the product quality or physical location of the commodity is not aligned with benchmark indices.
• For level 3 equity derivatives, significant unobservable inputs generally include equity volatility inputs for options that are long-dated and/or have strike prices that differ significantly from current market prices. In addition, the valuation of certain structured trades requires the use of level 3 correlation inputs, such as the correlation of the price performance of two or more individual stocks or the correlation of the price performance for a basket of stocks to another asset class such as commodities.

Subsequent to the initial valuation of a level 3 derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are recorded in level 3. Level 3 inputs are changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See below for further information about significant unobservable inputs used in the valuation of level 3 derivatives.

## Valuation Adjustments

Valuation adjustments are integral to determining the fair value of derivative portfolios and are used to adjust the mid-market valuations produced by derivative pricing models to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity, credit valuation adjustments and funding valuation adjustments, which account for the credit and funding risk inherent in the uncollateralized portion of derivative portfolios. The firm also makes funding valuation adjustments to collateralized derivatives where the terms of the agreement do not permit the firm to deliver or repledge collateral received. Market-based inputs are generally used when calibrating valuation adjustments to market-clearing levels.

In addition, for derivatives that include significant unobservable inputs, the firm makes model or exit price adjustments to account for the valuation uncertainty present in the transaction.



## Fair Value of Derivatives by Level

The tables below present the fair value of derivatives on a gross basis by level and major product type as well as the impact of netting, included in the consolidated statements of financial condition.

As of December 2016

<table><tr><td>$ in millions</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 46</td><td>$ 506,818</td><td>$ 614</td><td>$ 507,478</td></tr><tr><td>Credit</td><td>—</td><td>21,388</td><td>4,979</td><td>26,367</td></tr><tr><td>Currencies</td><td>—</td><td>111,762</td><td>187</td><td>111,949</td></tr><tr><td>Commodities</td><td>—</td><td>11,950</td><td>403</td><td>12,353</td></tr><tr><td>Equities</td><td>1</td><td>47,667</td><td>424</td><td>48,092</td></tr><tr><td>Gross fair value</td><td>47</td><td>699,585</td><td>6,607</td><td>706,239</td></tr><tr><td>Counterparty netting within levels</td><td>(12)</td><td>(564,100)</td><td>(1,417)</td><td>(565,529)</td></tr><tr><td>Subtotal</td><td>$ 35</td><td>$ 135,485</td><td>$ 5,190</td><td>$ 140,710</td></tr><tr><td>Cross-level counterparty netting</td><td></td><td></td><td></td><td>(1,709)</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>(85,329)</td></tr><tr><td>Net fair value</td><td></td><td></td><td></td><td>$ 53,672</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ (27)</td><td>$ (457,963)</td><td>$ (995)</td><td>$ (458,985)</td></tr><tr><td>Credit</td><td>—</td><td>(21,106)</td><td>(2,475)</td><td>(23,581)</td></tr><tr><td>Currencies</td><td>—</td><td>(107,212)</td><td>(184)</td><td>(107,396)</td></tr><tr><td>Commodities</td><td>—</td><td>(13,541)</td><td>(330)</td><td>(13,871)</td></tr><tr><td>Equities</td><td>(967)</td><td>(49,083)</td><td>(3,840)</td><td>(53,890)</td></tr><tr><td>Gross fair value</td><td>(994)</td><td>(648,905)</td><td>(7,824)</td><td>(657,723)</td></tr><tr><td>Counterparty netting within levels</td><td>12</td><td>564,100</td><td>1,417</td><td>565,529</td></tr><tr><td>Subtotal</td><td>$ (982)</td><td>$ (84,805)</td><td>$ (6,407)</td><td>$ (92,194)</td></tr><tr><td>Cross-level counterparty netting</td><td></td><td></td><td></td><td>1,709</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>42,986</td></tr><tr><td>Net fair value</td><td></td><td></td><td></td><td>$ (47,499)</td></tr></table>

As of December 2015

<table><tr><td>$ in millions</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 4</td><td>$ 567,761</td><td>$ 560</td><td>$ 568,325</td></tr><tr><td>Credit</td><td>—</td><td>34,832</td><td>6,050</td><td>40,882</td></tr><tr><td>Currencies</td><td>—</td><td>96,959</td><td>189</td><td>97,148</td></tr><tr><td>Commodities</td><td>—</td><td>20,087</td><td>587</td><td>20,674</td></tr><tr><td>Equities</td><td>46</td><td>46,491</td><td>623</td><td>47,160</td></tr><tr><td>Gross fair value</td><td>50</td><td>766,130</td><td>8,009</td><td>774,189</td></tr><tr><td>Counterparty netting within levels</td><td>—</td><td>(627,548)</td><td>(2,139)</td><td>(629,687)</td></tr><tr><td>Subtotal</td><td>$ 50</td><td>$ 138,582</td><td>$ 5,870</td><td>$ 144,502</td></tr><tr><td>Cross-level counterparty netting</td><td></td><td></td><td></td><td>(1,480)</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>(89,132)</td></tr><tr><td>Net fair value</td><td></td><td></td><td></td><td>$ 53,890</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ (11)</td><td>$ (513,275)</td><td>$ (958)</td><td>$ (514,244)</td></tr><tr><td>Credit</td><td>—</td><td>(33,518)</td><td>(3,257)</td><td>(36,775)</td></tr><tr><td>Currencies</td><td>—</td><td>(99,377)</td><td>(223)</td><td>(99,600)</td></tr><tr><td>Commodities</td><td>—</td><td>(20,222)</td><td>(849)</td><td>(21,071)</td></tr><tr><td>Equities</td><td>(18)</td><td>(43,953)</td><td>(2,227)</td><td>(46,198)</td></tr><tr><td>Gross fair value</td><td>(29)</td><td>(710,345)</td><td>(7,514)</td><td>(717,888)</td></tr><tr><td>Counterparty netting within levels</td><td>—</td><td>627,548</td><td>2,139</td><td>629,687</td></tr><tr><td>Subtotal</td><td>$ (29)</td><td>$ (82,797)</td><td>$ (5,375)</td><td>$ (88,201)</td></tr><tr><td>Cross-level counterparty netting</td><td></td><td></td><td></td><td>1,480</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>39,950</td></tr><tr><td>Net fair value</td><td></td><td></td><td></td><td>$ (46,771)</td></tr></table>

In the tables above:

• The gross fair values exclude the effects of both counterparty netting and collateral netting, and therefore are not representative of the firm’s exposure.

• Counterparty netting is reflected in each level to the extent that receivable and payable balances are netted within the same level and is included in counterparty netting within levels. Where the counterparty netting is across levels, the netting is reflected in cross-level counterparty netting.

• Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.

## Significant Unobservable Inputs

The table below presents the amount of level 3 assets (liabilities), and ranges, averages and medians of significant unobservable inputs used to value the firm’s level 3 derivatives.

Level 3 Assets (Liabilities) and Range of Significant

<table><tr><td colspan="3">Unobservable Inputs (Average/Median) as of December</td></tr><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td>Interest rates, net</td><td>$ (381)</td><td>$ (398)</td></tr><tr><td>Correlation</td><td>(10)% to 86% (56%/60%)</td><td>(25)% to 92% (53%/55%)</td></tr><tr><td>Volatility (bps)</td><td>31 to 151 (84/57)</td><td>31 to 152 (84/57)</td></tr><tr><td>Credit, net</td><td>$ 2,504</td><td>$ 2,793</td></tr><tr><td>Correlation</td><td>35% to 91% (65%/68%)</td><td>46% to 99% (68%/66%)</td></tr><tr><td>Credit spreads (bps)</td><td>1 to 993 (122/73)</td><td>1 to 1,019 (129/86)</td></tr><tr><td>Upfront credit points</td><td>0 to 100 (43/35)</td><td>0 to 100 (41/40)</td></tr><tr><td>Recovery rates</td><td>1% to 97% (58%/70%)</td><td>2% to 97% (58%/70%)</td></tr><tr><td>Currencies, net</td><td>$ 3</td><td>$ (34)</td></tr><tr><td>Correlation</td><td>25% to 70% (50%/55%)</td><td>25% to 70% (50%/51%)</td></tr><tr><td>Commodities, net</td><td>$ 73</td><td>$ (262)</td></tr><tr><td>Volatility</td><td>13% to 68% (33%/33%)</td><td>11% to 77% (35%/34%)</td></tr><tr><td>Natural gas spread</td><td>$ (1.81) to $ 4.33</td><td>$ (1.32) to $ 4.15</td></tr><tr><td></td><td>$ (0.14)/(\$ 0.05))</td><td>$ (0.05)/$ (0.01))</td></tr><tr><td>Oil spread</td><td>$ (19.72) to $ 64.92</td><td>$ (10.64) to $ 65.29</td></tr><tr><td></td><td>$ (25.30)/(\$ 16.43)</td><td>$ (3.34)/$ (3.31))</td></tr><tr><td>Equities, net</td><td>$ (3,416)</td><td>$ (1,604)</td></tr><tr><td>Correlation</td><td>(39)% to 88% (41%/41%)</td><td>(65)% to 94% (42%/48%)</td></tr><tr><td>Volatility</td><td>5% to 72% (24%/23%)</td><td>5% to 76% (24%/23%)</td></tr></table>

In the table above:

• Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.

• Ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative.

• Averages represent the arithmetic average of the inputs and are not weighted by the relative fair value or notional of the respective financial instruments. An average greater than the median indicates that the majority of inputs are below the average. For example, the difference between the average and the median for credit spreads and oil spread inputs indicates that the majority of the inputs fall in the lower end of the range.



• The ranges, averages and medians of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one derivative. For example, the highest correlation for interest rate derivatives is appropriate for valuing a specific interest rate derivative but may not be appropriate for valuing any other interest rate derivative. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 derivatives.

• Interest rates, currencies and equities derivatives are valued using option pricing models, credit derivatives are valued using option pricing, correlation and discounted cash flow models, and commodities derivatives are valued using option pricing and discounted cash flow models.

• The fair value of any one instrument may be determined using multiple valuation techniques. For example, option pricing models and discounted cash flows models are typically used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

• Correlation within currencies and equities includes cross-product correlation.

• Natural gas spread represents the spread per million British thermal units of natural gas.

• Oil spread represents the spread per barrel of oil and refined products.

## Range of Significant Unobservable Inputs

The following is information about the ranges of significant unobservable inputs used to value the firm’s level 3 derivative instruments:

• Correlation. Ranges for correlation cover a variety of underliers both within one market (e.g., equity index and equity single stock names) and across markets (e.g., correlation of an interest rate and a foreign exchange rate), as well as across regions. Generally, cross-product correlation inputs are used to value more complex instruments and are lower than correlation inputs on assets within the same derivative product type.

• Volatility. Ranges for volatility cover numerous underliers across a variety of markets, maturities and strike prices. For example, volatility of equity indices is generally lower than volatility of single stocks.
• Credit spreads, upfront credit points and recovery rates. The ranges for credit spreads, upfront credit points and recovery rates cover a variety of underliers (index and single names), regions, sectors, maturities and credit qualities (high-yield and investment-grade). The broad range of this population gives rise to the width of the ranges of significant unobservable inputs.

• Commodity prices and spreads. The ranges for commodity prices and spreads cover variability in products, maturities and delivery locations.

## Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs

The following is a description of the directional sensitivity of the firm’s level 3 fair value measurements to changes in significant unobservable inputs, in isolation:

• Correlation. In general, for contracts where the holder benefits from the convergence of the underlying asset or index prices (e.g., interest rates, credit spreads, foreign exchange rates, inflation rates and equity prices), an increase in correlation results in a higher fair value measurement.

• Volatility. In general, for purchased options, an increase in volatility results in a higher fair value measurement.

• Credit spreads, upfront credit points and recovery rates. In general, the fair value of purchased credit protection increases as credit spreads or upfront credit points increase or recovery rates decrease. Credit spreads, upfront credit points and recovery rates are strongly related to distinctive risk factors of the underlying reference obligations, which include reference entity-specific factors such as leverage, volatility and industry, market-based risk factors, such as borrowing costs or liquidity of the underlying reference obligation, and macroeconomic conditions.

• Commodity prices and spreads. In general, for contracts where the holder is receiving a commodity, an increase in the spread (price difference from a benchmark index due to differences in quality or delivery location) or price results in a higher fair value measurement.

Due to the distinctive nature of each of the firm’s level 3 derivatives, the interrelationship of inputs is not necessarily uniform within each product type.



## Level 3 Rollforward

The table below presents a summary of the changes in fair value for all level 3 derivatives. In the table below:

• Changes in fair value are presented for all derivative assets and liabilities that are categorized as level 3 as of the end of the period.

• Net unrealized gains/(losses) relate to instruments that were still held at period-end.

• If a derivative was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are reported at the beginning of the reporting period in which they occur.

• Positive amounts for transfers into level 3 and negative amounts for transfers out of level 3 represent net transfers of derivative assets. Negative amounts for transfers into level 3 and positive amounts for transfers out of level 3 represent net transfers of derivative liabilities.

• A derivative with level 1 and/or level 2 inputs is classified in level 3 in its entirety if it has at least one significant level 3 input.

• If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2 inputs) is classified as level 3.

• Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to level 1 or level 2 derivatives and/or level 1, level 2 and level 3 cash instruments. As a result, gains/(losses) included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

<table><tr><td></td><td colspan="2">Year Ended December</td></tr><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td>Total level 3 derivatives</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 495</td><td>$ 706</td></tr><tr><td>Net realized gains/(losses)</td><td>(37)</td><td>67</td></tr><tr><td>Net unrealized gains/(losses)</td><td>777</td><td>679</td></tr><tr><td>Purchases</td><td>115</td><td>240</td></tr><tr><td>Sales</td><td>(3,557)</td><td>(1,864)</td></tr><tr><td>Settlements</td><td>782</td><td>1,498</td></tr><tr><td>Transfers into level 3</td><td>352</td><td>(4)</td></tr><tr><td>Transfers out of level 3</td><td>(144)</td><td>(827)</td></tr><tr><td>Ending balance</td><td>(1,217)</td><td>$ 495</td></tr></table>

The table below disaggregates, by product type, the information for level 3 derivatives included in the summary table above.

<table><tr><td rowspan="2">$ in millions</td><td colspan="2">Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Interest rates, net</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (398)</td><td>$ (40)</td></tr><tr><td>Net realized gains/(losses)</td><td>(41)</td><td>(53)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(138)</td><td>66</td></tr><tr><td>Purchases</td><td>5</td><td>3</td></tr><tr><td>Sales</td><td>(3)</td><td>(31)</td></tr><tr><td>Settlements</td><td>36</td><td>(144)</td></tr><tr><td>Transfers into level 3</td><td>195</td><td>(149)</td></tr><tr><td>Transfers out of level 3</td><td>(37)</td><td>(50)</td></tr><tr><td>Ending balance</td><td>$ (381)</td><td>$ (398)</td></tr><tr><td>Credit, net</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 2,793</td><td>$ 3,530</td></tr><tr><td>Net realized gains/(losses)</td><td>—</td><td>92</td></tr><tr><td>Net unrealized gains/(losses)</td><td>196</td><td>804</td></tr><tr><td>Purchases</td><td>20</td><td>80</td></tr><tr><td>Sales</td><td>(73)</td><td>(237)</td></tr><tr><td>Settlements</td><td>(516)</td><td>(640)</td></tr><tr><td>Transfers into level 3</td><td>179</td><td>206</td></tr><tr><td>Transfers out of level 3</td><td>(95)</td><td>(1,042)</td></tr><tr><td>Ending balance</td><td>$ 2,504</td><td>$ 2,793</td></tr><tr><td>Currencies, net</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (34)</td><td>$ (267)</td></tr><tr><td>Net realized gains/(losses)</td><td>(30)</td><td>(49)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(42)</td><td>40</td></tr><tr><td>Purchases</td><td>14</td><td>32</td></tr><tr><td>Sales</td><td>(2)</td><td>(10)</td></tr><tr><td>Settlements</td><td>90</td><td>162</td></tr><tr><td>Transfers into level 3</td><td>1</td><td>(1)</td></tr><tr><td>Transfers out of level 3</td><td>6</td><td>59</td></tr><tr><td>Ending balance</td><td>$ 3</td><td>$ (34)</td></tr><tr><td>Commodities, net</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (262)</td><td>$(1,142)</td></tr><tr><td>Net realized gains/(losses)</td><td>(23)</td><td>34</td></tr><tr><td>Net unrealized gains/(losses)</td><td>101</td><td>(52)</td></tr><tr><td>Purchases</td><td>24</td><td>—</td></tr><tr><td>Sales</td><td>(119)</td><td>(234)</td></tr><tr><td>Settlements</td><td>391</td><td>1,034</td></tr><tr><td>Transfers into level 3</td><td>(23)</td><td>(35)</td></tr><tr><td>Transfers out of level 3</td><td>(16)</td><td>133</td></tr><tr><td>Ending balance</td><td>$ 73</td><td>$ (262)</td></tr><tr><td>Equities, net</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (1,604)</td><td>$(1,375)</td></tr><tr><td>Net realized gains/(losses)</td><td>57</td><td>43</td></tr><tr><td>Net unrealized gains/(losses)</td><td>660</td><td>(179)</td></tr><tr><td>Purchases</td><td>52</td><td>125</td></tr><tr><td>Sales</td><td>(3,360)</td><td>(1,352)</td></tr><tr><td>Settlements</td><td>781</td><td>1,086</td></tr><tr><td>Transfers into level 3</td><td>—</td><td>(25)</td></tr><tr><td>Transfers out of level 3</td><td>(2)</td><td>73</td></tr><tr><td>Ending balance</td><td>$ (3,416)</td><td>$(1,604)</td></tr></table>



## Level 3 Rollforward Commentary

Year Ended December 2016. The net realized and unrealized gains on level 3 derivatives of $740 million (reflecting $37 million of net realized losses and $777 million of net unrealized gains) for 2016, include gains/losses of approximately $980 million and $(240) million reported in “Market making” and “Other principal transactions” respectively.

The net unrealized gain on level 3 derivatives of $777 million for the year ended December 2016 was primarily attributable to gains on certain equity derivatives, reflecting the impact of an increase in equity prices.

Transfers into level 3 derivatives during 2016 primarily reflected transfers of certain interest rate derivative assets from level 2, principally due to reduced transparency of certain unobservable inputs used to value these derivatives, and transfers of certain credit derivative assets from level 2 primarily due to unobservable credit spread inputs becoming significant to the net risk of certain portfolios.

Transfers out of level 3 derivatives during 2016 primarily reflected transfers of certain credit derivatives assets to level 2, primarily due to unobservable credit spread inputs no longer being significant to the net risk of certain portfolios.

Year Ended December 2015. The net realized and unrealized gains on level 3 derivative assets and liabilities of $746 million (reflecting $67 million of net realized gains and $679 million of net unrealized gains) for 2015, include gains of approximately $518 million and $228 million reported in “Market making” and “Other principal transactions” respectively.

The net unrealized gain on level 3 derivatives of $679 million for 2015 was primarily attributable to gains on certain credit derivatives, reflecting the impact of wider credit spreads, and changes in foreign exchange and interest rates.

Transfers into level 3 derivatives during 2015 primarily reflected transfers of certain credit derivative assets from level 2, primarily due to unobservable credit spread inputs becoming significant to the valuations of these derivatives, and transfers of certain interest rate derivative liabilities from level 2, primarily due to certain unobservable inputs becoming significant to the valuations of these derivatives.

Transfers out of level 3 derivatives during 2015 primarily reflected transfers of certain credit derivative assets to level 2, principally due to increased transparency and reduced significance of certain unobservable credit spread inputs used to value these derivatives.

## OTC Derivatives

The table below presents the fair values of OTC derivative assets and liabilities by tenor and major product type.

<table><tr><td>$ in millions</td><td>Less than 1 Year</td><td>1 - 5 Years</td><td>Greater than 5 Years</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 5,845</td><td>$18,376</td><td>$79,507</td><td>$103,728</td></tr><tr><td>Credit</td><td>1,763</td><td>2,695</td><td>4,889</td><td>9,347</td></tr><tr><td>Currencies</td><td>18,344</td><td>8,292</td><td>8,428</td><td>35,064</td></tr><tr><td>Commodities</td><td>3,273</td><td>1,415</td><td>179</td><td>4,867</td></tr><tr><td>Equities</td><td>3,141</td><td>9,249</td><td>1,341</td><td>13,731</td></tr><tr><td>Counterparty netting within tenors</td><td>(3,543)</td><td>(5,550)</td><td>(3,794)</td><td>(12,887)</td></tr><tr><td>Subtotal</td><td>$28,823</td><td>$34,477</td><td>$90,550</td><td>$153,850</td></tr><tr><td>Cross-tensor counterparty netting</td><td></td><td></td><td></td><td>(17,396)</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>(85,329)</td></tr><tr><td>Total</td><td></td><td></td><td></td><td>$ 51,125</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 5,679</td><td>$10,814</td><td>$38,812</td><td>$ 55,305</td></tr><tr><td>Credit</td><td>2,060</td><td>3,328</td><td>1,167</td><td>6,555</td></tr><tr><td>Currencies</td><td>14,720</td><td>9,771</td><td>5,879</td><td>30,370</td></tr><tr><td>Commodities</td><td>2,546</td><td>1,555</td><td>2,315</td><td>6,416</td></tr><tr><td>Equities</td><td>7,000</td><td>10,426</td><td>2,614</td><td>20,040</td></tr><tr><td>Counterparty netting within tenors</td><td>(3,543)</td><td>(5,550)</td><td>(3,794)</td><td>(12,887)</td></tr><tr><td>Subtotal</td><td>$28,462</td><td>$30,344</td><td>$46,993</td><td>$105,799</td></tr><tr><td>Cross-tensor counterparty netting</td><td></td><td></td><td></td><td>(17,396)</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>(42,986)</td></tr><tr><td>Total</td><td></td><td></td><td></td><td>$ 45,417</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 4,231</td><td>$23,278</td><td>$81,401</td><td>$108,910</td></tr><tr><td>Credit</td><td>1,664</td><td>4,547</td><td>5,842</td><td>12,053</td></tr><tr><td>Currencies</td><td>14,646</td><td>8,936</td><td>6,353</td><td>29,935</td></tr><tr><td>Commodities</td><td>6,228</td><td>3,897</td><td>231</td><td>10,356</td></tr><tr><td>Equities</td><td>4,806</td><td>7,091</td><td>1,550</td><td>13,447</td></tr><tr><td>Counterparty netting within tenors</td><td>(3,660)</td><td>(5,751)</td><td>(5,270)</td><td>(14,681)</td></tr><tr><td>Subtotal</td><td>$27,915</td><td>$41,998</td><td>$90,107</td><td>$160,020</td></tr><tr><td>Cross-tensor counterparty netting</td><td></td><td></td><td></td><td>(20,462)</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>(89,132)</td></tr><tr><td>Total</td><td></td><td></td><td></td><td>$ 50,426</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rates</td><td>$ 5,323</td><td>$13,945</td><td>$35,592</td><td>$ 54,860</td></tr><tr><td>Credit</td><td>1,804</td><td>4,704</td><td>1,437</td><td>7,945</td></tr><tr><td>Currencies</td><td>12,378</td><td>9,940</td><td>10,048</td><td>32,366</td></tr><tr><td>Commodities</td><td>4,464</td><td>3,136</td><td>2,526</td><td>10,126</td></tr><tr><td>Equities</td><td>5,154</td><td>5,802</td><td>2,994</td><td>13,950</td></tr><tr><td>Counterparty netting within tenors</td><td>(3,660)</td><td>(5,751)</td><td>(5,270)</td><td>(14,681)</td></tr><tr><td>Subtotal</td><td>$25,463</td><td>$31,776</td><td>$47,327</td><td>$104,566</td></tr><tr><td>Cross-tensor counterparty netting</td><td></td><td></td><td></td><td>(20,462)</td></tr><tr><td>Cash collateral netting</td><td></td><td></td><td></td><td>(39,950)</td></tr><tr><td>Total</td><td></td><td></td><td></td><td>$ 44,154</td></tr></table>



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

In the table above:

• Tenor is based on expected duration for mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives.

• Counterparty netting within the same product type and tenor category is included within such product type and tenor category.

• Counterparty netting across product types within the same tenor category is included in counterparty netting within tenors. Where the counterparty netting is across tenor categories, the netting is reflected in cross-tenor counterparty netting.

## Credit Derivatives

The firm enters into a broad array of credit derivatives in locations around the world to facilitate client transactions and to manage the credit risk associated with market-making and investing and lending activities. Credit derivatives are actively managed based on the firm’s net risk position.

Credit derivatives are individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference entity.

The firm enters into the following types of credit derivatives:

• Credit Default Swaps. Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event the issuer (reference entity) of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer of protection. However, if a credit event occurs, the seller of protection is required to make a payment to the buyer of protection, which is calculated in accordance with the terms of the contract.

• Credit Options. In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.
• Credit Indices, Baskets and Tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a pro-rata portion of the transaction’s total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss is covered by the next most senior tranche in the capital structure.

• Total Return Swaps. A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives from the protection seller a floating rate of interest and protection against any reduction in fair value of the reference obligation, and in return the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation.

The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underliers. Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default.

As of December 2016, written and purchased credit derivatives had total gross notional amounts of $690.47 billion and $733.98 billion, respectively, for total net notional purchased protection of $43.51 billion. As of December 2015, written and purchased credit derivatives had total gross notional amounts of $923.48 billion and $968.68 billion, respectively, for total net notional purchased protection of $45.20 billion. Substantially all of the firm’s written and purchased credit derivatives are credit default swaps.



The table below presents certain information about credit derivatives.

<table><tr><td rowspan="2"></td><td colspan="5">Credit Spread on Underlier (basis points)</td></tr><tr><td>0 - 250</td><td>251 - 500</td><td>501 - 1,000</td><td>Greater than 1,000</td><td>Total</td></tr><tr><td colspan="6">As of December 2016</td></tr><tr><td colspan="6">Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor</td></tr><tr><td>Less than 1 year</td><td>$207,727</td><td>$ 5,819</td><td>$ 1,016</td><td>$ 8,629</td><td>$223,191</td></tr><tr><td>1 - 5 years</td><td>375,208</td><td>17,255</td><td>8,643</td><td>7,986</td><td>409,092</td></tr><tr><td>Greater than 5 years</td><td>52,977</td><td>3,928</td><td>1,045</td><td>233</td><td>58,183</td></tr><tr><td>Total</td><td>$635,912</td><td>$27,002</td><td>$10,704</td><td>$ 16,848</td><td>$690,466</td></tr><tr><td colspan="6">Maximum Payout/Notional Amount of Purchased Credit Derivatives</td></tr><tr><td>Offsetting</td><td>$558,305</td><td>$20,588</td><td>$10,133</td><td>$ 15,186</td><td>$604,212</td></tr><tr><td>Other</td><td>119,509</td><td>7,712</td><td>1,098</td><td>1,446</td><td>129,765</td></tr><tr><td colspan="6">Fair Value of Written Credit Derivatives</td></tr><tr><td>Asset</td><td>$ 13,919</td><td>$ 606</td><td>$ 187</td><td>$ 45</td><td>$ 14,757</td></tr><tr><td>Liability</td><td>2,436</td><td>902</td><td>809</td><td>5,686</td><td>9,833</td></tr><tr><td>Net asset/(liability)</td><td>$ 11,483</td><td>$ (296)</td><td>$ (622)</td><td>$ (5,641)</td><td>$ 4,924</td></tr><tr><td colspan="6">As of December 2015</td></tr><tr><td colspan="6">Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor</td></tr><tr><td>Less than 1 year</td><td>$240,468</td><td>$ 2,859</td><td>$ 2,881</td><td>$ 10,533</td><td>$256,741</td></tr><tr><td>1 - 5 years</td><td>514,986</td><td>42,399</td><td>16,327</td><td>26,271</td><td>599,983</td></tr><tr><td>Greater than 5 years</td><td>57,054</td><td>6,481</td><td>1,567</td><td>1,651</td><td>66,753</td></tr><tr><td>Total</td><td>$812,508</td><td>$51,739</td><td>$20,775</td><td>$ 38,455</td><td>$923,477</td></tr><tr><td colspan="6">Maximum Payout/Notional Amount of Purchased Credit Derivatives</td></tr><tr><td>Offsetting</td><td>$722,436</td><td>$46,313</td><td>$19,556</td><td>$ 33,266</td><td>$821,571</td></tr><tr><td>Other</td><td>132,757</td><td>6,383</td><td>3,372</td><td>4,598</td><td>147,110</td></tr><tr><td colspan="6">Fair Value of Written Credit Derivatives</td></tr><tr><td>Asset</td><td>$ 17,110</td><td>$ 924</td><td>$ 108</td><td>$ 190</td><td>$ 18,332</td></tr><tr><td>Liability</td><td>2,756</td><td>2,596</td><td>1,942</td><td>12,485</td><td>19,779</td></tr><tr><td>Net asset/(liability)</td><td>$ 14,354</td><td>$ (1,672)</td><td>$ (1,834)</td><td>$ (12,295)</td><td>$ (1,447)</td></tr></table>

In the table above:

• Fair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s credit exposure.

• Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives.

• The credit spread on the underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower.

• Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers and are included in offsetting.

• Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in offsetting.

## Impact of Credit Spreads on Derivatives

On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk through the unwind of derivative contracts and changes in credit mitigants.

The net gain, including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $85 million for 2016, $9 million for 2015 and $135 million for 2014.

## Bifurcated Embedded Derivatives

The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings. These derivatives, which are recorded at fair value, primarily consist of interest rate, equity and commodity products and are included in “Unsecured short-term borrowings” and “Unsecured long-term borrowings” with the related borrowings. See Note 8 for further information.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Fair value of assets</td><td>$ 676</td><td>$ 466</td></tr><tr><td>Fair value of liabilities</td><td>864</td><td>794</td></tr><tr><td>Net liability</td><td>$ 188</td><td>$ 328</td></tr><tr><td>Notional amount</td><td>$8,726</td><td>$7,869</td></tr></table>

Derivatives with Credit-Related Contingent Features
Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies.



The table below presents the aggregate fair value of net derivative liabilities under such agreements (excluding application of collateral posted to reduce these liabilities), the related aggregate fair value of the assets posted as collateral and the additional collateral or termination payments that could have been called at the reporting date by counterparties in the event of a one-notch and two-notch downgrade in the firm’s credit ratings.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Net derivative liabilities under bilateral agreements</td><td>$32,927</td><td>$29,836</td></tr><tr><td>Collateral posted</td><td>27,840</td><td>26,075</td></tr><tr><td>Additional collateral or termination payments:</td><td></td><td></td></tr><tr><td>One-notch downgrade</td><td>677</td><td>1,061</td></tr><tr><td>Two-notch downgrade</td><td>2,216</td><td>2,689</td></tr></table>

## Hedge Accounting

The firm applies hedge accounting for (i) certain interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long-term and short-term borrowings and certain fixed-rate certificates of deposit and (ii) certain foreign currency forward contracts and foreign currency-denominated debt used to manage foreign currency exposures on the firm’s net investment in certain non-U.S. operations.

To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and test the hedging relationship at least on a quarterly basis to ensure the hedging instrument continues to be highly effective over the life of the hedging relationship.

## Fair Value Hedges

The firm designates certain interest rate swaps as fair value hedges. These interest rate swaps hedge changes in fair value attributable to the designated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR) or Overnight Index Swap Rate (OIS)), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations.

The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%.
For qualifying fair value hedges, gains or losses on derivatives are included in “Interest expense.” The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is subsequently amortized into interest expense over its remaining life. Gains or losses resulting from hedge ineffectiveness are included in “Interest expense.” When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense.

The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges, the related hedged borrowings and deposits, and the hedge ineffectiveness on these derivatives, which primarily consists of amortization of prepaid credit spreads resulting from the passage of time.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Interest rate hedges</td><td>(1,480)</td><td>(1,613)</td><td>(1,936)</td></tr><tr><td>Hedged borrowings and deposits</td><td>834</td><td>898</td><td>(2,451)</td></tr><tr><td>Hedge ineffectiveness</td><td>(646)</td><td>(715)</td><td>(515)</td></tr></table>

## Net Investment Hedges

The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (i.e., based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates.

For qualifying net investment hedges, the gains or losses on the hedging instruments, to the extent effective, are included in “Currency translation” in the consolidated statements of comprehensive income.



The table below presents the gains/(losses) from net investment hedging.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Hedges:</td><td></td><td></td><td></td></tr><tr><td>Foreign currency forward contract</td><td>$135</td><td>$695</td><td>$576</td></tr><tr><td>Foreign currency-denominated debt</td><td>(85)</td><td>(9)</td><td>202</td></tr></table>

The gain/(loss) related to ineffectiveness was not material for 2016, 2015 or 2014. The gain reclassified to earnings from accumulated other comprehensive income was $167 million for 2016 and was not material for 2015 or 2014.

As of December 2016 and December 2015, the firm had designated $1.69 billion and $2.20 billion, respectively, of foreign currency-denominated debt, included in “Unsecured long-term borrowings” and “Unsecured short-term borrowings,” as hedges of net investments in non-U.S. subsidiaries.

## Note 8.

## Fair Value Option

Other Financial Assets and Financial Liabilities at Fair Value

In addition to all cash and derivative instruments included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” the firm accounts for certain of its other financial assets and financial liabilities at fair value primarily under the fair value option. The primary reasons for electing the fair value option are to:

• Reflect economic events in earnings on a timely basis;

• Mitigate volatility in earnings from using different measurement attributes (e.g., transfers of financial instruments owned accounted for as financings are recorded at fair value whereas the related secured financing would be recorded on an accrual basis absent electing the fair value option); and

• Address simplification and cost-benefit considerations (e.g., accounting for hybrid financial instruments at fair value in their entirety versus bifurcation of embedded derivatives and hedge accounting for debt hosts).
Hybrid financial instruments are instruments that contain bifurcable embedded derivatives and do not require settlement by physical delivery of non-financial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative from the associated debt, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedges. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option.

Other financial assets and financial liabilities accounted for at fair value under the fair value option include:

• Repurchase agreements and substantially all resale agreements;

• Securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution;

• Substantially all other secured financings, including transfers of assets accounted for as financings rather than sales;

• Certain unsecured short-term borrowings, consisting of all commercial paper and certain hybrid financial instruments;

• Certain unsecured long-term borrowings, including certain prepaid commodity transactions and certain hybrid financial instruments;

• Certain receivables from customers and counterparties, including transfers of assets accounted for as secured loans rather than purchases and certain margin loans;

• Certain time deposits issued by the firm’s bank subsidiaries (deposits with no stated maturity are not eligible for a fair value option election), including structured certificates of deposit, which are hybrid financial instruments; and

• Certain subordinated liabilities of consolidated VIEs.



## Fair Value of Other Financial Assets and Financial Liabilities by Level

The table below presents, by level within the fair value hierarchy, other financial assets and financial liabilities accounted for at fair value primarily under the fair value option.

<table><tr><td>$ in millions</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Securities purchased under agreements to resell</td><td>$ —</td><td>$ 116,077</td><td>$ —</td><td>$ 116,077</td></tr><tr><td>Securities borrowed</td><td>—</td><td>82,398</td><td>—</td><td>82,398</td></tr><tr><td>Receivables from customers and counterparties</td><td>—</td><td>3,211</td><td>55</td><td>3,266</td></tr><tr><td>Total</td><td>$ —</td><td>$ 201,686</td><td>$ 55</td><td>$ 201,741</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Deposits</td><td>$ —</td><td>$ (10,609)</td><td>$ (3,173)</td><td>$ (13,782)</td></tr><tr><td>Securities sold under agreements to repurchase</td><td>—</td><td>(71,750)</td><td>(66)</td><td>(71,816)</td></tr><tr><td>Securities loaned</td><td>—</td><td>(2,647)</td><td>—</td><td>(2,647)</td></tr><tr><td>Other secured financings</td><td>—</td><td>(20,516)</td><td>(557)</td><td>(21,073)</td></tr><tr><td>Unsecured borrowings:</td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term</td><td>—</td><td>(10,896)</td><td>(3,896)</td><td>(14,792)</td></tr><tr><td>Long-term</td><td>—</td><td>(22,185)</td><td>(7,225)</td><td>(29,410)</td></tr><tr><td>Other liabilities and accrued expenses</td><td>—</td><td>(559)</td><td>(62)</td><td>(621)</td></tr><tr><td>Total</td><td>$ —</td><td>$ (139,162)</td><td>$ (14,979)</td><td>$ (154,141)</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Securities purchased under agreements to resell</td><td>$ —</td><td>$ 132,853</td><td>$ —</td><td>$ 132,853</td></tr><tr><td>Securities borrowed</td><td>—</td><td>75,340</td><td>—</td><td>75,340</td></tr><tr><td>Receivables from customers and counterparties</td><td>—</td><td>4,947</td><td>45</td><td>4,992</td></tr><tr><td>Total</td><td>$ —</td><td>$ 213,140</td><td>$ 45</td><td>$ 213,185</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Deposits</td><td>$ —</td><td>$ (12,465)</td><td>$ (2,215)</td><td>$ (14,680)</td></tr><tr><td>Securities sold under agreements to repurchase</td><td>—</td><td>(85,998)</td><td>(71)</td><td>(86,069)</td></tr><tr><td>Securities loaned</td><td>—</td><td>(466)</td><td>—</td><td>(466)</td></tr><tr><td>Other secured financings</td><td>—</td><td>(22,658)</td><td>(549)</td><td>(23,207)</td></tr><tr><td>Unsecured borrowings:</td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term</td><td>—</td><td>(13,610)</td><td>(4,133)</td><td>(17,743)</td></tr><tr><td>Long-term</td><td>—</td><td>(18,049)</td><td>(4,224)</td><td>(22,273)</td></tr><tr><td>Other liabilities and accrued expenses</td><td>—</td><td>(1,201)</td><td>(52)</td><td>(1,253)</td></tr><tr><td>Total</td><td>$ —</td><td>$ (154,447)</td><td>$ (11,244)</td><td>$ (165,691)</td></tr></table>

In the table above, other financial assets are shown as positive amounts and other financial liabilities are shown as negative amounts.

## Valuation Techniques and Significant Inputs

Other financial assets and financial liabilities at fair value are generally valued based on discounted cash flow techniques, which incorporate inputs with reasonable levels of price transparency, and are generally classified as level 2 because the inputs are observable. Valuation adjustments may be made for liquidity and for counterparty and the firm’s credit quality.

See below for information about the significant inputs used to value other financial assets and financial liabilities at fair value, including the ranges of significant unobservable inputs used to value the level 3 instruments within these categories. These ranges represent the significant unobservable inputs that were used in the valuation of each type of other financial assets and financial liabilities at fair value. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one instrument. For example, the highest yield presented below for other secured financings is appropriate for valuing a specific agreement in that category but may not be appropriate for valuing any other agreements in that category. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 other financial assets and financial liabilities.

Resale and Repurchase Agreements and Securities Borrowed and Loaned. The significant inputs to the valuation of resale and repurchase agreements and securities borrowed and loaned are funding spreads, the amount and timing of expected future cash flows and interest rates. As of both December 2016 and December 2015, the firm had no level 3 resale agreements, securities borrowed or securities loaned. As of both December 2016 and December 2015, the firm’s level 3 repurchase agreements were not material. See Note 10 for further information about collateralized agreements and financings.



Other Secured Financings. The significant inputs to the valuation of other secured financings at fair value are the amount and timing of expected future cash flows, interest rates, funding spreads, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market prices, market yields and recovery assumptions) and the frequency of additional collateral calls. The ranges of significant unobservable inputs used to value level 3 other secured financings are as follows:

As of December 2016:

• Yield: 0.4% to 16.6% (weighted average: 3.5%)

• Duration: 0.1 to 5.7 years (weighted average: 2.3 years)

As of December 2015:

• Yield: 0.6% to 10.0% (weighted average: 2.7%)

• Duration: 1.6 to 8.8 years (weighted average: 2.8 years)

Generally, increases in funding spreads, yield or duration, in isolation, would result in a lower fair value measurement. Due to the distinctive nature of each of the firm’s level 3 other secured financings, the interrelationship of inputs is not necessarily uniform across such financings. See Note 10 for further information about collateralized agreements and financings.

Unsecured Short-term and Long-term Borrowings. The significant inputs to the valuation of unsecured short-term and long-term borrowings at fair value are the amount and timing of expected future cash flows, interest rates, the credit spreads of the firm, as well as commodity prices in the case of prepaid commodity transactions. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments. See Note 7 for further information about derivatives. See Notes 15 and 16 for further information about unsecured short-term and long-term borrowings, respectively.

Certain of the firm’s unsecured short-term and long-term borrowings are included in level 3, substantially all of which are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these borrowings, these inputs are incorporated in the firm’s derivative disclosures related to unobservable inputs in Note 7.
Receivables from Customers and Counterparties. Receivables from customers and counterparties at fair value are primarily comprised of transfers of assets accounted for as secured loans rather than purchases. The significant inputs to the valuation of such receivables are commodity prices, interest rates, the amount and timing of expected future cash flows and funding spreads. As of both December 2016 and December 2015, the firm’s level 3 receivables from customers and counterparties were not material.

Deposits. The significant inputs to the valuation of time deposits are interest rates and the amount and timing of future cash flows. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments. See Note 7 for further information about derivatives. See Note 14 for further information about deposits.

The firm’s deposits that are included in level 3 are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these deposits, these inputs are incorporated in the firm’s derivative disclosures related to unobservable inputs in Note 7.

Transfers Between Levels of the Fair Value Hierarchy
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. There were no transfers of other financial assets and financial liabilities between level 1 and level 2 during 2016 or 2015. See “Level 3 Rollforward” below for information about transfers between level 2 and level 3.



## Level 3 Rollforward

The table below presents a summary of the changes in fair value for other level 3 financial assets and financial liabilities accounted for at fair value. In the table below:

• Changes in fair value are presented for all other financial assets and liabilities that are categorized as level 3 as of the end of the period.

• Net unrealized gains/(losses) relate to instruments that were still held at period-end.

• If a financial asset or financial liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. For level 3 other financial assets, increases are shown as positive amounts, while decreases are shown as negative amounts. For level 3 other financial liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.

• Level 3 other financial assets and liabilities are frequently economically hedged with cash instruments and derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1, 2 or 3 cash instruments or derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Year Ended December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Total other financial assets</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ 45</td><td>$ 56</td></tr><tr><td>Net realized gains/(losses)</td><td>6</td><td>2</td></tr><tr><td>Net unrealized gains/(losses)</td><td>1</td><td>2</td></tr><tr><td>Purchases</td><td>10</td><td>8</td></tr><tr><td>Settlements</td><td>(7)</td><td>(22)</td></tr><tr><td>Transfers out of level 3</td><td>—</td><td>(1)</td></tr><tr><td>Ending balance</td><td>$ 55</td><td>$ 45</td></tr></table>

<table><tr><td>Total other financial liabilities</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (11,244)</td><td>$ (9,292)</td></tr><tr><td>Net realized gains/(losses)</td><td>(99)</td><td>75</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(7)</td><td>783</td></tr><tr><td>Purchases</td><td>(8)</td><td>(1)</td></tr><tr><td>Issuances</td><td>(10,236)</td><td>(8,024)</td></tr><tr><td>Settlements</td><td>5,983</td><td>3,604</td></tr><tr><td>Transfers into level 3</td><td>(759)</td><td>(1,213)</td></tr><tr><td>Transfers out of level 3</td><td>1,391</td><td>2,824</td></tr><tr><td>Ending balance</td><td>$ (14,979)</td><td>$ (11,244)</td></tr></table>

The table below disaggregates, by the consolidated statements of financial condition line items, the information for other financial liabilities included in the summary table above.

<table><tr><td rowspan="2">Year Ended December</td><td colspan="2">2016</td></tr><tr><td>2015</td><td></td></tr><tr><td>Deposits</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$ (2,215)</td><td>$ (1,065)</td></tr><tr><td>Net realized gains/(losses)</td><td>(22)</td><td>(9)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(89)</td><td>56</td></tr><tr><td>Issuances</td><td>(993)</td><td>(1,252)</td></tr><tr><td>Settlements</td><td>146</td><td>55</td></tr><tr><td>Ending balance</td><td>$ (3,173)</td><td>$ (2,215)</td></tr></table>

<table><tr><td colspan="3">Securities sold under agreements to repurchase</td></tr><tr><td>Beginning balance</td><td>$ (71)</td><td>$ (124)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(6)</td><td>(2)</td></tr><tr><td>Settlements</td><td>11</td><td>55</td></tr><tr><td>Ending balance</td><td>$ (66)</td><td>$ (71)</td></tr></table>

<table><tr><td colspan="3">Other secured financings</td></tr><tr><td>Beginning balance</td><td>$ (549)</td><td>$ (1,091)</td></tr><tr><td>Net realized gains/(losses)</td><td>(8)</td><td>(10)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(3)</td><td>34</td></tr><tr><td>Purchases</td><td>(5)</td><td>(1)</td></tr><tr><td>Issuances</td><td>(150)</td><td>(504)</td></tr><tr><td>Settlements</td><td>273</td><td>363</td></tr><tr><td>Transfers into level 3</td><td>(117)</td><td>(85)</td></tr><tr><td>Transfers out of level 3</td><td>2</td><td>745</td></tr><tr><td>Ending balance</td><td>$ (557)</td><td>$ (549)</td></tr></table>

<table><tr><td colspan="3">Unsecured short-term borrowings</td></tr><tr><td>Beginning balance</td><td>$ (4,133)</td><td>$ (3,712)</td></tr><tr><td>Net realized gains/(losses)</td><td>(57)</td><td>96</td></tr><tr><td>Net unrealized gains/(losses)</td><td>(115)</td><td>355</td></tr><tr><td>Issuances</td><td>(3,837)</td><td>(3,377)</td></tr><tr><td>Settlements</td><td>3,492</td><td>2,275</td></tr><tr><td>Transfers into level 3</td><td>(370)</td><td>(641)</td></tr><tr><td>Transfers out of level 3</td><td>1,124</td><td>871</td></tr><tr><td>Ending balance</td><td>$ (3,896)</td><td>$ (4,133)</td></tr></table>

<table><tr><td colspan="3">Unsecured long-term borrowings</td></tr><tr><td>Beginning balance</td><td>$ (4,224)</td><td>$ (2,585)</td></tr><tr><td>Net realized gains/(losses)</td><td>(27)</td><td>(7)</td></tr><tr><td>Net unrealized gains/(losses)</td><td>190</td><td>352</td></tr><tr><td>Purchases</td><td>(3)</td><td>—</td></tr><tr><td>Issuances</td><td>(5,201)</td><td>(2,888)</td></tr><tr><td>Settlements</td><td>2,047</td><td>846</td></tr><tr><td>Transfers into level 3</td><td>(272)</td><td>(464)</td></tr><tr><td>Transfers out of level 3</td><td>265</td><td>522</td></tr><tr><td>Ending balance</td><td>$ (7,225)</td><td>$ (4,224)</td></tr></table>

<table><tr><td colspan="3">Other liabilities and accrued expenses</td></tr><tr><td>Beginning balance</td><td>$ (52)</td><td>$ (715)</td></tr><tr><td>Net realized gains/(losses)</td><td>15</td><td>5</td></tr><tr><td>Net unrealized gains/(losses)</td><td>16</td><td>(12)</td></tr><tr><td>Issuances</td><td>(55)</td><td>(3)</td></tr><tr><td>Settlements</td><td>14</td><td>10</td></tr><tr><td>Transfers into level 3</td><td>—</td><td>(23)</td></tr><tr><td>Transfers out of level 3</td><td>—</td><td>686</td></tr><tr><td>Ending balance</td><td>$ (62)</td><td>$ (52)</td></tr></table>



## Level 3 Rollforward Commentary

Year Ended December 2016. The net realized and unrealized losses on level 3 other financial liabilities of $106 million (reflecting $99 million of net realized losses and $7 million of net unrealized losses) for 2016 include losses of approximately $21 million and $10 million reported in “Market making” and “Interest expense,” respectively, in the consolidated statements of earnings and losses of $75 million reported in “Debt valuation adjustment” in the consolidated statements of comprehensive income.

The net unrealized loss on level 3 other financial liabilities of $7 million for 2016 primarily reflected losses on certain hybrid financial instruments included in unsecured short-term borrowings, principally due to an increase in global equity prices, and losses on certain hybrid financial instruments included in deposits, principally due to the impact of an increase in the market value of the underlying assets, partially offset by gains on certain hybrid financial instruments included in unsecured long-term borrowings, principally due to changes in foreign exchange rates.

Transfers into level 3 of other financial liabilities during 2016 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings from level 2, principally due to reduced transparency of certain inputs, including correlation and volatility inputs used to value these instruments.

Transfers out of level 3 of other financial liabilities during 2016 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings to level 2, principally due to increased transparency of correlation and volatility inputs used to value these instruments.
Year Ended December 2015. The net realized and unrealized gains on level 3 other financial liabilities of $858 million (reflecting $75 million of net realized gains and $783 million of net unrealized gains) for 2015 include gains/(losses) of approximately $841 million, $28 million and $11 million reported in “Market making,” “Other principal transactions” and “Interest expense,” respectively.

The net unrealized gain on level 3 other financial liabilities of $783 million for 2015 primarily reflected gains on certain hybrid financial instruments included in unsecured short-term and long-term borrowings, principally due to a decrease in global equity prices, the impact of wider credit spreads, and changes in interest and foreign exchange rates.

Transfers into level 3 of other financial liabilities during 2015 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings from level 2, principally due to reduced transparency of certain correlation and volatility inputs used to value these instruments, and transfers from level 3 unsecured long-term borrowings to level 3 unsecured short-term borrowings, as these borrowings neared maturity.

Transfers out of level 3 of other financial liabilities during 2015 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings and certain other secured financings to level 2, principally due to increased transparency of certain correlation, volatility and funding spread inputs used to value these instruments, transfers to level 3 unsecured short-term borrowings from level 3 unsecured long-term borrowings, as these borrowings neared maturity, and transfers of certain subordinated liabilities included in other liabilities and accrued expenses to level 2, principally due to increased price transparency as a result of market transactions in the related underlying investments.



## Gains and Losses on Financial Assets and Financial Liabilities Accounted for at Fair Value Under the Fair Value Option

The table below presents the gains and losses recognized in earnings as a result of the firm electing to apply the fair value option to certain financial assets and financial liabilities. These gains and losses are included in “Market making” and “Other principal transactions.” The table below also includes gains and losses on the embedded derivative component of hybrid financial instruments included in unsecured short-term borrowings, unsecured long-term borrowings and deposits. These gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account for the entire hybrid financial instrument at fair value.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Unsecured short-term borrowings</td><td>$1,028</td><td>$ 346</td><td>$(1,180)</td></tr><tr><td>Unsecured long-term borrowings</td><td>584</td><td>771</td><td>(592)</td></tr><tr><td>Other liabilities and accrued expenses</td><td>(55)</td><td>(684)</td><td>(441)</td></tr><tr><td>Other</td><td>(630)</td><td>(217)</td><td>(366)</td></tr><tr><td>Total</td><td>$1,129</td><td>$ 216</td><td>$ (2,579)</td></tr></table>

In the table above:

• Gains/(losses) exclude contractual interest, which is included in “Interest income” and “Interest expense,” for all instruments other than hybrid financial instruments. See Note 23 for further information about interest income and interest expense.

• Unsecured short-term borrowings includes gains/(losses) on the embedded derivative component of hybrid financial instruments of $(1.05) billion for 2016, $339 million for 2015 and $(1.22) billion for 2014, respectively.

• Unsecured long-term borrowings includes gains/(losses) on the embedded derivative component of hybrid financial instruments of $737 million for 2016, $653 million for 2015 and $(697) million for 2014, respectively.

• Other liabilities and accrued expenses includes gains/(losses) on certain subordinated liabilities of consolidated VIEs.

• Other primarily consists of gains/(losses) on receivables from customers and counterparties, deposits and other secured financings.
Excluding the gains and losses on the instruments accounted for under the fair value option described above, “Market making” and “Other principal transactions” primarily represent gains and losses on “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value.”

## Loans and Lending Commitments

The table below presents the difference between the aggregate fair value and the aggregate contractual principal amount for loans and long-term receivables for which the fair value option was elected. In the table below, the aggregate contractual principal amount of loans on non-accrual status and/or more than 90 days past due (which excludes loans carried at zero fair value and considered uncollectible) exceeds the related fair value primarily because the firm regularly purchases loans, such as distressed loans, at values significantly below the contractual principal amounts.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td colspan="3">Performing loans and long-term receivables</td></tr><tr><td colspan="3">Aggregate contractual principal in excess of fair value $ 478</td></tr><tr><td colspan="3">Loans on nonaccrual status and/or more than 90 days past due</td></tr><tr><td colspan="3">Aggregate contractual principal in excess of fair value</td></tr><tr><td colspan="3">8,101</td></tr><tr><td colspan="3">9,600</td></tr><tr><td colspan="3">Aggregate fair value of loans on nonaccrual status</td></tr><tr><td colspan="3">2,138</td></tr><tr><td colspan="3">2,391</td></tr></table>

As of December 2016 and December 2015, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $80 million and $211 million, respectively, and the related total contractual amount of these lending commitments was $7.19 billion and $14.01 billion, respectively. See Note 18 for further information about lending commitments.



## Long-Term Debt Instruments

The aggregate contractual principal amount of long-term other secured financings for which the fair value option was elected exceeded the related fair value by $361 million and $362 million as of December 2016 and December 2015, respectively. The aggregate contractual principal amount of unsecured long-term borrowings for which the fair value option was elected exceeded the related fair value by $1.56 billion and $1.12 billion as of December 2016 and December 2015, respectively. The amounts above include both principal- and non-principal-protected long-term borrowings.

## Impact of Credit Spreads on Loans and Lending Commitments

The estimated net gain attributable to changes in instrument-specific credit spreads on loans and lending commitments for which the fair value option was elected was $281 million for 2016, $751 million for 2015 and $1.83 billion for 2014, respectively. The firm generally calculates the fair value of loans and lending commitments for which the fair value option is elected by discounting future cash flows at a rate which incorporates the instrument-specific credit spreads. For floating-rate loans and lending commitments, substantially all changes in fair value are attributable to changes in instrument-specific credit spreads, whereas for fixed-rate loans and lending commitments, changes in fair value are also attributable to changes in interest rates.

## Debt Valuation Adjustment

The firm calculates the fair value of financial liabilities for which the fair value option is elected by discounting future cash flows at a rate which incorporates the firm’s credit spreads. The net DVA on such financial liabilities was a loss of $844 million ($544 million, net of tax) for 2016 and was included in “Debt valuation adjustment” in the consolidated statements of comprehensive income. The gains/(losses) reclassified to earnings from accumulated other comprehensive loss upon extinguishment of such financial liabilities were not material for 2016.

## Note 9.

## Loans Receivable

Loans receivable is comprised of loans held for investment that are accounted for at amortized cost net of allowance for loan losses. Interest on loans receivable is recognized over the life of the loan and is recorded on an accrual basis.

The table below presents details about loans receivable.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Corporate loans</td><td>$24,837</td><td>$20,740</td></tr><tr><td>Loans to private wealth management clients</td><td>13,828</td><td>13,961</td></tr><tr><td>Loans backed by commercial real estate</td><td>4,761</td><td>5,271</td></tr><tr><td>Loans backed by residential real estate</td><td>3,865</td><td>2,316</td></tr><tr><td>Other loans</td><td>2,890</td><td>3,533</td></tr><tr><td>Total loans receivable, gross</td><td>50,181</td><td>45,821</td></tr><tr><td>Allowance for loan losses</td><td>(509)</td><td>(414)</td></tr><tr><td>Total loans receivable</td><td>$49,672</td><td>$45,407</td></tr></table>

As of December 2016 and December 2015, the fair value of loans receivable was $49.80 billion and $45.19 billion, respectively. As of December 2016, had these loans been carried at fair value and included in the fair value hierarchy, $28.40 billion and $21.40 billion would have been classified in level 2 and level 3, respectively. As of December 2015, had these loans been carried at fair value and included in the fair value hierarchy, $23.91 billion and $21.28 billion would have been classified in level 2 and level 3, respectively.

The firm also extends lending commitments that are held for investment and accounted for on an accrual basis. As of December 2016 and December 2015, such lending commitments were $98.05 billion and $93.92 billion, respectively. Substantially all of these commitments were extended to corporate borrowers and were primarily related to the firm’s relationship lending activities. The carrying value and the estimated fair value of such lending commitments were liabilities of $327 million and $2.55 billion, respectively, as of December 2016, and $291 million and $3.32 billion, respectively, as of December 2015. As of December 2016, had these lending commitments been carried at fair value and included in the fair value hierarchy, $1.10 billion and $1.45 billion would have been classified in level 2 and level 3, respectively. As of December 2015, had these lending commitments been carried at fair value and included in the fair value hierarchy, $1.35 billion and $1.97 billion would have been classified in level 2 and level 3, respectively.



The following is a description of the captions in the table above:

• Corporate Loans. Corporate loans include term loans, revolving lines of credit, letter of credit facilities and bridge loans, and are principally used for operating liquidity and general corporate purposes, or in connection with acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors. Loans receivable related to the firm’s relationship lending activities are reported within corporate loans.

• Loans to Private Wealth Management Clients. Loans to the firm’s private wealth management clients include loans used by clients to finance private asset purchases, employ leverage for strategic investments in real or financial assets, bridge cash flow timing gaps or provide liquidity for other needs. Such loans are primarily secured by securities or other assets.

• Loans Backed by Commercial Real Estate. Loans backed by commercial real estate include loans extended by the firm that are directly or indirectly secured by hotels, retail stores, multifamily housing complexes and commercial and industrial properties. Loans backed by commercial real estate also include loans purchased by the firm.

• Loans Backed by Residential Real Estate. Loans backed by residential real estate include loans extended by the firm to clients who warehouse assets that are directly or indirectly secured by residential real estate. Loans backed by residential real estate also include loans purchased by the firm.

• Other Loans. Other loans primarily include loans extended to clients who warehouse assets that are directly or indirectly secured by consumer loans, including auto loans, and private student loans and other assets. Other loans also includes unsecured loans to individuals made through the firm’s online platform.
Loans receivable includes Purchased Credit Impaired (PCI) loans. PCI loans represent acquired loans or pools of loans with evidence of credit deterioration subsequent to their origination and where it is probable, at acquisition, that the firm will not be able to collect all contractually required payments. Loans acquired within the same reporting period, which have at least two common risk characteristics, one of which relates to their credit risk, are eligible to be pooled together and considered a single unit of account. PCI loans are initially recorded at acquisition price and the difference between the acquisition price and the expected cash flows (accretable yield) is recognized as interest income over the life of such loans or pools of loans on an effective yield method. Expected cash flows on PCI loans are determined using various inputs and assumptions, including default rates, loss severities, recoveries, amount and timing of prepayments and other macroeconomic indicators.

As of December 2016, the gross carrying value of PCI loans was $3.97 billion (including $1.44 billion, $2.51 billion and $18 million related to loans backed by commercial real estate, loans backed by residential real estate and other consumer loans, respectively). The outstanding principal balance and accretable yield related to such loans was $8.52 billion and $526 million, respectively, as of December 2016. At the time of acquisition, the fair value, related expected cash flows, and the contractually required cash flows of PCI loans acquired during 2016 were $2.51 billion, $2.82 billion and $6.39 billion, respectively. As of December 2015, the gross carrying value of PCI loans was $2.12 billion (including $1.16 billion, $941 million and $2.3 million related to loans backed by commercial real estate, loans backed by residential real estate and other consumer loans, respectively). The outstanding principal balance and accretable yield related to such loans was $5.54 billion and $234 million, respectively, as of December 2015. At the time of acquisition, the fair value, related expected cash flows, and the contractually required cash flows of PCI loans acquired during 2015 were $2.27 billion, $2.50 billion and $6.47 billion, respectively.



## Credit Quality

The firm’s risk assessment process includes evaluating the credit quality of its loans receivable. For loans receivable (excluding PCI loans), the firm performs credit reviews which include initial and ongoing analyses of its borrowers. A credit review is an independent analysis of the capacity and willingness of a borrower 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 borrower’s industry, and the economic environment. The firm also assigns a regulatory risk rating to such loans based on the definitions provided by the U.S. federal bank regulatory agencies.

The table below presents gross loans receivable (excluding PCI loans of $3.97 billion and $2.12 billion as of December 2016 and December 2015, respectively, which are not assigned a credit rating equivalent) and related lending commitments by the firm’s internally determined public rating agency equivalent and by regulatory risk rating. Non-criticized/pass loans and lending commitments represent loans and lending commitments that are performing and/or do not demonstrate adverse characteristics that are likely to result in a credit loss.

<table><tr><td>$ in millions</td><td>Loans</td><td>Lending Commitments</td><td>Total</td></tr><tr><td>Credit Rating Equivalent</td><td></td><td></td><td></td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Investment-grade</td><td>$18,434</td><td>$72,323</td><td>$ 90,757</td></tr><tr><td>Non-investment-grade</td><td>27,777</td><td>25,722</td><td>53,499</td></tr><tr><td>Total</td><td>$46,211</td><td>$98,045</td><td>$144,256</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Investment-grade</td><td>$19,459</td><td>$64,898</td><td>$ 84,357</td></tr><tr><td>Non-investment-grade</td><td>24,241</td><td>29,021</td><td>53,262</td></tr><tr><td>Total</td><td>$43,700</td><td>$93,919</td><td>$137,619</td></tr><tr><td>Regulatory Risk Rating</td><td></td><td></td><td></td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Non-criticized/pass</td><td>$43,146</td><td>$94,966</td><td>$138,112</td></tr><tr><td>Criticized</td><td>3,065</td><td>3,079</td><td>6,144</td></tr><tr><td>Total</td><td>$46,211</td><td>$98,045</td><td>$144,256</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Non-criticized/pass</td><td>$40,967</td><td>$92,021</td><td>$132,988</td></tr><tr><td>Criticized</td><td>2,733</td><td>1,898</td><td>4,631</td></tr><tr><td>Total</td><td>$43,700</td><td>$93,919</td><td>$137,619</td></tr></table>

The firm enters into economic hedges to mitigate credit risk on certain loans receivable and commercial lending commitments (both of which are held for investment) related to the firm’s relationship lending activities. Such hedges are accounted for at fair value. See Note 18 for further information about commercial lending commitments and associated hedges.

Loans receivable (excluding PCI loans) are determined to be impaired when it is probable that the firm will not be able to collect all principal and interest due under the contractual terms of the loan. At that time, loans are generally placed on non-accrual status and all accrued but uncollected interest is reversed against interest income, and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible. Otherwise, all cash received is used to reduce the outstanding loan balance. In certain circumstances, the firm may also modify the original terms of a loan agreement by granting a concession to a borrower experiencing financial difficulty. Such modifications are considered troubled debt restructurings and typically include interest rate reductions, payment extensions, and modification of loan covenants. Loans modified in a troubled debt restructuring are considered impaired and are subject to specific loan-level reserves.

As of December 2016 and December 2015, the gross carrying value of impaired loans receivable (excluding PCI loans) on non-accrual status were $404 million and $223 million, respectively. As of December 2016, such loans included $142 million of corporate loans that were modified in a troubled debt restructuring, and the firm had $144 million in lending commitments related to these loans. There were no such loans as of December 2015.

For PCI loans, the firm’s risk assessment process includes reviewing certain key metrics, such as delinquency status, collateral values, credit scores and other risk factors. When it is determined that the firm cannot reasonably estimate expected cash flows on the PCI loans or pools of loans, such loans are placed on non-accrual status.



## Allowance for Losses on Loans and Lending Commitments

The firm’s allowance for loan losses is comprised of specific loan-level reserves, portfolio level reserves, and reserves on PCI loans as described below:

• Specific loan-level reserves are determined on loans (excluding PCI loans) that exhibit credit quality weakness and are therefore individually evaluated for impairment.

• Portfolio level reserves are determined on loans (excluding PCI loans) not deemed impaired by aggregating groups of loans with similar risk characteristics and estimating the probable loss inherent in the portfolio.

• Reserves on PCI loans are recorded when it is determined that the expected cash flows, which are reassessed on a quarterly basis, will be lower than those used to establish the current effective yield for such loans or pools of loans. If the expected cash flows are determined to be significantly higher than those used to establish the current effective yield, such increases are initially recognized as a reduction to any previously recorded allowances for loan losses and any remaining increases are recognized as interest income prospectively over the life of the loan or pools of loans as an increase to the effective yield.

The allowance for loan losses is determined using various inputs, including industry default and loss data, current macroeconomic indicators, borrower's capacity to meet its financial obligations, borrower's country of risk, loan seniority and collateral type. Management's estimate of loan losses entails judgment about loan collectability at the reporting dates, and there are uncertainties inherent in those judgments. While management uses the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used. Loans are charged off against the allowance for loan losses when deemed to be uncollectible. As of December 2016 and December 2015, substantially all of the firm's loans receivable were evaluated for impairment at the portfolio level.
The firm also records an allowance for losses on lending commitments that are held for investment and accounted for on an accrual basis. Such allowance is determined using the same methodology as the allowance for loan losses, while also taking into consideration the probability of drawdowns or funding, and is included in “Other liabilities and accrued expenses.” As of December 2016 and December 2015, substantially all of such lending commitments were evaluated for impairment at the portfolio level.

The table below presents changes in the allowance for loan losses and the allowance for losses on lending commitments.

<table><tr><td></td><td colspan="2">Year Ended December</td></tr><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td>Allowance for loan losses</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$414</td><td>$228</td></tr><tr><td>Charge-offs</td><td>(8)</td><td>(1)</td></tr><tr><td>Provision</td><td>138</td><td>187</td></tr><tr><td>Other</td><td>(35)</td><td>—</td></tr><tr><td>Ending balance</td><td>$509</td><td>$414</td></tr><tr><td>Allowance for losses on lending commitments</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$188</td><td>$ 86</td></tr><tr><td>Provision</td><td>44</td><td>102</td></tr><tr><td>Other</td><td>(20)</td><td>—</td></tr><tr><td>Ending balance</td><td>$212</td><td>$188</td></tr></table>

In the table above:

• The provision for losses on loans and lending commitments is included in “Other principal transactions.” Substantially all of this provision was related to corporate loans and corporate lending commitments.

• Other represents the reduction to the allowance related to loans and lending commitments transferred to held for sale.

• As of December 2016 and December 2015, substantially all of the allowance for loan losses and allowance for losses on lending commitments were related to corporate loans and corporate lending commitments and were primarily determined at the portfolio level.

• The firm’s allowance for losses on PCI loans as of December 2016 was not material. There was no allowance for losses on PCI loans as of December 2015.



## Note 10.

## Collateralized Agreements and Financings

Collateralized agreements are securities purchased under agreements to resell (resale agreements) and securities borrowed. Collateralized financings are securities sold under agreements to repurchase (repurchase agreements), securities loaned and other secured financings. The firm enters into these transactions in order to, among other things, facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities.

Collateralized agreements and financings are presented on a net-by-counterparty basis when a legal right of setoff exists. Interest on collateralized agreements and collateralized financings is recognized over the life of the transaction and included in “Interest income” and “Interest expense,” respectively. See Note 23 for further information about interest income and interest expense.

The table below presents the carrying value of resale and repurchase agreements and securities borrowed and loaned transactions.

<table><tr><td rowspan="2">\( in \text{millions}\)</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Securities purchased under agreements to resell</td><td>116,925</td><td>134,308</td></tr><tr><td>Securities borrowed</td><td>184,600</td><td>177,638</td></tr><tr><td>Securities sold under agreements to repurchase</td><td>71,816</td><td>86,069</td></tr><tr><td>Securities loaned</td><td>7,524</td><td>3,614</td></tr></table>

## In the table above:

• Substantially all resale agreements and all repurchase agreements are carried at fair value under the fair value option. See Note 8 for further information about the valuation techniques and significant inputs used to determine fair value.

• As of December 2016 and December 2015, $82.40 billion and $75.34 billion of securities borrowed, and $2.65 billion and $466 million of securities loaned were at fair value, respectively.

## Resale and Repurchase Agreements

A resale agreement is a transaction in which the firm purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller at a stated price plus accrued interest at a future date.

A repurchase agreement is a transaction in which the firm sells financial instruments to a buyer, typically in exchange for cash, and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date.

Even though repurchase and resale agreements (including “repos- and reverses-to-maturity”) involve the legal transfer of ownership of financial instruments, they are accounted for as financing arrangements because they require the financial instruments to be repurchased or resold before or at the maturity of the agreement. The financial instruments purchased or sold in resale and repurchase agreements typically include U.S. government and federal agency, and investment-grade sovereign obligations.

The firm receives financial instruments purchased under resale agreements and makes delivery of financial instruments sold under repurchase agreements. To mitigate credit exposure, the firm monitors the market value of these financial instruments on a daily basis, and delivers or obtains additional collateral due to changes in the market value of the financial instruments, as appropriate. For resale agreements, the firm typically requires collateral with a fair value approximately equal to the carrying value of the relevant assets in the consolidated statements of financial condition.



## Securities Borrowed and Loaned Transactions

In a securities borrowed transaction, the firm borrows securities from a counterparty in exchange for cash or securities. When the firm returns the securities, the counterparty returns the cash or securities. Interest is generally paid periodically over the life of the transaction.

In a securities loaned transaction, the firm lends securities to a counterparty in exchange for cash or securities. When the counterparty returns the securities, the firm returns the cash or securities posted as collateral. Interest is generally paid periodically over the life of the transaction.

The firm receives securities borrowed and makes delivery of securities loaned. To mitigate credit exposure, the firm monitors the market value of these securities on a daily basis, and delivers or obtains additional collateral due to changes in the market value of the securities, as appropriate. For securities borrowed transactions, the firm typically requires collateral with a fair value approximately equal to the carrying value of the securities borrowed transaction.

Securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution are recorded at fair value under the fair value option. See Note 8 for further information about securities borrowed and loaned accounted for at fair value.

Securities borrowed and loaned within Securities Services are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminated on demand, they exhibit little, if any, sensitivity to changes in interest rates. Therefore, the carrying value of such arrangements approximates fair value. While these arrangements are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6 through 8. Had these arrangements been included in the firm's fair value hierarchy, they would have been classified in level 2 as of December 2016 and December 2015.

## Offsetting Arrangements

The table below presents the gross and net resale and repurchase agreements and securities borrowed and loaned transactions, and the related amount of counterparty netting included in the consolidated statements of financial condition. The table below also presents the amounts not offset in the consolidated statements of financial condition, including counterparty netting that does not meet the criteria for netting under U.S. GAAP and the fair value of cash or securities collateral received or posted subject to enforceable credit support agreements.

<table><tr><td rowspan="2">\( \S \)  in millions</td><td colspan="2">Assets</td><td colspan="2">Liabilities</td></tr><tr><td>Resale agreements</td><td>Securities borrowed</td><td>Repurchase agreements</td><td>Securities loaned</td></tr><tr><td colspan="5">As of December 2016</td></tr><tr><td colspan="5">Included in the consolidated statements of financial condition</td></tr><tr><td>Gross carrying value</td><td>$ 173,561</td><td>$ 189,571</td><td>$128,452</td><td>$12,495</td></tr><tr><td>Counterparty netting</td><td>(56,636)</td><td>(4,971)</td><td>(56,636)</td><td>(4,971)</td></tr><tr><td>Total</td><td>116,925</td><td>184,600</td><td>71,816</td><td>7,524</td></tr><tr><td colspan="5">Amounts not offset</td></tr><tr><td>Counterparty netting</td><td>(8,319)</td><td>(4,045)</td><td>(8,319)</td><td>(4,045)</td></tr><tr><td>Collateral</td><td>(107,148)</td><td>(170,625)</td><td>(62,081)</td><td>(3,087)</td></tr><tr><td>Total</td><td>$ 1,458</td><td>$ 9,930</td><td>$ 1,416</td><td>$ 392</td></tr><tr><td colspan="5">As of December 2015</td></tr><tr><td colspan="5">Included in the consolidated statements of financial condition</td></tr><tr><td>Gross carrying value</td><td>$ 163,199</td><td>$ 180,203</td><td>$114,960</td><td>$ 6,179</td></tr><tr><td>Counterparty netting</td><td>(28,891)</td><td>(2,565)</td><td>(28,891)</td><td>(2,565)</td></tr><tr><td>Total</td><td>134,308</td><td>177,638</td><td>86,069</td><td>3,614</td></tr><tr><td colspan="5">Amounts not offset</td></tr><tr><td>Counterparty netting</td><td>(4,979)</td><td>(1,732)</td><td>(4,979)</td><td>(1,732)</td></tr><tr><td>Collateral</td><td>(125,561)</td><td>(167,061)</td><td>(78,958)</td><td>(1,721)</td></tr><tr><td>Total</td><td>$ 3,768</td><td>$ 8,845</td><td>$ 2,132</td><td>$ 161</td></tr></table>

In the table above:

• Substantially all of the gross carrying values of these arrangements are subject to enforceable netting agreements.

• Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted.



## Gross Carrying Value of Repurchase Agreements and Securities Loaned

The table below presents the gross carrying value of repurchase agreements and securities loaned by class of collateral pledged.

<table><tr><td>$ in millions</td><td>Repurchase agreements</td><td>Securities loaned</td></tr><tr><td>As of December 2016</td><td></td><td></td></tr><tr><td>Money market instruments</td><td>$ 317</td><td>$ —</td></tr><tr><td>U.S. government and federal agency obligations</td><td>47,207</td><td>115</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>56,156</td><td>1,846</td></tr><tr><td>Securities backed by commercial real estate</td><td>208</td><td>—</td></tr><tr><td>Securities backed by residential real estate</td><td>122</td><td>—</td></tr><tr><td>Corporate debt securities</td><td>8,297</td><td>39</td></tr><tr><td>State and municipal obligations</td><td>831</td><td>—</td></tr><tr><td>Other debt obligations</td><td>286</td><td>—</td></tr><tr><td>Equities and convertible debentures</td><td>15,028</td><td>10,495</td></tr><tr><td>Total</td><td>$128,452</td><td>$12,495</td></tr><tr><td>As of December 2015</td><td></td><td></td></tr><tr><td>Money market instruments</td><td>$ 806</td><td>$ —</td></tr><tr><td>U.S. government and federal agency obligations</td><td>54,856</td><td>101</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>31,547</td><td>2,465</td></tr><tr><td>Securities backed by commercial real estate</td><td>269</td><td>—</td></tr><tr><td>Securities backed by residential real estate</td><td>2,059</td><td>—</td></tr><tr><td>Corporate debt securities</td><td>6,877</td><td>30</td></tr><tr><td>State and municipal obligations</td><td>609</td><td>—</td></tr><tr><td>Other debt obligations</td><td>101</td><td>—</td></tr><tr><td>Equities and convertible debentures</td><td>17,836</td><td>3,583</td></tr><tr><td>Total</td><td>$114,960</td><td>$ 6,179</td></tr></table>

The table below presents the gross carrying value of repurchase agreements and securities loaned by maturity date.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December 2016</td></tr><tr><td>Repurchase agreements</td><td>Securities loaned</td></tr><tr><td>No stated maturity and overnight</td><td>$ 35,939</td><td>$ 4,825</td></tr><tr><td>2 - 30 days</td><td>47,339</td><td>5,034</td></tr><tr><td>31 - 90 days</td><td>16,553</td><td>500</td></tr><tr><td>91 days - 1 year</td><td>18,968</td><td>1,636</td></tr><tr><td>Greater than 1 year</td><td>9,653</td><td>500</td></tr><tr><td>Total</td><td>$128,452</td><td>$12,495</td></tr></table>

In the table above:

• Repurchase agreements and securities loaned that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates.

• Repurchase agreements and securities loaned that are redeemable prior to maturity at the option of the holder are reflected at the earliest dates such options become exercisable.

## Other Secured Financings

In addition to repurchase agreements and securities loaned transactions, the firm funds certain assets through the use of other secured financings and pledges financial instruments and other assets as collateral in these transactions. These other secured financings consist of:

• Liabilities of consolidated VIEs;

• Transfers of assets accounted for as financings rather than sales (primarily collateralized central bank financings, pledged commodities, bank loans and mortgage whole loans); and

• Other structured financing arrangements.

Other secured financings include arrangements that are nonrecourse. As of December 2016 and December 2015, nonrecourse other secured financings were $2.54 billion and $2.20 billion, respectively.

The firm has elected to apply the fair value option to substantially all other secured financings because the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. See Note 8 for further information about other secured financings that are accounted for at fair value.

Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest, which generally approximates fair value. While these financings are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these financings been included in the firm’s fair value hierarchy, they would have been primarily classified in level 2 as of December 2016 and December 2015.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

The table below presents information about other secured financings.

<table><tr><td>$ in millions</td><td>U.S. Dollar</td><td>Non-U.S. Dollar</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Other secured financings (short-term):</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>$ 9,380</td><td>$ 3,738</td><td>$13,118</td></tr><tr><td>At amortized cost</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Weighted average interest rates</td><td>—%</td><td>—%</td><td></td></tr><tr><td>Other secured financings (long-term):</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>5,562</td><td>2,393</td><td>7,955</td></tr><tr><td>At amortized cost</td><td>145</td><td>305</td><td>450</td></tr><tr><td>Weighted average interest rates</td><td>4.06%</td><td>2.16%</td><td></td></tr><tr><td>Total</td><td>$15,087</td><td>$ 6,436</td><td>$21,523</td></tr><tr><td>Other secured financings collateralized by:</td><td></td><td></td><td></td></tr><tr><td>Financial instruments</td><td>$13,858</td><td>$ 5,974</td><td>$19,832</td></tr><tr><td>Other assets</td><td>1,229</td><td>462</td><td>1,691</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Other secured financings (short-term):</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>$ 7,952</td><td>$ 5,448</td><td>$13,400</td></tr><tr><td>At amortized cost</td><td>514</td><td>319</td><td>833</td></tr><tr><td>Weighted average interest rates</td><td>2.93%</td><td>3.83%</td><td></td></tr><tr><td>Other secured financings (long-term):</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>6,702</td><td>3,105</td><td>9,807</td></tr><tr><td>At amortized cost</td><td>370</td><td>343</td><td>713</td></tr><tr><td>Weighted average interest rates</td><td>2.87%</td><td>1.54%</td><td></td></tr><tr><td>Total</td><td>$15,538</td><td>$ 9,215</td><td>$24,753</td></tr><tr><td>Other secured financings collateralized by:</td><td></td><td></td><td></td></tr><tr><td>Financial instruments</td><td>$14,862</td><td>$ 8,872</td><td>$23,734</td></tr><tr><td>Other assets</td><td>676</td><td>343</td><td>1,019</td></tr></table>

## In the table above:

• Short-term secured financings include financings maturing within one year of the financial statement date and financings that are redeemable within one year of the financial statement date at the option of the holder.

• Weighted average interest rates exclude secured financings at fair value and include the effect of hedging activities. See Note 7 for further information about hedging activities.

• Total other secured financings include $285 million and $334 million related to transfers of financial assets accounted for as financings rather than sales as of December 2016 and December 2015, respectively. Such financings were collateralized by financial assets of $285 million and $336 million as of December 2016 and December 2015, respectively, primarily included in “Financial instruments owned, at fair value.”

• Other secured financings collateralized by financial instruments include $13.65 billion and $14.98 billion of other secured financings collateralized by financial instruments owned, at fair value as of December 2016 and December 2015, respectively, and include $6.18 billion and $8.76 billion of other secured financings collateralized by financial instruments received as collateral and replegaged as of December 2016 and December 2015, respectively.
The table below presents other secured financings by maturity date.

<table><tr><td>$ in millions</td><td>As of December 2016</td></tr><tr><td>Other secured financings (short-term)</td><td>$13,118</td></tr><tr><td>Other secured financings (long-term):</td><td></td></tr><tr><td>2018</td><td>5,575</td></tr><tr><td>2019</td><td>702</td></tr><tr><td>2020</td><td>1,158</td></tr><tr><td>2021</td><td>321</td></tr><tr><td>2022 - thereafter</td><td>649</td></tr><tr><td>Total other secured financings (long-term)</td><td>8,405</td></tr><tr><td>Total other secured financings</td><td>$21,523</td></tr></table>

## In the table above:

• Long-term secured financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates.

• Long-term secured financings that are redeemable prior to maturity at the option of the holder are reflected at the earliest dates such options become exercisable.

## Collateral Received and Pledged

The firm receives cash and securities (e.g., U.S. government and federal agency, other sovereign and corporate obligations, as well as equities and convertible debentures) as collateral, primarily in connection with resale agreements, securities borrowed, derivative transactions and customer margin loans. The firm obtains cash and securities as collateral on an upfront or contingent basis for derivative instruments and collateralized agreements to reduce its credit exposure to individual counterparties.

In many cases, the firm is permitted to deliver or replege financial instruments received as collateral when entering into repurchase agreements and securities loaned transactions, primarily in connection with secured client financing activities. The firm is also permitted to deliver or replege these financial instruments in connection with other secured financings, collateralized derivative transactions and firm or customer settlement requirements.

The firm also pledges certain financial instruments owned, at fair value in connection with repurchase agreements, securities loaned transactions and other secured financings, and other assets (substantially all real estate and cash) in connection with other secured financings to counterparties who may or may not have the right to deliver or replege them.



The table below presents financial instruments at fair value received as collateral that were available to be delivered or replegged and were delivered or replegged by the firm.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Collateral available to be delivered or replegged</td><td>$634,609</td><td>$636,684</td></tr><tr><td>Collateral that was delivered or replegged</td><td>495,717</td><td>496,240</td></tr></table>

In the table above, as of December 2016 and December 2015, collateral available to be delivered or replegged excludes $15.47 billion and $18.94 billion, respectively, of securities received under resale agreements and securities borrowed transactions that contractually had the right to be delivered or replegged, but were segregated for regulatory and other purposes.

The table below presents information about assets pledged.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Financial instruments owned, at fair value pledged to counterparties that:</td><td></td><td></td></tr><tr><td>Had the right to deliver or repleedge</td><td>$ 51,278</td><td>$ 54,426</td></tr><tr><td>Did not have the right to deliver or repleedge</td><td>61,099</td><td>63,880</td></tr><tr><td>Other assets pledged to counterparties that did not have the right to deliver or repleedge</td><td>3,287</td><td>1,841</td></tr></table>

The firm also segregated $15.29 billion and $19.56 billion of securities included in “Financial instruments owned, at fair value” as of December 2016 and December 2015, respectively, for regulatory and other purposes. See Note 3 for information about segregated cash.

## Note 11.

## Securitization Activities

The firm securitizes residential and commercial mortgages, corporate bonds, loans and other types of financial assets by selling these assets to securitization vehicles (e.g., trusts, corporate entities and limited liability companies) or through a resecuritization. The firm acts as underwriter of the beneficial interests that are sold to investors. The firm’s residential mortgage securitizations are primarily in connection with government agency securitizations.

Beneficial interests issued by securitization entities are debt or equity securities that give the investors rights to receive all or portions of specified cash inflows to a securitization vehicle and include senior and subordinated interests in principal, interest and/or other cash inflows. The proceeds from the sale of beneficial interests are used to pay the transferor for the financial assets sold to the securitization vehicle or to purchase securities which serve as collateral. The firm accounts for a securitization as a sale when it has relinquished control over the transferred assets. Prior to securitization, the firm accounts for assets pending transfer at fair value and therefore does not typically recognize significant gains or losses upon the transfer of assets. Net revenues from underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.

For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Notes 10 and 23 for further information about collateralized financings and interest expense, respectively.

The firm generally receives cash in exchange for the transferred assets but may also have continuing involvement with transferred assets, including ownership of beneficial interests in securitized financial assets, primarily in the form of senior or subordinated securities. The firm may also purchase senior or subordinated securities issued by securitization vehicles (which are typically VIEs) in connection with secondary market-making activities.

The primary risks included in beneficial interests and other interests from the firm’s continuing involvement with securitization vehicles are the performance of the underlying collateral, the position of the firm’s investment in the capital structure of the securitization vehicle and the market yield for the security. These interests are primarily accounted for at fair value and are classified in level 2 of the fair value hierarchy. Beneficial interests and other interests not accounted for at fair value are carried at amounts that approximate fair value. See Notes 5 through 8 for further information about fair value measurements.

The table below presents the amount of financial assets securitized and the cash flows received on retained interests in securitization entities in which the firm had continuing involvement as of the end of the period.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Residential mortgages</td><td>$12,164</td><td>$10,479</td><td>$19,099</td></tr><tr><td>Commercial mortgages</td><td>233</td><td>6,043</td><td>2,810</td></tr><tr><td>Other financial assets</td><td>181</td><td>—</td><td>1,009</td></tr><tr><td>Total</td><td>$12,578</td><td>$16,522</td><td>$22,918</td></tr><tr><td>Retained interests cash flows</td><td>$189</td><td>$174</td><td>$215</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

The table below presents the firm’s continuing involvement in nonconsolidated securitization entities to which the firm sold assets, as well as the total outstanding principal amount of transferred assets in which the firm has continuing involvement.

<table><tr><td>$ in millions</td><td>Outstanding Principal Amount</td><td>Retained Interests</td><td>Purchased Interests</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>U.S. government agency-issued collateralized mortgage obligations</td><td>$25,140</td><td>$ 953</td><td>$24</td></tr><tr><td>Other residential mortgage-backed</td><td>3,261</td><td>540</td><td>6</td></tr><tr><td>Other commercial mortgage-backed</td><td>357</td><td>15</td><td>—</td></tr><tr><td>CDOs, CLOs and other</td><td>2,284</td><td>56</td><td>6</td></tr><tr><td>Total</td><td>$31,042</td><td>$1,564</td><td>$36</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>U.S. government agency-issued collateralized mortgage obligations</td><td>$39,088</td><td>$ 846</td><td>$20</td></tr><tr><td>Other residential mortgage-backed</td><td>2,195</td><td>154</td><td>17</td></tr><tr><td>Other commercial mortgage-backed</td><td>6,842</td><td>115</td><td>28</td></tr><tr><td>CDOs, CLOs and other</td><td>2,732</td><td>44</td><td>7</td></tr><tr><td>Total</td><td>$50,857</td><td>$1,159</td><td>$72</td></tr></table>

In the table above:

• The outstanding principal amount is presented for the purpose of providing information about the size of the securitization entities in which the firm has continuing involvement and is not representative of the firm’s risk of loss.

• For retained or purchased interests, the firm’s risk of loss is limited to the carrying value of these interests.

• Purchased interests represent senior and subordinated interests, purchased in connection with secondary market-making activities, in securitization entities in which the firm also holds retained interests.

• Substantially all of the total outstanding principal amount and total retained interests as of December 2016 and December 2015 relate to securitizations during 2012 and thereafter.

• The fair value of retained interests was $1.58 billion and $1.16 billion as of December 2016 and December 2015, respectively.

In addition to the interests in the table above, the firm had other continuing involvement in the form of derivative transactions and commitments with certain nonconsolidated VIEs. The carrying value of these derivatives and commitments was a net asset of $48 million and $92 million as of December 2016 and December 2015, respectively. The notional amounts of these derivatives and commitments are included in maximum exposure to loss in the nonconsolidated VIE table in Note 12.
The table below presents the weighted average key economic assumptions used in measuring the fair value of mortgage-backed retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Fair value of retained interests</td><td>$1,519</td><td>$1,115</td></tr><tr><td>Weighted average life (years)</td><td>7.5</td><td>7.5</td></tr><tr><td>Constant prepayment rate</td><td>8.1%</td><td>10.4%</td></tr><tr><td>Impact of 10% adverse change</td><td>$ (14)</td><td>$ (22)</td></tr><tr><td>Impact of 20% adverse change</td><td>(28)</td><td>(43)</td></tr><tr><td>Discount rate</td><td>5.3%</td><td>5.5%</td></tr><tr><td>Impact of 10% adverse change</td><td>$ (37)</td><td>$ (28)</td></tr><tr><td>Impact of 20% adverse change</td><td>(71)</td><td>(55)</td></tr></table>

In the table above:

• Amounts do not reflect the benefit of other financial instruments that are held to mitigate risks inherent in these retained interests.

• Changes in fair value based on an adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value is not usually linear.

• The impact of a change in a particular assumption is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.

• The constant prepayment rate is included only for positions for which it is a key assumption in the determination of fair value.

• The discount rate for retained interests that relate to U.S. government agency-issued collateralized mortgage obligations does not include any credit loss.

• Expected credit loss assumptions are reflected in the discount rate for the remainder of retained interests.

The firm has other retained interests not reflected in the table above with a fair value of $56 million and a weighted average life of 3.5 years as of December 2016, and a fair value of $44 million and a weighted average life of 3.5 years as of December 2015. Due to the nature and current fair value of certain of these retained interests, the weighted average assumptions for constant prepayment and discount rates and the related sensitivity to adverse changes are not meaningful as of December 2016 and December 2015. The firm’s maximum exposure to adverse changes in the value of these interests is the carrying value of $56 million and $44 million as of December 2016 and December 2015, respectively.



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

## Note 12.

## Variable Interest Entities

A variable interest in a VIE is an investment (e.g., debt or equity securities) or other interest (e.g., derivatives or loans and lending commitments) that will absorb portions of the VIE’s expected losses and/or receive portions of the VIE’s expected residual returns.

The firm’s variable interests in VIEs include senior and subordinated debt in residential and commercial mortgage-backed and other asset-backed securitization entities, CDOs and CLOs; loans and lending commitments; limited and general partnership interests; preferred and common equity; derivatives that may include foreign currency, equity and/or credit risk; guarantees; and certain of the fees the firm receives from investment funds. Certain interest rate, foreign currency and credit derivatives the firm enters into with VIEs are not variable interests because they create, rather than absorb, risk.

VIEs generally finance the purchase of assets by issuing debt and equity securities that are either collateralized by or indexed to the assets held by the VIE. The debt and equity securities issued by a VIE may include tranches of varying levels of subordination. The firm’s involvement with VIEs includes securitization of financial assets, as described in Note 11, and investments in and loans to other types of VIEs, as described below. See Note 11 for additional information about securitization activities, including the definition of beneficial interests. See Note 3 for the firm’s consolidation policies, including the definition of a VIE.

## VIE Consolidation Analysis

The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers:

• Which variable interest holder has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance;

• Which variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE;

• The VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders;

• The VIE’s capital structure;

• The terms between the VIE and its variable interest holders and other parties involved with the VIE; and

• Related-party relationships.

The firm reassesses its initial evaluation of whether an entity is a VIE when certain reconsideration events occur. The firm reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.

## VIE Activities

The firm is principally involved with VIEs through the following business activities:

Mortgage-Backed VIEs and Corporate CDO and CLO VIEs. The firm sells residential and commercial mortgage loans and securities to mortgage-backed VIEs and corporate bonds and loans to corporate CDO and CLO VIEs and may retain beneficial interests in the assets sold to these VIEs. The firm purchases and sells beneficial interests issued by mortgage-backed and corporate CDO and CLO VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain of these VIEs, primarily interest rate swaps, which are typically not variable interests. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs.

Certain mortgage-backed and corporate CDO and CLO VIEs, usually referred to as synthetic CDOs or credit-linked note VIEs, synthetically create the exposure for the beneficial interests they issue by entering into credit derivatives, rather than purchasing the underlying assets. These credit derivatives may reference a single asset, an index, or a portfolio/basket of assets or indices. See Note 7 for further information about credit derivatives. These VIEs use the funds from the sale of beneficial interests and the premiums received from credit derivative counterparties to purchase securities which serve to collateralize the beneficial interest holders and/or the credit derivative counterparty. These VIEs may enter into other derivatives, primarily interest rate swaps, which are typically not variable interests. The firm may be a counterparty to derivatives with these VIEs and generally enters into derivatives with other counterparties to mitigate its risk.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Real Estate, Credit-Related and Other Investing VIEs. The firm purchases equity and debt securities issued by and makes loans to VIEs that hold real estate, performing and nonperforming debt, distressed loans and equity securities. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.

Other Asset-Backed VIEs. The firm structures VIEs that issue notes to clients, and purchases and sells beneficial interests issued by other asset-backed VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain other asset-backed VIEs, primarily total return swaps on the collateral assets held by these VIEs under which the firm pays the VIE the return due to the note holders and receives the return on the collateral assets owned by the VIE. The firm generally can be removed as the total return swap counterparty. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs. The firm typically does not sell assets to the other asset-backed VIEs it structures.

Principal-Protected Note VIEs. The firm structures VIEs that issue principal-protected notes to clients. These VIEs own portfolios of assets, principally with exposure to hedge funds. Substantially all of the principal protection on the notes issued by these VIEs is provided by the asset portfolio rebalancing that is required under the terms of the notes. The firm enters into total return swaps with these VIEs under which the firm pays the VIE the return due to the principal-protected note holders and receives the return on the assets owned by the VIE. The firm may enter into derivatives with other counterparties to mitigate the risk it has from the derivatives it enters into with these VIEs. The firm also obtains funding through these VIEs.

Investments in Funds and Other VIEs. The firm makes equity investments in certain of the investment fund VIEs it manages and is entitled to receive fees from these VIEs. The firm typically does not sell assets to, or enter into derivatives with, these VIEs. Other VIEs primarily includes nonconsolidated power-related VIEs. The firm purchases debt and equity securities issued by VIEs that hold power-related assets and may provide commitments to these VIEs.

## Adoption of ASU No. 2015-02

The firm adopted ASU No. 2015-02 as of January 1, 2016. Upon adoption, certain of the firm’s investments in entities that were previously classified as voting interest entities are now classified as VIEs. These include investments in certain limited partnership entities that have been deconsolidated upon adoption as certain fee interests are not considered significant interests under the guidance, and the firm is no longer deemed to have a controlling financial interest in such entities. See Note 3 for further information about the adoption of ASU No. 2015-02.

Nonconsolidated VIEs. As a result of adoption as of January 1, 2016, “Investments in funds and other” nonconsolidated VIEs included $10.70 billion in “Assets in VIEs,” $543 million in “Carrying value of variable interests – assets” and $559 million in “Maximum exposure to loss” related to investments in limited partnership entities that were previously classified as nonconsolidated voting interest entities.

Consolidated VIEs. As a result of adoption as of January 1, 2016, “Real estate, credit-related and other investing” consolidated VIEs included $302 million of assets, substantially all included in “Financial instruments owned, at fair value,” and $122 million of liabilities, included in “Other liabilities and accrued expenses” primarily related to investments in limited partnership entities that were previously classified as consolidated voting interest entities.



## Nonconsolidated VIEs

The table below presents a summary of the nonconsolidated VIEs in which the firm holds variable interests. The firm’s exposure to the obligations of VIEs is generally limited to its interests in these entities. In certain instances, the firm provides guarantees, including derivative guarantees, to VIEs or holders of variable interests in VIEs. The nature of the firm’s variable interests can take different forms, as described in the rows under maximum exposure to loss. In the table below:

• The maximum exposure to loss excludes the benefit of offsetting financial instruments that are held to mitigate the risks associated with these variable interests.

• For retained and purchased interests, and loans and investments, the maximum exposure to loss is the carrying value of these interests.

• For commitments and guarantees, and derivatives, the maximum exposure to loss is the notional amount, which does not represent anticipated losses and also has not been reduced by unrealized losses already recorded. As a result, the maximum exposure to loss exceeds liabilities recorded for commitments and guarantees, and derivatives provided to VIEs.

• Total maximum exposure to loss for commitments and guarantees, and derivatives include $1.28 billion and $1.52 billion as of December 2016 and December 2015, respectively, related to transactions with VIEs to which the firm transferred assets.

<table><tr><td></td><td colspan="2">As of December</td></tr><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td>Total nonconsolidated VIEs</td><td></td><td></td></tr><tr><td>Assets in VIEs</td><td>$70,083</td><td>$90,145</td></tr><tr><td>Carrying value of variable interests — assets</td><td>6,199</td><td>7,171</td></tr><tr><td>Carrying value of variable interests — liabilities</td><td>254</td><td>177</td></tr><tr><td>Maximum exposure to loss:</td><td></td><td></td></tr><tr><td>Retained interests</td><td>1,564</td><td>1,159</td></tr><tr><td>Purchased interests</td><td>544</td><td>1,528</td></tr><tr><td>Commitments and guarantees</td><td>2,196</td><td>2,020</td></tr><tr><td>Derivatives</td><td>7,144</td><td>6,936</td></tr><tr><td>Loans and investments</td><td>3,760</td><td>4,108</td></tr><tr><td>Total maximum exposure to loss</td><td>$15,208</td><td>$15,751</td></tr></table>

The table below disaggregates, by principal business activity, the information for nonconsolidated VIEs included in the summary table above.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Mortgage-backed</td><td></td><td></td></tr><tr><td>Assets in VIEs</td><td>$32,714</td><td>$62,672</td></tr><tr><td>Carrying value of variable interests — assets</td><td>1,936</td><td>2,439</td></tr><tr><td>Maximum exposure to loss:</td><td></td><td></td></tr><tr><td>Retained interests</td><td>1,508</td><td>1,115</td></tr><tr><td>Purchased interests</td><td>429</td><td>1,324</td></tr><tr><td>Commitments and guarantees</td><td>9</td><td>40</td></tr><tr><td>Derivatives</td><td>163</td><td>222</td></tr><tr><td>Total maximum exposure to loss</td><td>$ 2,109</td><td>$ 2,701</td></tr><tr><td>Corporate CDOs and CLOs</td><td></td><td></td></tr><tr><td>Assets in VIEs</td><td>$ 5,391</td><td>$ 6,493</td></tr><tr><td>Carrying value of variable interests — assets</td><td>393</td><td>624</td></tr><tr><td>Carrying value of variable interests — liabilities</td><td>25</td><td>29</td></tr><tr><td>Maximum exposure to loss:</td><td></td><td></td></tr><tr><td>Retained interests</td><td>2</td><td>3</td></tr><tr><td>Purchased interests</td><td>43</td><td>106</td></tr><tr><td>Commitments and guarantees</td><td>186</td><td>647</td></tr><tr><td>Derivatives</td><td>2,841</td><td>2,633</td></tr><tr><td>Loans and investments</td><td>94</td><td>265</td></tr><tr><td>Total maximum exposure to loss</td><td>$ 3,166</td><td>$ 3,654</td></tr><tr><td>Real estate, credit-related and other investing</td><td></td><td></td></tr><tr><td>Assets in VIEs</td><td>$ 8,617</td><td>$ 9,793</td></tr><tr><td>Carrying value of variable interests — assets</td><td>2,550</td><td>3,557</td></tr><tr><td>Carrying value of variable interests — liabilities</td><td>3</td><td>3</td></tr><tr><td>Maximum exposure to loss:</td><td></td><td></td></tr><tr><td>Commitments and guarantees</td><td>693</td><td>570</td></tr><tr><td>Loans and investments</td><td>2,550</td><td>3,557</td></tr><tr><td>Total maximum exposure to loss</td><td>$ 3,243</td><td>$ 4,127</td></tr><tr><td>Other asset-backed</td><td></td><td></td></tr><tr><td>Assets in VIEs</td><td>$ 6,405</td><td>$ 7,026</td></tr><tr><td>Carrying value of variable interests — assets</td><td>293</td><td>265</td></tr><tr><td>Carrying value of variable interests — liabilities</td><td>220</td><td>145</td></tr><tr><td>Maximum exposure to loss:</td><td></td><td></td></tr><tr><td>Retained interests</td><td>54</td><td>41</td></tr><tr><td>Purchased interests</td><td>72</td><td>98</td></tr><tr><td>Commitments and guarantees</td><td>275</td><td>500</td></tr><tr><td>Derivatives</td><td>4,134</td><td>4,075</td></tr><tr><td>Loans and investments</td><td>89</td><td>—</td></tr><tr><td>Total maximum exposure to loss</td><td>$ 4,624</td><td>$ 4,714</td></tr><tr><td>Investments in funds and other</td><td></td><td></td></tr><tr><td>Assets in VIEs</td><td>$16,956</td><td>$ 4,161</td></tr><tr><td>Carrying value of variable interests — assets</td><td>1,027</td><td>286</td></tr><tr><td>Carrying value of variable interests — liabilities</td><td>6</td><td>—</td></tr><tr><td>Maximum exposure to loss:</td><td></td><td></td></tr><tr><td>Commitments and guarantees</td><td>1,033</td><td>263</td></tr><tr><td>Derivatives</td><td>6</td><td>6</td></tr><tr><td>Loans and investments</td><td>1,027</td><td>286</td></tr><tr><td>Total maximum exposure to loss</td><td>$ 2,066</td><td>$ 555</td></tr></table>

In the table above, mortgage-backed includes assets in VIEs of $1.54 billion and $4.08 billion, and maximum exposure to loss of $279 million and $502 million, as of December 2016 and December 2015, respectively, related to CDOs backed by mortgage obligations.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

The carrying values of the firm’s variable interests in nonconsolidated VIEs are included in the consolidated statements of financial condition as follows:

• Mortgage-backed: As of December 2016, substantially all assets were included in “Financial instruments owned, at fair value,” “Loans receivable” and “Receivables from customers and counterparties.” As of December 2015, all assets were included in “Financial instruments owned, at fair value;”

• Corporate CDOs and CLOs: As of both December 2016 and December 2015, all assets were included in “Financial instruments owned, at fair value” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value;”

• Real estate, credit-related and other investing: As of both December 2016 and December 2015, all assets were included in “Financial instruments owned, at fair value,” “Loans receivable” and “Other assets,” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value” and “Other liabilities and accrued expenses;”

• Other asset-backed: As of both December 2016 and December 2015, all assets were included in “Financial instruments owned, at fair value” and “Loans receivable” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value;” and

• Investments in funds and other: As of both December 2016 and December 2015, substantially all assets were included in “Financial instruments owned, at fair value” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value.”

## Consolidated VIEs

The table below presents a summary of the carrying amount and classification of assets and liabilities in consolidated VIEs. In the table below:

• Assets and liabilities are presented net of intercompany eliminations and exclude the benefit of offsetting financial instruments that are held to mitigate the risks associated with the firm’s variable interests.

• VIEs in which the firm holds a majority voting interest are excluded if (i) the VIE meets the definition of a business and (ii) the VIE’s assets can be used for purposes other than the settlement of its obligations.

• Substantially all the assets can only be used to settle obligations of the VIE.

<table><tr><td rowspan="2">$ in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Total consolidated VIEs</td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 300</td><td>$ 423</td></tr><tr><td>Receivables from brokers, dealers and clearing organizations</td><td>—</td><td>1</td></tr><tr><td>Loans receivable</td><td>603</td><td>1,534</td></tr><tr><td>Financial instruments owned, at fair value</td><td>2,047</td><td>2,283</td></tr><tr><td>Other assets</td><td>682</td><td>471</td></tr><tr><td>Total</td><td>$3,632</td><td>$4,712</td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Other secured financings</td><td>$ 854</td><td>$ 858</td></tr><tr><td>Payables to brokers, dealers and clearing organizations</td><td>1</td><td>—</td></tr><tr><td>Payables to customers and counterparties</td><td>—</td><td>434</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>7</td><td>16</td></tr><tr><td>Unsecured short-term borrowings</td><td>197</td><td>416</td></tr><tr><td>Unsecured long-term borrowings</td><td>334</td><td>312</td></tr><tr><td>Other liabilities and accrued expenses</td><td>803</td><td>556</td></tr><tr><td>Total</td><td>$2,196</td><td>$2,592</td></tr></table>



The table below disaggregates, by principal business activity, the information for consolidated VIEs included in the summary table above.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Real estate, credit-related and other investing</td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 300</td><td>$ 423</td></tr><tr><td>Receivables from brokers, dealers and clearing organizations</td><td>—</td><td>1</td></tr><tr><td>Loans receivable</td><td>603</td><td>1,534</td></tr><tr><td>Financial instruments owned, at fair value</td><td>1,708</td><td>1,585</td></tr><tr><td>Other assets</td><td>680</td><td>456</td></tr><tr><td>Total</td><td>$3,291</td><td>$3,999</td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Other secured financings</td><td>$ 284</td><td>$ 332</td></tr><tr><td>Payables to brokers, dealers and clearing organizations</td><td>1</td><td>—</td></tr><tr><td>Payables to customers and counterparties</td><td>—</td><td>2</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>7</td><td>16</td></tr><tr><td>Other liabilities and accrued expenses</td><td>803</td><td>556</td></tr><tr><td>Total</td><td>$1,095</td><td>$ 906</td></tr><tr><td>CDOs, mortgage-backed and other asset-backed Assets</td><td></td><td></td></tr><tr><td>Financial instruments owned, at fair value</td><td>$ 253</td><td>$ 572</td></tr><tr><td>Other assets</td><td>2</td><td>15</td></tr><tr><td>Total</td><td>$ 255</td><td>$ 587</td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Other secured financings</td><td>$ 139</td><td>$ 113</td></tr><tr><td>Payables to customers and counterparties</td><td>—</td><td>432</td></tr><tr><td>Total</td><td>$ 139</td><td>$ 545</td></tr><tr><td>Principal-protected notes</td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Financial instruments owned, at fair value</td><td>$ 86</td><td>$ 126</td></tr><tr><td>Total</td><td>$ 86</td><td>$ 126</td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Other secured financings</td><td>$ 431</td><td>$ 413</td></tr><tr><td>Unsecured short-term borrowings</td><td>197</td><td>416</td></tr><tr><td>Unsecured long-term borrowings</td><td>334</td><td>312</td></tr><tr><td>Total</td><td>$ 962</td><td>$1,141</td></tr></table>

In the table above:

• The majority of the assets in principal-protected notes VIEs are intercompany and are eliminated in consolidation.

• The liabilities of real estate, credit-related and other investing VIEs, and CDOs, mortgage-backed and other asset-backed VIEs do not have recourse to the general credit of the firm.

## Note 13.

## Other Assets

Other assets are generally less liquid, non-financial assets. The table below presents other assets by type.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Property, leasehold improvements and equipment</td><td>$12,070</td><td>$ 9,956</td></tr><tr><td>Goodwill and identifiable intangible assets</td><td>4,095</td><td>4,148</td></tr><tr><td>Income tax-related assets</td><td>5,550</td><td>5,548</td></tr><tr><td>Equity-method investments</td><td>219</td><td>258</td></tr><tr><td>Miscellaneous receivables and other</td><td>3,547</td><td>5,308</td></tr><tr><td>Total</td><td>$25,481</td><td>$25,218</td></tr></table>

In the table above:

• Equity-method investments exclude investments accounted for at fair value under the fair value option where the firm would otherwise apply the equity method of accounting of $7.92 billion and $6.59 billion as of December 2016 and December 2015, respectively, all of which are included in “Financial instruments owned, at fair value.” The firm has generally elected the fair value option for such investments acquired after the fair value option became available.

• The decrease in miscellaneous receivables and other from December 2015 to December 2016 reflects the sale of assets previously classified as held for sale related to certain of the firm’s consolidated investments. Miscellaneous receivables and other includes $682 million and $581 million of investments in qualified affordable housing projects as of December 2016 and December 2015, respectively.

Property, Leasehold Improvements and Equipment
Property, leasehold improvements and equipment in the table above is net of accumulated depreciation and amortization of $7.68 billion and $7.77 billion as of December 2016 and December 2015, respectively. Property, leasehold improvements and equipment included $5.96 billion and $5.93 billion as of December 2016 and December 2015, respectively, related to property, leasehold improvements and equipment that the firm uses in connection with its operations. The remainder is held by investment entities, including VIEs, consolidated by the firm. Substantially all property and equipment is depreciated on a straight-line basis over the useful life of the asset. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter. Capitalized costs of software developed or obtained for internal use are amortized on a straight-line basis over three years.

## Goodwill and Identifiable Intangible Assets

The tables below present the carrying values of goodwill and identifiable intangible assets.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Goodwill as of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Investment Banking:</td><td></td><td></td></tr><tr><td>Financial Advisory</td><td>$ 98</td><td>$ 98</td></tr><tr><td>Underwriting</td><td>183</td><td>183</td></tr><tr><td>Institutional Client Services:</td><td></td><td></td></tr><tr><td>Fixed Income, Currency and Commodities</td><td></td><td></td></tr><tr><td>Client Execution</td><td>269</td><td>269</td></tr><tr><td>Equities Client Execution</td><td>2,403</td><td>2,402</td></tr><tr><td>Securities Services</td><td>105</td><td>105</td></tr><tr><td>Investing &amp; Lending</td><td>2</td><td>2</td></tr><tr><td>Investment Management</td><td>606</td><td>598</td></tr><tr><td>Total</td><td>$3,666</td><td>$3,657</td></tr></table>



<table><tr><td></td><td colspan="2">Identifiable Intangible Assets as of December</td></tr><tr><td>$ in millions</td><td>2016</td><td>2015</td></tr><tr><td>Institutional Client Services:</td><td></td><td></td></tr><tr><td>Fixed Income, Currency and Commodities</td><td></td><td></td></tr><tr><td>Client Execution</td><td>$ 65</td><td>$ 92</td></tr><tr><td>Equities Client Execution</td><td>141</td><td>193</td></tr><tr><td>Investing &amp; Lending</td><td>105</td><td>75</td></tr><tr><td>Investment Management</td><td>118</td><td>131</td></tr><tr><td>Total</td><td>$429</td><td>$491</td></tr></table>

Goodwill. Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date.

Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. The quantitative goodwill test consists of two steps:

• The first step compares the estimated fair value of each reporting unit with its estimated net book value (including goodwill and identifiable intangible assets). If the reporting unit’s estimated fair value exceeds its estimated net book value, goodwill is not impaired. To estimate the fair value of each reporting unit, a relative value technique is used because the firm believes market participants would use this technique to value the firm’s reporting units. The relative value technique applies observable price-to-earnings multiples or price-to-book multiples and projected return on equity of comparable competitors to reporting units’ net earnings or net book value. The net book value of each reporting unit reflects an allocation of total shareholders’ equity and represents the estimated amount of total shareholders’ equity required to support the activities of the reporting unit under currently applicable regulatory capital requirements.

• If the estimated fair value of a reporting unit is less than its estimated net book value, the second step of the goodwill test is performed to measure the amount of impairment, if any. An impairment is equal to the excess of the carrying amount of goodwill over its fair value.
During the fourth quarter of 2016, the firm assessed goodwill for impairment using a qualitative assessment. Multiple factors were assessed with respect to each of the firm’s reporting units to determine whether it was more likely than not that the fair value of any of these reporting units was less than its carrying amount. The qualitative assessment also considered changes since the 2015 quantitative test.

In accordance with ASC 350, the firm considered the following factors in the qualitative assessment performed in the fourth quarter when evaluating whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount:

• Performance Indicators. During 2016, the firm’s net earnings, pre-tax margin, diluted earnings per common share, return on average common shareholders’ equity and book value per common share increased as compared with 2015. In addition, the firm’s overall cost structure declined reflecting the impact of expense savings initiatives.

• Firm and Industry Events. There were no events, entity-specific or otherwise, since the 2015 quantitative goodwill test that would have had a significant negative impact on the valuation of the firm’s reporting units.

• Macroeconomic Indicators. Since the 2015 quantitative goodwill test, the firm’s general operating environment improved as concerns about the outlook for global economic growth moderated.

• Fair Value Indicators. Since the 2015 quantitative goodwill test, fair value indicators improved as global equity prices increased and credit spreads tightened. In addition, most publicly-traded industry participants, including the firm, experienced increases in stock price, price-to-book multiples and price-to-earnings multiples.

As a result of the qualitative assessment, the firm determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount.

Notwithstanding the results of the qualitative assessment, since the 2015 quantitative goodwill test determined that the estimated fair value of the Fixed Income, Currency and Commodities Client Execution reporting unit was not substantially in excess of its carrying value, the firm also performed a quantitative test on this reporting unit during the fourth quarter of 2016. In the quantitative test, the estimated fair value of the Fixed Income, Currency and Commodities Client Execution reporting unit substantially exceeded its carrying value.

Therefore, the firm determined that goodwill for all reporting units was not impaired.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Identifiable Intangible Assets. The table below presents the gross carrying amount, accumulated amortization and net carrying amount of identifiable intangible assets.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Customer lists</td><td></td><td></td></tr><tr><td>Gross carrying amount</td><td>$ 1,065</td><td>$ 1,072</td></tr><tr><td>Accumulated amortization</td><td>(837)</td><td>(777)</td></tr><tr><td>Net carrying amount</td><td>228</td><td>295</td></tr><tr><td>Other</td><td></td><td></td></tr><tr><td>Gross carrying amount</td><td>543</td><td>449</td></tr><tr><td>Accumulated amortization</td><td>(342)</td><td>(253)</td></tr><tr><td>Net carrying amount</td><td>201</td><td>196</td></tr><tr><td>Total</td><td></td><td></td></tr><tr><td>Gross carrying amount</td><td>1,608</td><td>1,521</td></tr><tr><td>Accumulated amortization</td><td>(1,179)</td><td>(1,030)</td></tr><tr><td>Net carrying amount</td><td>$ 429</td><td>$ 491</td></tr></table>

In the table above:

• The net carrying amount of other intangibles primarily includes intangible assets related to acquired leases and commodities transportation rights.

• During 2016 and 2015, the firm acquired $89 million (primarily related to acquired leases) and $67 million (primarily related to customer lists), respectively, of intangible assets with a weighted average amortization period of three years.

Substantially all of the firm’s identifiable intangible assets are considered to have finite useful lives and are amortized over their estimated useful lives generally using the straight-line method.

The tables below present details about amortization of identifiable intangible assets.

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Amortization</td><td>$162</td><td>$132</td><td>$217</td></tr><tr><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td>As of</td></tr><tr><td></td><td></td><td></td><td>December 2016</td></tr><tr><td>Estimated future amortization</td><td></td><td></td><td></td></tr><tr><td>2017</td><td></td><td></td><td>$133</td></tr><tr><td>2018</td><td></td><td></td><td>113</td></tr><tr><td>2019</td><td></td><td></td><td>79</td></tr><tr><td>2020</td><td></td><td></td><td>29</td></tr><tr><td>2021</td><td></td><td></td><td>19</td></tr></table>

## Impairments

The firm tests property, leasehold improvements and equipment, identifiable intangible assets and other assets for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. To the extent the carrying value of an asset exceeds the projected undiscounted cash flows expected to result from the use and eventual disposal of the asset or asset group, the firm determines the asset is impaired and records an impairment equal to the difference between the estimated fair value and the carrying value of the asset or asset group. In addition, the firm will recognize an impairment prior to the sale of an asset if the carrying value of the asset exceeds its estimated fair value.

During both 2016 and 2015, impairments were not material to the firm’s results of operations or financial condition.

During 2014, primarily as a result of deterioration in market and operating conditions related to certain of the firm’s consolidated investments and the firm’s exhausted fund lead market maker (LMM) rights, the firm determined that certain assets were impaired and recorded impairments of $360 million, all of which were included in “Depreciation and amortization.” These impairments consisted of $268 million related to property, leasehold improvements and equipment, substantially all of which was attributable to a consolidated investment in Latin America, $70 million related to identifiable intangible assets, primarily attributable to the firm’s LMM rights, and $22 million related to goodwill as a result of the sale of Metro International Trade Services (Metro). The impairments related to property, leasehold improvements and equipment and goodwill were included within the firm’s Investing & Lending segment and the impairments related to identifiable intangible assets were principally included within the firm’s Institutional Client Services segment. The impairments represented the excess of the carrying values of these assets over their estimated fair values, substantially all of which are calculated using level 3 measurements. These fair values were calculated using a combination of discounted cash flow analyses and relative value analyses, including the estimated cash flows expected to result from the use and eventual disposition of these assets.



## Note 14.

## Deposits

The table below presents the types and sources of the firm’s deposits.

<table><tr><td>$ in millions</td><td>Savings and Demand</td><td>Time</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Private bank and online retail</td><td>$61,166</td><td>$ 4,437</td><td>$ 65,603</td></tr><tr><td>Brokered certificates of deposit</td><td>—</td><td>34,905</td><td>34,905</td></tr><tr><td>Deposit sweep programs</td><td>16,019</td><td>—</td><td>16,019</td></tr><tr><td>Institutional</td><td>12</td><td>7,559</td><td>7,571</td></tr><tr><td>Total</td><td>$77,197</td><td>$46,901</td><td>$124,098</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Private bank</td><td>$38,715</td><td>$ 2,354</td><td>$ 41,069</td></tr><tr><td>Brokered certificates of deposit</td><td>—</td><td>32,419</td><td>32,419</td></tr><tr><td>Deposit sweep programs</td><td>15,791</td><td>—</td><td>15,791</td></tr><tr><td>Institutional</td><td>1</td><td>8,239</td><td>8,240</td></tr><tr><td>Total</td><td>$54,507</td><td>$43,012</td><td>$ 97,519</td></tr></table>

In April 2016, Goldman Sachs Bank USA (GS Bank USA) acquired GE Capital Bank’s online retail deposit platform and assumed $16.52 billion of deposits, consisting of $8.76 billion in online deposit accounts and certificates of deposit, and $7.76 billion in brokered certificates of deposit. In the table above:

• Substantially all deposits are interest-bearing.

• Savings and demand deposits have no stated maturity.

• Time deposits include $13.78 billion and $14.68 billion as of December 2016 and December 2015, respectively, of deposits accounted for at fair value under the fair value option. See Note 8 for further information about deposits accounted for at fair value.

• Time deposits have a weighted average maturity of approximately 2.5 years and 3 years as of December 2016 and December 2015, respectively.

• Deposit sweep programs represent long-term contractual agreements with several U.S. broker-dealers who sweep client cash to FDIC-insured deposits.

• Deposits insured by the FDIC as of December 2016 and December 2015 were approximately $69.91 billion and $55.48 billion, respectively.

The table below presents deposits held in U.S. and non-U.S. offices. Substantially all U.S. deposits were held at GS Bank USA and substantially all non-U.S. deposits were held at Goldman Sachs International Bank (GSIB).

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>U.S. offices</td><td>$106,037</td><td>$81,920</td></tr><tr><td>Non-U.S. offices</td><td>18,061</td><td>15,599</td></tr><tr><td>Total</td><td>$124,098</td><td>$97,519</td></tr></table>

The table below presents maturities of time deposits held in U.S. and non-U.S. offices.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">As of December 2016</td></tr><tr><td>U.S.</td><td>Non-U.S.</td><td>Total</td></tr><tr><td>2017</td><td>$11,245</td><td>$8,262</td><td>$19,507</td></tr><tr><td>2018</td><td>6,004</td><td>542</td><td>6,546</td></tr><tr><td>2019</td><td>5,350</td><td>—</td><td>5,350</td></tr><tr><td>2020</td><td>4,054</td><td>—</td><td>4,054</td></tr><tr><td>2021</td><td>3,519</td><td>39</td><td>3,558</td></tr><tr><td>2022 - thereafter</td><td>7,671</td><td>215</td><td>7,886</td></tr><tr><td>Total</td><td>$37,843</td><td>$9,058</td><td>$46,901</td></tr></table>

As of December 2016, deposits in U.S. and non-U.S. offices include $2.05 billion and $8.53 billion, respectively, of time deposits that were greater than $250,000.

The firm’s savings and demand deposits are recorded based on the amount of cash received plus accrued interest, which approximates fair value. In addition, the firm designates certain derivatives as fair value hedges to convert a majority of its time deposits not accounted for at fair value from fixed-rate obligations into floating-rate obligations. Accordingly, the carrying value of time deposits approximated fair value as of December 2016 and December 2015. While these savings and demand deposits and time deposits are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these deposits been included in the firm’s fair value hierarchy, they would have been classified in level 2 as of December 2016 and December 2015.

## Note 15.

## Short-Term Borrowings

The table below presents details about the firm’s short-term borrowings.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Other secured financings (short-term)</td><td>$13,118</td><td>$14,233</td></tr><tr><td>Unsecured short-term borrowings</td><td>39,265</td><td>42,787</td></tr><tr><td>Total</td><td>$52,383</td><td>$57,020</td></tr></table>

See Note 10 for information about other secured financings.

Unsecured short-term borrowings include the portion of unsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder.



The firm accounts for commercial paper and certain hybrid financial instruments at fair value under the fair value option. See Note 8 for further information about unsecured short-term borrowings that are accounted for at fair value. The carrying value of unsecured short-term borrowings that are not recorded at fair value generally approximates fair value due to the short-term nature of the obligations. While these unsecured short-term borrowings are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6 through 8. Had these borrowings been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2016 and December 2015.

The table below presents details about the firm’s unsecured short-term borrowings.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Current portion of unsecured long-term borrowings</td><td>$23,528</td><td>$25,373</td></tr><tr><td>Hybrid financial instruments</td><td>11,700</td><td>12,956</td></tr><tr><td>Commercial paper</td><td>—</td><td>208</td></tr><tr><td>Other short-term borrowings</td><td>4,037</td><td>4,250</td></tr><tr><td>Total</td><td>$39,265</td><td>$42,787</td></tr><tr><td>Weighted average interest rate</td><td>1.68%</td><td>1.52%</td></tr></table>

In the table above:

• The current portion of unsecured long-term borrowings includes $21.53 billion and $24.11 billion as of December 2016 and December 2015, respectively, issued by Group Inc.

• The weighted average interest rates for these borrowings include the effect of hedging activities and exclude financial instruments accounted for at fair value under the fair value option. See Note 7 for further information about hedging activities.

## Note 16.

## Long-Term Borrowings

The table below presents details about the firm’s long-term borrowings.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Other secured financings (long-term)</td><td>$ 8,405</td><td>$ 10,520</td></tr><tr><td>Unsecured long-term borrowings</td><td>189,086</td><td>175,422</td></tr><tr><td>Total</td><td>$197,491</td><td>$185,942</td></tr></table>

See Note 10 for information about other secured financings.

The table below presents unsecured long-term borrowings extending through 2056 and consisting principally of senior borrowings.

<table><tr><td>$ in millions</td><td>U.S. Dollar</td><td>Non-U.S. Dollar</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Fixed-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>Group Inc.</td><td>$ 93,885</td><td>$31,274</td><td>$125,159</td></tr><tr><td>Subsidiaries</td><td>2,228</td><td>885</td><td>3,113</td></tr><tr><td>Floating-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>Group Inc.</td><td>27,864</td><td>19,112</td><td>46,976</td></tr><tr><td>Subsidiaries</td><td>8,884</td><td>4,954</td><td>13,838</td></tr><tr><td>Total</td><td>$132,861</td><td>$56,225</td><td>$189,086</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Fixed-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>Group Inc.</td><td>$ 90,076</td><td>$29,808</td><td>$119,884</td></tr><tr><td>Subsidiaries</td><td>2,114</td><td>895</td><td>3,009</td></tr><tr><td>Floating-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>Group Inc.</td><td>27,881</td><td>16,916</td><td>44,797</td></tr><tr><td>Subsidiaries</td><td>5,662</td><td>2,070</td><td>7,732</td></tr><tr><td>Total</td><td>$125,733</td><td>$49,689</td><td>$175,422</td></tr></table>

In the table above:

• Floating interest rates are generally based on LIBOR or OIS. Equity-linked and indexed instruments are included in floating-rate obligations.

• Interest rates on U.S. dollar-denominated debt ranged from 1.60% to 10.04% (with a weighted average rate of 4.57%) and 1.60% to 10.04% (with a weighted average rate of 8.89%) as of December 2016 and December 2015, respectively.

• Interest rates on non-U.S. dollar-denominated debt ranged from 0.02% to 13.00% (with a weighted average rate of 3.05%) and 0.40% to 13.00% (with a weighted average rate of 3.81%) as of December 2016 and December 2015, respectively.

The table below presents unsecured long-term borrowings by maturity date.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">As of December 2016</td></tr><tr><td>Group Inc.</td><td>Subsidiaries</td><td>Total</td></tr><tr><td>2018</td><td>$ 23,814</td><td>$ 2,890</td><td>$ 26,704</td></tr><tr><td>2019</td><td>23,012</td><td>2,582</td><td>25,594</td></tr><tr><td>2020</td><td>17,291</td><td>1,118</td><td>18,409</td></tr><tr><td>2021</td><td>20,005</td><td>740</td><td>20,745</td></tr><tr><td>2022 - thereafter</td><td>88,013</td><td>9,621</td><td>97,634</td></tr><tr><td>Total</td><td>$172,135</td><td>$16,951</td><td>$189,086</td></tr></table>

In the table above:

• Unsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder are excluded as they are included as unsecured short-term borrowings.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

• Unsecured long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates.

• Unsecured long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the earliest dates such options become exercisable.

• Unsecured long-term borrowings include $7.43 billion of adjustments to the carrying value of certain unsecured long-term borrowings resulting from the application of hedge accounting by year of maturity as follows: $386 million in 2018, $295 million in 2019, $355 million in 2020, $586 million in 2021, and $5.81 billion in 2022 and thereafter.

The firm designates certain derivatives as fair value hedges to convert a portion of its fixed-rate unsecured long-term borrowings not accounted for at fair value into floating-rate obligations. See Note 7 for further information about hedging activities. The table below presents unsecured long-term borrowings, after giving effect to such hedging activities.

<table><tr><td>$ in millions</td><td>Group Inc.</td><td>Subsidiaries</td><td>Total</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Fixed-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>$ —</td><td>$ 150</td><td>$ 150</td></tr><tr><td>At amortized cost</td><td>71,225</td><td>3,493</td><td>74,718</td></tr><tr><td>Floating-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>17,591</td><td>11,669</td><td>29,260</td></tr><tr><td>At amortized cost</td><td>83,319</td><td>1,639</td><td>84,958</td></tr><tr><td>Total</td><td>$172,135</td><td>$16,951</td><td>$189,086</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Fixed-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>$ —</td><td>$ 21</td><td>$ 21</td></tr><tr><td>At amortized cost</td><td>52,448</td><td>2,569</td><td>55,017</td></tr><tr><td>Floating-rate obligations:</td><td></td><td></td><td></td></tr><tr><td>At fair value</td><td>16,194</td><td>6,058</td><td>22,252</td></tr><tr><td>At amortized cost</td><td>96,039</td><td>2,093</td><td>98,132</td></tr><tr><td>Total</td><td>$164,681</td><td>$10,741</td><td>$175,422</td></tr></table>

In the table above, the weighted average interest rates on the aggregate amounts were 2.87% (3.90% related to fixed-rate obligations and 1.97% related to floating-rate obligations) and 2.73% (4.33% related to fixed-rate obligations and 1.84% related to floating-rate obligations) as of December 2016 and December 2015, respectively. These rates exclude financial instruments accounted for at fair value under the fair value option.

As of December 2016 and December 2015, the carrying value of unsecured long-term borrowings for which the firm did not elect the fair value option approximated fair value. As these borrowings are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP, their fair value is not included in the firm's fair value hierarchy in Notes 6 through 8. Had these borrowings been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2016 and December 2015.

## Subordinated Borrowings

Unsecured long-term borrowings include subordinated debt and junior subordinated debt. Junior subordinated debt is junior in right of payment to other subordinated borrowings, which are junior to senior borrowings. As of both December 2016 and December 2015, subordinated debt had maturities ranging from 2018 to 2045. Subordinated debt that matures within one year of the financial statement date is included in “Unsecured short-term borrowings.”

The table below presents subordinated borrowings.

<table><tr><td>$ in millions</td><td>Par Amount</td><td>Carrying Amount</td><td>Rate</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Subordinated debt</td><td>$15,058</td><td>$17,604</td><td>4.29%</td></tr><tr><td>Junior subordinated debt</td><td>1,360</td><td>1,809</td><td>5.70%</td></tr><tr><td>Total</td><td>$16,418</td><td>$19,413</td><td>4.41%</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Subordinated debt</td><td>$18,004</td><td>$20,784</td><td>3.79%</td></tr><tr><td>Junior subordinated debt</td><td>1,359</td><td>1,817</td><td>5.77%</td></tr><tr><td>Total</td><td>$19,363</td><td>$22,601</td><td>3.93%</td></tr></table>

## In the table above:

• Par amount and carrying amount of subordinated debt issued by Group Inc. were $14.84 billion and $17.39 billion, respectively, as of December 2016 and $17.47 billion and $20.25 billion, respectively, as of December 2015.

• The rate is the weighted average interest rate for these borrowings, including the effect of fair value hedges used to convert these fixed-rate obligations into floating-rate obligations. See Note 7 for further information about hedging activities.

## Junior Subordinated Debt

Junior Subordinated Debt Held by Trusts. In 2012, the Vesey Street Investment Trust I (Vesey Street Trust) and the Murray Street Investment Trust I (Murray Street Trust) issued an aggregate of $2.25 billion of senior guaranteed trust securities to third parties, the proceeds of which were used to purchase junior subordinated debt issued by Group Inc. from Goldman Sachs Capital II and Goldman Sachs Capital III (APEX Trusts). The APEX Trusts used the proceeds to purchase shares of Group Inc.'s Perpetual Non-Cumulative Preferred Stock, Series E (Series E Preferred Stock) and Perpetual Non-Cumulative Preferred Stock, Series F (Series F Preferred Stock). The senior guaranteed trust securities issued by the Vesey Street Trust and the related junior subordinated debt matured during the third quarter of 2016. As of December 2016, $1.45 billion of senior guaranteed trust securities issued by the Murray Street Trust and the related junior subordinated debt (that pays interest semi-annually at a fixed annual rate of 4.647%, and matures on March 9, 2017) were outstanding.



The Murray Street Trust is required to redeem its senior guaranteed trust securities upon the maturity of the junior subordinated debt it holds.

The firm has the right to defer payments on the junior subordinated debt, subject to limitations. During any such deferral period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common or preferred stock. However, as Group Inc. fully and unconditionally guarantees the payment of the distribution and redemption amounts when due on a senior basis on the senior guaranteed trust securities, the junior subordinated debt held by the Murray Street Trust is included in “Unsecured short-term borrowings,” and is not classified as subordinated borrowings.

The APEX Trusts and the Murray Street Trust are Delaware statutory trusts sponsored by the firm and wholly-owned finance subsidiaries of the firm for regulatory and legal purposes but are not consolidated for accounting purposes.

The firm has covenanted in favor of the holders of Group Inc.'s 6.345% junior subordinated debt due February 15, 2034, that, subject to certain exceptions, the firm will not redeem or purchase the capital securities issued by the APEX Trusts, shares of Group Inc.'s Series E or Series F Preferred Stock or shares of Group Inc.'s Series O Perpetual Non-Cumulative Preferred Stock if the redemption or purchase results in less than $253 million aggregate liquidation preference outstanding, prior to specified dates in 2022 for a price that exceeds a maximum amount determined by reference to the net cash proceeds that the firm has received from the sale of qualifying securities. During 2016, the firm exchanged a par amount of $1.32 billion of APEX issued by the APEX Trusts for a corresponding redemption value of the Series E and Series F Preferred Stock, which was permitted under the covenants referenced above.

Junior Subordinated Debt Issued in Connection with Trust Preferred Securities. Group Inc. issued $2.84 billion of junior subordinated debt in 2004 to Goldman Sachs Capital I (Trust), a Delaware statutory trust. The Trust issued $2.75 billion of guaranteed preferred beneficial interests (Trust Preferred Securities) to third parties and $85 million of common beneficial interests to Group Inc. and used the proceeds from the issuances to purchase the junior subordinated debt from Group Inc. During 2014 and the first quarter of 2015, the firm purchased $1.43 billion (par amount) of Trust Preferred Securities and delivered these securities, along with $44.2 million of common beneficial interests, to the Trust in exchange for a corresponding par amount of the junior subordinated debt. Following the exchanges, these Trust Preferred Securities, common beneficial interests and junior subordinated debt were extinguished. Subsequent to these extinguishments, the outstanding par amount of junior subordinated debt held by the Trust was $1.36 billion and the outstanding par amount of Trust Preferred Securities and common beneficial interests issued by the Trust was $1.32 billion and $40.8 million, respectively. The Trust is a wholly-owned finance subsidiary of the firm for regulatory and legal purposes but is not consolidated for accounting purposes.

The firm pays interest semi-annually on the junior subordinated debt at an annual rate of 6.345% and the debt matures on February 15, 2034. The coupon rate and the payment dates applicable to the beneficial interests are the same as the interest rate and payment dates for the junior subordinated debt. The firm has the right, from time to time, to defer payment of interest on the junior subordinated debt, and therefore cause payment on the Trust’s preferred beneficial interests to be deferred, in each case up to ten consecutive semi-annual periods. During any such deferral period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common stock. The Trust is not permitted to pay any distributions on the common beneficial interests held by Group Inc. unless all dividends payable on the preferred beneficial interests have been paid in full.



## Note 17.

## Other Liabilities and Accrued Expenses

The table below presents other liabilities and accrued expenses by type.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Compensation and benefits</td><td>$ 7,181</td><td>$ 8,149</td></tr><tr><td>Noncontrolling interests</td><td>506</td><td>459</td></tr><tr><td>Income tax-related liabilities</td><td>1,794</td><td>1,280</td></tr><tr><td>Employee interests in consolidated funds</td><td>77</td><td>149</td></tr><tr><td>Subordinated liabilities of consolidated VIEs</td><td>584</td><td>501</td></tr><tr><td>Accrued expenses and other</td><td>4,220</td><td>8,355</td></tr><tr><td>Total</td><td>$ 14,362</td><td>$ 18,893</td></tr></table>

In the table above, the decrease in accrued expenses and other from December 2015 to December 2016 reflects payments related to the settlement agreement with the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (RMBS Working Group), as well as the sale of liabilities previously classified as held for sale related to certain of the firm’s consolidated investments.

## Note 18.

## Commitments, Contingencies and Guarantees

## Commitments

The table below presents the firm’s commitments by type.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Commitments to extend credit</td><td></td><td></td></tr><tr><td>Commercial lending:</td><td></td><td></td></tr><tr><td>Investment-grade</td><td>$ 73,664</td><td>$ 72,428</td></tr><tr><td>Non-investment-grade</td><td>34,878</td><td>41,277</td></tr><tr><td>Warehouse financing</td><td>3,514</td><td>3,453</td></tr><tr><td>Total commitments to extend credit</td><td>112,056</td><td>117,158</td></tr><tr><td>Contingent and forward starting resale and securities borrowing agreements</td><td>25,348</td><td>28,874</td></tr><tr><td>Forward starting repurchase and secured lending agreements</td><td>8,939</td><td>5,878</td></tr><tr><td>Letters of credit</td><td>373</td><td>249</td></tr><tr><td>Investment commitments</td><td>8,444</td><td>6,054</td></tr><tr><td>Other</td><td>6,014</td><td>6,944</td></tr><tr><td>Total commitments</td><td>$161,174</td><td>$165,157</td></tr></table>

The table below presents the firm’s commitments by period of expiration.

<table><tr><td rowspan="2">\( in millions</td><td colspan="4">As of December 2016</td></tr><tr><td>2017</td><td>2018 - 2019</td><td>2020 - 2021</td><td>2022 - Thereafter</td></tr><tr><td>Commitments to extend credit</td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial lending:</td><td></td><td></td><td></td><td></td></tr><tr><td>Investment-grade</td><td>$19,408</td><td>$14,091</td><td>$39,665</td><td>$ 500</td></tr><tr><td>Non-investment-grade</td><td>2,562</td><td>9,458</td><td>18,484</td><td>4,374</td></tr><tr><td>Warehouse financing</td><td>388</td><td>1,356</td><td>263</td><td>1,507</td></tr><tr><td>Total commitments to extend credit</td><td>22,358</td><td>24,905</td><td>58,412</td><td>6,381</td></tr><tr><td>Contingent and forward starting resale and securities borrowing agreements</td><td>25,348</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Forward starting repurchase and secured lending agreements</td><td>8,939</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Letters of credit</td><td>308</td><td>21</td><td>—</td><td>44</td></tr><tr><td>Investment commitments</td><td>6,713</td><td>415</td><td>108</td><td>1,208</td></tr><tr><td>Other</td><td>5,756</td><td>200</td><td>15</td><td>43</td></tr><tr><td>Total commitments</td><td>$69,422</td><td>$25,541</td><td>$58,535</td><td>$7,676</td></tr></table>

## Commitments to Extend Credit

The firm’s commitments to extend credit are agreements to lend with fixed termination dates and depend on the satisfaction of all contractual conditions to borrowing. These commitments are presented net of amounts syndicated to third parties. The total commitment amount does not necessarily reflect actual future cash flows because the firm may syndicate all or substantial additional portions of these commitments. In addition, commitments can expire unused or be reduced or cancelled at the counterparty’s request.

As of December 2016 and December 2015, $98.05 billion and $93.92 billion, respectively, of the firm’s lending commitments were held for investment and were accounted for on an accrual basis. See Note 9 for further information about such commitments. In addition, as of December 2016 and December 2015, $6.87 billion and $9.92 billion, respectively, of the firm’s lending commitments were held for sale and were accounted for at the lower of cost or fair value.

The firm accounts for the remaining commitments to extend credit at fair value. Losses, if any, are generally recorded, net of any fees in “Other principal transactions.”



Commercial Lending. The firm’s commercial lending commitments are extended to investment-grade and non-investment-grade corporate borrowers. Commitments to investment-grade corporate borrowers are principally used for operating liquidity and general corporate purposes. The firm also extends lending commitments in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. Commitments that are extended for contingent acquisition financing are often intended to be short-term in nature, as borrowers often seek to replace them with other funding sources.

Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection on certain approved loan commitments (primarily investment-grade commercial lending commitments). The notional amount of such loan commitments was $26.88 billion and $27.03 billion as of December 2016 and December 2015, respectively. The credit loss protection on loan commitments provided by SMFG is generally limited to 95% of the first loss the firm realizes on such commitments, up to a maximum of approximately $950 million. In addition, subject to the satisfaction of certain conditions, upon the firm’s request, SMFG will provide protection for 70% of additional losses on such commitments, up to a maximum of $1.13 billion, of which $768 million of protection had been provided as of both December 2016 and December 2015. The firm also uses other financial instruments to mitigate credit risks related to certain commitments not covered by SMFG. These instruments primarily include credit default swaps that reference the same or similar underlying instrument or entity, or credit default swaps that reference a market index.

Warehouse Financing. The firm provides financing to clients who warehouse financial assets. These arrangements are secured by the warehoused assets, primarily consisting of consumer and corporate loans.

## Contingent and Forward Starting Resale and Securities Borrowing Agreements/Forward Starting Repurchase and Secured Lending Agreements

The firm enters into resale and securities borrowing agreements and repurchase and secured lending agreements that settle at a future date, generally within three business days. The firm also enters into commitments to provide contingent financing to its clients and counterparties through resale agreements. The firm’s funding of these commitments depends on the satisfaction of all contractual conditions to the resale agreement and these commitments can expire unused.

## Letters of Credit

The firm has commitments under letters of credit issued by various banks which the firm provides to counterparties in lieu of securities or cash to satisfy various collateral and margin deposit requirements.

## Investment Commitments

The firm’s investment commitments include commitments to invest in private equity, real estate and other assets directly and through funds that the firm raises and manages. Investment commitments include $2.10 billion and $2.86 billion as of December 2016 and December 2015, respectively, related to commitments to invest in funds managed by the firm. If these commitments are called, they would be funded at market value on the date of investment.

## Leases

The firm has contractual obligations under long-term noncancelable lease agreements for office space expiring on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges.

The table below presents future minimum rental payments, net of minimum sublease rentals.

<table><tr><td>$ in millions</td><td>As of December 2016</td></tr><tr><td>2017</td><td>$ 290</td></tr><tr><td>2018</td><td>282</td></tr><tr><td>2019</td><td>238</td></tr><tr><td>2020</td><td>206</td></tr><tr><td>2021</td><td>159</td></tr><tr><td>2022 - thereafter</td><td>766</td></tr><tr><td>Total</td><td>$1,941</td></tr></table>

Rent charged to operating expense was $244 million for 2016, $249 million for 2015 and $309 million for 2014.

Operating leases include office space held in excess of current requirements. Rent expense relating to space held for growth is included in “Occupancy.” The firm records a liability, based on the fair value of the remaining lease rentals reduced by any potential or existing sublease rentals, for leases where the firm has ceased using the space and management has concluded that the firm will not derive any future economic benefits. Costs to terminate a lease before the end of its term are recognized and measured at fair value on termination. During 2016, the firm incurred exit costs of approximately $68 million related to excess office space.



## Contingencies

Legal Proceedings. See Note 27 for information about legal proceedings, including certain mortgage-related matters, and agreements the firm has entered into to toll the statute of limitations.

Certain Mortgage-Related Contingencies. There are multiple areas of focus by regulators, governmental agencies and others within the mortgage market that may impact originators, issuers, servicers and investors. There remains significant uncertainty surrounding the nature and extent of any potential exposure for participants in this market.

The firm has not been a significant originator of residential mortgage loans. The firm did purchase loans originated by others and generally received loan-level representations. During the period 2005 through 2008, the firm sold approximately $10 billion of loans to government-sponsored enterprises and approximately $11 billion of loans to other third parties. In addition, the firm transferred $125 billion of loans to trusts and other mortgage securitization vehicles. In connection with both sales of loans and securitizations, the firm provided loan-level representations and/or assigned the loan-level representations from the party from whom the firm purchased the loans.

The firm’s exposure to claims for repurchase of residential mortgage loans based on alleged breaches of representations will depend on a number of factors such as the extent to which these claims are made within the statute of limitations, taking into consideration the agreements to toll the statute of limitations the firm has entered into with trustees representing certain trusts. Based upon the large number of defaults in residential mortgages, including those sold or securitized by the firm, there is a potential for repurchase claims. However, the firm is not in a position to make a meaningful estimate of that exposure at this time.

Other Contingencies. In connection with the sale of Metro, the firm agreed to provide indemnities to the buyer, which primarily relate to fundamental representations and warranties, and potential liabilities for legal or regulatory proceedings arising out of the conduct of Metro’s business while the firm owned it.
In connection with the settlement agreement with the RMBS Working Group, the firm agreed to provide $1.80 billion in consumer relief in the form of principal forgiveness for underwater homeowners and distressed borrowers; financing for construction, rehabilitation and preservation of affordable housing; and support for debt restructuring, foreclosure prevention and housing quality improvement programs, as well as land banks.

## Guarantees

The table below presents information about certain derivatives that meet the definition of a guarantee, securities lending indemnifications and certain other guarantees.

<table><tr><td>$ in millions</td><td>Securities lending Indemnifications</td><td>Other financial guarantees</td></tr><tr><td>As of December 2016</td><td></td><td></td></tr><tr><td>Carrying Value of Net Liability</td><td>$ 8,873</td><td>$ —</td></tr><tr><td>Maximum Payout/Notional Amount by Period of Expiration</td><td></td><td></td></tr><tr><td>2017</td><td>$432,328</td><td>$33,403</td></tr><tr><td>2018 - 2019</td><td>261,676</td><td>—</td></tr><tr><td>2020 - 2021</td><td>71,264</td><td>—</td></tr><tr><td>2022 - thereafter</td><td>51,506</td><td>—</td></tr><tr><td>Total</td><td>$816,774</td><td>$33,403</td></tr><tr><td>As of December 2015</td><td></td><td></td></tr><tr><td>Carrying Value of Net Liability</td><td>$ 8,351</td><td>$ —</td></tr><tr><td>Maximum Payout/Notional Amount by Period of Expiration</td><td></td><td></td></tr><tr><td>2016</td><td>$640,288</td><td>$31,902</td></tr><tr><td>2017 - 2018</td><td>168,784</td><td>—</td></tr><tr><td>2019 - 2020</td><td>67,643</td><td>—</td></tr><tr><td>2021 - thereafter</td><td>49,728</td><td>—</td></tr><tr><td>Total</td><td>$926,443</td><td>$31,902</td></tr></table>

In the table above:

• The maximum payout is based on the notional amount of the contract and does not represent anticipated losses.

• Amounts exclude certain commitments to issue standby letters of credit that are included in “Commitments to extend credit.” See the tables in “Commitments” above for a summary of the firm’s commitments.



Derivative Guarantees. The firm enters into various derivatives that meet the definition of a guarantee under U.S. GAAP, including written equity and commodity put options, written currency contracts and interest rate caps, floors and swaptions. These derivatives are risk managed together with derivatives that do not meet the definition of a guarantee, and therefore the amounts in the table above do not reflect the firm's overall risk related to its derivative activities. Disclosures about derivatives are not required if they may be cash settled and the firm has no basis to conclude it is probable that the counterparties held the underlying instruments at inception of the contract. The firm has concluded that these conditions have been met for certain large, internationally active commercial and investment bank counterparties, central clearing counterparties and certain other counterparties. Accordingly, the firm has not included such contracts in the table above. In addition, see Note 7 for information about credit derivatives that meet the definition of a guarantee, which are not included in the table above.

Derivatives are accounted for at fair value and therefore the carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying values in the table above exclude the effect of counterparty and cash collateral netting.

Securities Lending Indemnifications. The firm, in its capacity as an agency lender, indemnifies most of its securities lending customers against losses incurred in the event that borrowers do not return securities and the collateral held is insufficient to cover the market value of the securities borrowed. Collateral held by the lenders in connection with securities lending indemnifications was $34.33 billion and $32.85 billion as of December 2016 and December 2015, respectively. Because the contractual nature of these arrangements requires the firm to obtain collateral with a market value that exceeds the value of the securities lent to the borrower, there is minimal performance risk associated with these guarantees.

Other Financial Guarantees. In the ordinary course of business, the firm provides other financial guarantees of the obligations of third parties (e.g., standby letters of credit and other guarantees to enable clients to complete transactions and fund-related guarantees). These guarantees represent obligations to make payments to beneficiaries if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary.
Guarantees of Securities Issued by Trusts. The firm has established trusts, including Goldman Sachs Capital I, the APEX Trusts, the Murray Street Trust, and other entities for the limited purpose of issuing securities to third parties, lending the proceeds to the firm and entering into contractual arrangements with the firm and third parties related to this purpose. The firm does not consolidate these entities. See Note 16 for further information about the transactions involving Goldman Sachs Capital I, the APEX Trusts, and the Murray Street Trust.

The firm effectively provides for the full and unconditional guarantee of the securities issued by these entities. Timely payment by the firm of amounts due to these entities under the guarantee, borrowing, preferred stock and related contractual arrangements will be sufficient to cover payments due on the securities issued by these entities.

Management believes that it is unlikely that any circumstances will occur, such as nonperformance on the part of paying agents or other service providers, that would make it necessary for the firm to make payments related to these entities other than those required under the terms of the guarantee, borrowing, preferred stock and related contractual arrangements and in connection with certain expenses incurred by these entities.

Indemnities and Guarantees of Service Providers. In the ordinary course of business, the firm indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the firm or its affiliates.

The firm may also be liable to some clients or other parties for losses arising from its custodial role or caused by acts or omissions of third-party service providers, including subcustodians and third-party brokers. In certain cases, the firm has the right to seek indemnification from these third-party service providers for certain relevant losses incurred by the firm. In addition, the firm is a member of payment, clearing and settlement networks as well as securities exchanges around the world that may require the firm to meet the obligations of such networks and exchanges in the event of member defaults and other loss scenarios.



In connection with the firm’s prime brokerage and clearing businesses, the firm agrees to clear and settle on behalf of its clients the transactions entered into by them with other brokerage firms. The firm’s obligations in respect of such transactions are secured by the assets in the client’s account as well as any proceeds received from the transactions cleared and settled by the firm on behalf of the client. In connection with joint venture investments, the firm may issue loan guarantees under which it may be liable in the event of fraud, misappropriation, environmental liabilities and certain other matters involving the borrower.

The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no material liabilities related to these guarantees and indemnifications have been recognized in the consolidated statements of financial condition as of December 2016 and December 2015.

Other Representations, Warranties and Indemnifications. The firm provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The firm may also provide indemnifications protecting against changes in or adverse application of certain U.S. tax laws in connection with ordinary-course transactions such as securities issuances, borrowings or derivatives.

In addition, the firm may provide indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or an adverse application of certain non-U.S. tax laws.

These indemnifications generally are standard contractual terms and are entered into in the ordinary course of business. Generally, there are no stated or notional amounts included in these indemnifications, and the contingencies triggering the obligation to indemnify are not expected to occur. The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no material liabilities related to these arrangements have been recognized in the consolidated statements of financial condition as of December 2016 and December 2015.
Guarantees of Subsidiaries. Group Inc. fully and unconditionally guarantees the securities issued by GS Finance Corp., a wholly-owned finance subsidiary of the firm.

Group Inc. has guaranteed the payment obligations of Goldman, Sachs & Co. (GS&Co.) and GS Bank USA, subject to certain exceptions.

In addition, Group Inc. guarantees many of the obligations of its other consolidated subsidiaries on a transaction-by-transaction basis, as negotiated with counterparties. Group Inc. is unable to develop an estimate of the maximum payout under its subsidiary guarantees; however, because these guaranteed obligations are also obligations of consolidated subsidiaries, Group Inc.'s liabilities as guarantor are not separately disclosed.

## Note 19.

## Shareholders' Equity

## Common Equity

Dividends declared per common share were $2.60 in 2016, $2.55 in 2015 and $2.25 in 2014. On January 17, 2017, Group Inc. declared a dividend of $0.65 per common share to be paid on March 30, 2017 to common shareholders of record on March 2, 2017.

The firm’s share repurchase program is intended to help maintain the appropriate level of common equity. The share repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), the amounts and timing of which are determined primarily by the firm’s current and projected capital position, but which may also be influenced by general market conditions and the prevailing price and trading volumes of the firm’s common stock. Prior to repurchasing common stock, the firm must receive confirmation that the Federal Reserve Board does not object to such capital actions.

The table below presents the amount of common stock repurchased by the firm under the share repurchase program.

<table><tr><td rowspan="2">in millions, except per share amounts</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Common share repurchases</td><td>36.6</td><td>22.1</td><td>31.8</td></tr><tr><td>Average cost per share</td><td>$165.88</td><td>$189.41</td><td>$171.79</td></tr><tr><td>Total cost of common share repurchases</td><td>$6,069</td><td>$4,195</td><td>$5,469</td></tr></table>



Pursuant to the terms of certain share-based compensation plans, employees may remit shares to the firm or the firm may cancel RSUs or stock options to satisfy minimum statutory employee tax withholding requirements and the exercise price of stock options. Under these plans, during 2016, 2015 and 2014, 49,374 shares, 35,217 shares and 174,489 shares were remitted with a total value of $7 million, $6 million and $31 million, and the firm cancelled 6.1 million, 5.7 million and 5.8 million of RSUs with a total value of $921 million, $1.03 billion and $974 million. Under these plans, the firm also cancelled 5.5 million, 2.0 million and 15.6 million of stock options with a total value of $1.11 billion, $406 million and $2.65 billion during 2016, 2015 and 2014, respectively.

## Preferred Equity

The tables below present details about the perpetual preferred stock issued and outstanding as of December 2016.

<table><tr><td>Series</td><td>Shares Authorized</td><td>Shares Issued</td><td>Shares Outstanding</td><td>Depositary Shares Per Share</td></tr><tr><td>A</td><td>50,000</td><td>30,000</td><td>29,999</td><td>1,000</td></tr><tr><td>B</td><td>50,000</td><td>32,000</td><td>32,000</td><td>1,000</td></tr><tr><td>C</td><td>25,000</td><td>8,000</td><td>8,000</td><td>1,000</td></tr><tr><td>D</td><td>60,000</td><td>54,000</td><td>53,999</td><td>1,000</td></tr><tr><td>E</td><td>17,500</td><td>7,667</td><td>7,667</td><td>N/A</td></tr><tr><td>F</td><td>5,000</td><td>1,615</td><td>1,615</td><td>N/A</td></tr><tr><td>I</td><td>34,500</td><td>34,000</td><td>34,000</td><td>1,000</td></tr><tr><td>J</td><td>46,000</td><td>40,000</td><td>40,000</td><td>1,000</td></tr><tr><td>K</td><td>32,200</td><td>28,000</td><td>28,000</td><td>1,000</td></tr><tr><td>L</td><td>52,000</td><td>52,000</td><td>52,000</td><td>25</td></tr><tr><td>M</td><td>80,000</td><td>80,000</td><td>80,000</td><td>25</td></tr><tr><td>N</td><td>31,050</td><td>27,000</td><td>27,000</td><td>1,000</td></tr><tr><td>O</td><td>26,000</td><td>26,000</td><td>26,000</td><td>25</td></tr><tr><td>Total</td><td>509,250</td><td>420,282</td><td>420,280</td><td></td></tr></table>

<table><tr><td>Series</td><td>Earliest Redemption Date</td><td>Liquidation Preference</td><td>Redemption Value ($ in millions)</td></tr><tr><td>A</td><td>Currently redeemable</td><td>$ 25,000</td><td>$ 750</td></tr><tr><td>B</td><td>Currently redeemable</td><td>25,000</td><td>800</td></tr><tr><td>C</td><td>Currently redeemable</td><td>25,000</td><td>200</td></tr><tr><td>D</td><td>Currently redeemable</td><td>25,000</td><td>1,350</td></tr><tr><td>E</td><td>Currently redeemable</td><td>100,000</td><td>767</td></tr><tr><td>F</td><td>Currently redeemable</td><td>100,000</td><td>161</td></tr><tr><td>I</td><td>November 10, 2017</td><td>25,000</td><td>850</td></tr><tr><td>J</td><td>May 10, 2023</td><td>25,000</td><td>1,000</td></tr><tr><td>K</td><td>May 10, 2024</td><td>25,000</td><td>700</td></tr><tr><td>L</td><td>May 10, 2019</td><td>25,000</td><td>1,300</td></tr><tr><td>M</td><td>May 10, 2020</td><td>25,000</td><td>2,000</td></tr><tr><td>N</td><td>May 10, 2021</td><td>25,000</td><td>675</td></tr><tr><td>O</td><td>November 10, 2026</td><td>25,000</td><td>650</td></tr><tr><td>Total</td><td></td><td></td><td>$11,203</td></tr></table>

In the tables above:

• All shares have a par value of $0.01 per share and, where applicable, each share is represented by the specified number of depositary shares.

• The earliest redemption date represents the date on which each share of non-cumulative Preferred Stock is redeemable at the firm’s option.

• The redemption price per share for Series A through F Preferred Stock is the liquidation preference plus declared and unpaid dividends. The redemption price per share for Series I through O Preferred Stock is the liquidation preference plus accrued and unpaid dividends. Each share of non-cumulative Series E and Series F Preferred Stock issued and outstanding is redeemable at the firm’s option, subject to certain covenant restrictions governing the firm’s ability to redeem the preferred stock without issuing common stock or other instruments with equity-like characteristics. See Note 16 for information about the replacement capital covenants applicable to the Series E and Series F Preferred Stock.

• In February 2016, Group Inc. issued 27,000 shares of Series N perpetual 6.30% Non-Cumulative Preferred Stock (Series N Preferred Stock).

• In July 2016, Group Inc. issued 26,000 shares of Series O perpetual 5.30% Fixed-to-Floating Rate Non-Cumulative Preferred Stock (Series O Preferred Stock).

• Prior to redeeming preferred stock, the firm must receive confirmation that the Federal Reserve Board does not object to such capital actions.

• All series of preferred stock are pari passu and have a preference over the firm’s common stock on liquidation.

• Dividends on each series of preferred stock, excluding Series I, Series M and Series O Preferred Stock, if declared, are payable quarterly in arrears. Dividends on Series L, Series M and Series O Preferred Stock, if declared, are payable semi-annually in arrears from the issuance date to, but excluding, May 10, 2019, May 10, 2020 and November 10, 2026, respectively, and quarterly thereafter.

• The firm’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the firm fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period.



During 2016, the firm delivered a par amount of $1.32 billion (fair value of $1.04 billion) of APEX to the APEX Trusts in exchange for 9,833 shares of Series E Preferred Stock and 3,385 shares of Series F Preferred Stock for a total redemption value of $1.32 billion (net carrying value of $1.31 billion). Following the exchange, shares of Series E and Series F Preferred Stock were cancelled. The difference between the fair value of the APEX and the net carrying value of the preferred stock at the time of cancellation was $266 million for 2016, and was recorded in “Preferred stock dividends,” along with preferred dividends declared on the firm’s preferred stock. See Note 16 for further information about APEX.

The table below presents the dividend rates of the firm’s perpetual preferred stock as of December 2016.

<table><tr><td>Series</td><td>Dividend Rate</td></tr><tr><td>A</td><td>3 month LIBOR + 0.75%, with floor of 3.75% per annum</td></tr><tr><td>B</td><td>6.20% per annum</td></tr><tr><td>C</td><td>3 month LIBOR + 0.75%, with floor of 4.00% per annum</td></tr><tr><td>D</td><td>3 month LIBOR + 0.67%, with floor of 4.00% per annum</td></tr><tr><td>E</td><td>3 month LIBOR + 0.77%, with floor of 4.00% per annum</td></tr><tr><td>F</td><td>3 month LIBOR + 0.77%, with floor of 4.00 % per annum</td></tr><tr><td>I</td><td>5.95% per annum</td></tr><tr><td>J</td><td>5.50% per annum to, but excluding, May 10, 2023; 3 month LIBOR + 3.64% per annum thereafter</td></tr><tr><td>K</td><td>6.375% per annum to, but excluding, May 10, 2024; 3 month LIBOR + 3.55% per annum thereafter</td></tr><tr><td>L</td><td>5.70% per annum to, but excluding, May 10, 2019; 3 month LIBOR + 3.884% per annum thereafter</td></tr><tr><td>M</td><td>5.375% per annum to, but excluding, May 10, 2020; 3 month LIBOR + 3.922% per annum thereafter</td></tr><tr><td>N</td><td>6.30% per annum</td></tr><tr><td>O</td><td>5.30% per annum to, but excluding, November 10, 2026; 3 month LIBOR + 3.834% per annum thereafter</td></tr></table>

The table below presents preferred dividends declared on the firm’s preferred stock.

<table><tr><td rowspan="3">Series</td><td colspan="6">Year Ended December</td></tr><tr><td colspan="2">2016</td><td colspan="2">2015</td><td colspan="2">2014</td></tr><tr><td>per share</td><td>$ in millions</td><td>per share</td><td>$ in millions</td><td>per share</td><td>$ in millions</td></tr><tr><td>A</td><td>$ 953.12</td><td>$ 29</td><td>$ 950.52</td><td>$ 28</td><td>$ 945.32</td><td>$ 28</td></tr><tr><td>B</td><td>1,550.00</td><td>50</td><td>1,550.00</td><td>50</td><td>1,550.00</td><td></td></tr><tr><td>C</td><td>1,016.68</td><td>8</td><td>1,013.90</td><td>8</td><td>1,008.34</td><td>8</td></tr><tr><td>D</td><td>1,016.68</td><td>55</td><td>1,013.90</td><td>54</td><td>1,008.34</td><td>54</td></tr><tr><td>E</td><td>4,066.66</td><td>50</td><td>4,055.55</td><td>71</td><td>4,044.44</td><td>71</td></tr><tr><td>F</td><td>4,066.66</td><td>13</td><td>4,055.55</td><td>20</td><td>4,044.44</td><td>20</td></tr><tr><td>I</td><td>1,487.52</td><td>51</td><td>1,487.52</td><td>51</td><td>1,487.52</td><td></td></tr><tr><td>J</td><td>1,375.00</td><td>55</td><td>1,375.00</td><td>55</td><td>1,375.00</td><td></td></tr><tr><td>K</td><td>1,593.76</td><td>45</td><td>1,593.76</td><td>45</td><td>850.00</td><td>24</td></tr><tr><td>L</td><td>1,425.00</td><td>74</td><td>1,425.00</td><td>74</td><td>760.00</td><td>39</td></tr><tr><td>M</td><td>1,343.76</td><td>107</td><td>735.33</td><td>59</td><td>—</td><td>—</td></tr><tr><td>N</td><td>1,124.38</td><td>30</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>O</td><td>379.10</td><td>10</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td></td><td>$577</td><td></td><td>$515</td><td></td><td>$400</td></tr></table>

In the table above, the total preferred dividend amounts for Series E and Series F Preferred Stock for 2016 include prorated dividends of $866.67 per share related to 4,861 shares of Series E Preferred Stock and 1,639 shares of Series F Preferred Stock, which were cancelled during 2016.

On January 10, 2017, Group Inc. declared dividends of $239.58, $387.50, $255.56, $255.56, $371.88, $343.75, $398.44 and $393.75 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series I Preferred Stock, Series J Preferred Stock, Series K Preferred Stock and Series N Preferred Stock, respectively, to be paid on February 10, 2017 to preferred shareholders of record on January 26, 2017. In addition, the firm declared dividends of $1,000.00 per each share of Series E Preferred Stock and Series F Preferred Stock, to be paid on March 1, 2017 to preferred shareholders of record on February 14, 2017.

## Accumulated Other Comprehensive Loss

The table below presents accumulated other comprehensive loss, net of tax, by type. In the table below, the beginning balance of accumulated other comprehensive loss for the current period has been adjusted to reflect the impact of reclassifying the cumulative debt valuation adjustment, net of tax, from retained earnings to accumulated other comprehensive loss. See Note 3 for further information about the adoption of ASU No. 2016-01. See Note 8 for further information about the debt valuation adjustment.

<table><tr><td>$ in millions</td><td>Beginning balance</td><td>Other comprehensive income/(loss) adjustments, net of tax</td><td>Ending balance</td></tr><tr><td>As of December 2016</td><td></td><td></td><td></td></tr><tr><td>Currency translation</td><td>(587)</td><td>(60)</td><td>(647)</td></tr><tr><td>Debt valuation adjustment</td><td>305</td><td>(544)</td><td>(239)</td></tr><tr><td>Pension and postretirement liabilities</td><td>(131)</td><td>(199)</td><td>(330)</td></tr><tr><td>Total</td><td>(413)</td><td>(803)</td><td>(1,216)</td></tr><tr><td>As of December 2015</td><td></td><td></td><td></td></tr><tr><td>Currency translation</td><td>(473)</td><td>(114)</td><td>(587)</td></tr><tr><td>Pension and postretirement liabilities</td><td>(270)</td><td>139</td><td>(131)</td></tr><tr><td>Total</td><td>(743)</td><td>25</td><td>(718)</td></tr></table>



## Note 20.

## Regulation and Capital Adequacy

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

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

## Capital Framework

The regulations under the Revised Capital Framework are largely based on the Basel Committee 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 Revised Capital Framework, the firm is an “Advanced approach” banking organization.

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

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

<table><tr><td rowspan="2"></td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>CET1 ratio</td><td>5.875%</td><td>4.5%</td></tr><tr><td>Tier 1 capital ratio</td><td>7.375%</td><td>6.0%</td></tr><tr><td>Total capital ratio</td><td>9.375%</td><td>8.0%</td></tr><tr><td>Tier 1 leverage ratio</td><td>4.000%</td><td>4.0%</td></tr></table>

In the table above:

• The minimum ratios as of December 2016 reflect (i) the 2.5% phase-in of the capital conservation buffer (0.625%), (ii) the 2.5% phase-in of the Global Systemically Important Bank (G-SIB) buffer (0.75%), and (iii) the counter-cyclical capital buffer of zero percent, each described below.

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

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

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

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



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

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

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

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

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

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

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

## Credit Risk

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

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

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



## Market Risk

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

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

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

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

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

## Operational Risk

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

## Consolidated Regulatory Capital Ratios

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



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

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

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Common shareholders&#x27; equity</td><td>$ 75,690</td><td>$ 75,528</td></tr><tr><td>Deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities</td><td>(2,874)</td><td>(2,814)</td></tr><tr><td>Deductions for investments in nonconsolidated financial institutions</td><td>(424)</td><td>(864)</td></tr><tr><td>Other adjustments</td><td>(346)</td><td>(487)</td></tr><tr><td>Common Equity Tier 1</td><td>72,046</td><td>71,363</td></tr><tr><td>Preferred stock</td><td>11,203</td><td>11,200</td></tr><tr><td>Junior subordinated debt issued to trusts</td><td>—</td><td>330</td></tr><tr><td>Deduction for investments in covered funds</td><td>(445)</td><td>(413)</td></tr><tr><td>Other adjustments</td><td>(364)</td><td>(969)</td></tr><tr><td>Tier 1 capital</td><td>$ 82,440</td><td>$ 81,511</td></tr><tr><td>Standardized Tier 2 and Total capital</td><td></td><td></td></tr><tr><td>Tier 1 capital</td><td>$ 82,440</td><td>$ 81,511</td></tr><tr><td>Qualifying subordinated debt</td><td>14,566</td><td>15,132</td></tr><tr><td>Junior subordinated debt issued to trusts</td><td>792</td><td>990</td></tr><tr><td>Allowance for losses on loans and lending commitments</td><td>722</td><td>602</td></tr><tr><td>Other adjustments</td><td>(6)</td><td>(19)</td></tr><tr><td>Standardized Tier 2 capital</td><td>16,074</td><td>16,705</td></tr><tr><td>Standardized Total capital</td><td>$ 98,514</td><td>$ 98,216</td></tr><tr><td>Basel III Advanced Tier 2 and Total capital</td><td></td><td></td></tr><tr><td>Tier 1 capital</td><td>$ 82,440</td><td>$ 81,511</td></tr><tr><td>Standardized Tier 2 capital</td><td>16,074</td><td>16,705</td></tr><tr><td>Allowance for losses on loans and lending commitments</td><td>(722)</td><td>(602)</td></tr><tr><td>Basel III Advanced Tier 2 capital</td><td>15,352</td><td>16,103</td></tr><tr><td>Basel III Advanced Total capital</td><td>$ 97,792</td><td>$ 97,614</td></tr><tr><td>RWAs</td><td></td><td></td></tr><tr><td>Standardized</td><td>$496,676</td><td>$524,107</td></tr><tr><td>Basel III Advanced</td><td>549,650</td><td>577,651</td></tr><tr><td>CET1 ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>14.5%</td><td>13.6%</td></tr><tr><td>Basel III Advanced</td><td>13.1%</td><td>12.4%</td></tr><tr><td>Tier 1 capital ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>16.6%</td><td>15.6%</td></tr><tr><td>Basel III Advanced</td><td>15.0%</td><td>14.1%</td></tr><tr><td>Total capital ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>19.8%</td><td>18.7%</td></tr><tr><td>Basel III Advanced</td><td>17.8%</td><td>16.9%</td></tr><tr><td>Tier 1 leverage ratio</td><td>9.4%</td><td>9.3%</td></tr></table>

In the table above:

• The deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities, include goodwill of $3.67 billion and $3.66 billion as of December 2016 and December 2015, respectively, and identifiable intangible assets of $257 million (60% of $429 million) and $196 million (40% of $491 million) as of December 2016 and December 2015, respectively, net of associated deferred tax liabilities of $1.05 billion and $1.04 billion as of December 2016 and December 2015, respectively. Goodwill is fully deducted from CET1, while the deduction for identifiable intangible assets is required to be phased into CET1 ratably over five years from 2014 to 2018. The balance that is not deducted during the transitional period is risk weighted.

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

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

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



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

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

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

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Year Ended December 2016</td></tr><tr><td>Standardized</td><td>Basel III Advanced</td></tr><tr><td>Common Equity Tier 1</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$71,363</td><td>$71,363</td></tr><tr><td>Change in common shareholders&#x27; equity</td><td>162</td><td>162</td></tr><tr><td>Change in deductions for:</td><td></td><td></td></tr><tr><td>Transitional provisions</td><td>(839)</td><td>(839)</td></tr><tr><td>Goodwill and identifiable intangible assets, net of deferred tax liabilities</td><td>16</td><td>16</td></tr><tr><td>Investments in nonconsolidated financial institutions</td><td>895</td><td>895</td></tr><tr><td>Change in other adjustments</td><td>449</td><td>449</td></tr><tr><td>Ending balance</td><td>$72,046</td><td>$72,046</td></tr><tr><td>Tier 1 capital</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$81,511</td><td>$81,511</td></tr><tr><td>Change in deductions for:</td><td></td><td></td></tr><tr><td>Transitional provisions</td><td>(558)</td><td>(558)</td></tr><tr><td>Investments in covered funds</td><td>(32)</td><td>(32)</td></tr><tr><td>Other net increase in CET1</td><td>1,522</td><td>1,522</td></tr><tr><td>Redesignation of junior subordinated debt issued to trusts</td><td>(330)</td><td>(330)</td></tr><tr><td>Change in preferred stock</td><td>3</td><td>3</td></tr><tr><td>Change in other adjustments</td><td>324</td><td>324</td></tr><tr><td>Ending balance</td><td>82,440</td><td>82,440</td></tr><tr><td>Tier 2 capital</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>16,705</td><td>16,103</td></tr><tr><td>Change in qualifying subordinated debt</td><td>(566)</td><td>(566)</td></tr><tr><td>Redesignation of junior subordinated debt issued to trusts</td><td>(198)</td><td>(198)</td></tr><tr><td>Change in the allowance for losses on loans and lending commitments</td><td>120</td><td>—</td></tr><tr><td>Change in other adjustments</td><td>13</td><td>13</td></tr><tr><td>Ending balance</td><td>16,074</td><td>15,352</td></tr><tr><td>Total capital</td><td>$98,514</td><td>$97,792</td></tr></table>

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Year Ended December 2015</td></tr><tr><td>Standardized</td><td>Basel III Advanced</td></tr><tr><td>Common Equity Tier 1</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$69,830</td><td>$69,830</td></tr><tr><td>Change in common shareholders&#x27; equity</td><td>1,931</td><td>1,931</td></tr><tr><td>Change in deductions for:</td><td></td><td></td></tr><tr><td>Transitional provisions</td><td>(1,368)</td><td>(1,368)</td></tr><tr><td>Goodwill and identifiable intangible assets, net of deferred tax liabilities</td><td>75</td><td>75</td></tr><tr><td>Investments in nonconsolidated financial institutions</td><td>1,059</td><td>1,059</td></tr><tr><td>Change in other adjustments</td><td>(164)</td><td>(164)</td></tr><tr><td>Ending balance</td><td>$71,363</td><td>$71,363</td></tr><tr><td>Tier 1 capital</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$78,433</td><td>$78,433</td></tr><tr><td>Change in deductions for:</td><td></td><td></td></tr><tr><td>Transitional provisions</td><td>(1,073)</td><td>(1,073)</td></tr><tr><td>Investments in covered funds</td><td>(413)</td><td>(413)</td></tr><tr><td>Other net increase in CET1</td><td>2,901</td><td>2,901</td></tr><tr><td>Redesignation of junior subordinated debt issued to trusts</td><td>(330)</td><td>(330)</td></tr><tr><td>Change in preferred stock</td><td>2,000</td><td>2,000</td></tr><tr><td>Change in other adjustments</td><td>(7)</td><td>(7)</td></tr><tr><td>Ending balance</td><td>81,511</td><td>81,511</td></tr><tr><td>Tier 2 capital</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>12,861</td><td>12,545</td></tr><tr><td>Increased deductions for transitional provisions</td><td>(53)</td><td>(53)</td></tr><tr><td>Change in qualifying subordinated debt</td><td>3,238</td><td>3,238</td></tr><tr><td>Redesignation of junior subordinated debt issued to trusts</td><td>330</td><td>330</td></tr><tr><td>Change in the allowance for losses on loans and lending commitments</td><td>286</td><td>—</td></tr><tr><td>Change in other adjustments</td><td>43</td><td>43</td></tr><tr><td>Ending balance</td><td>16,705</td><td>16,103</td></tr><tr><td>Total capital</td><td>$98,216</td><td>$97,614</td></tr></table>

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



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

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

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">Standardized Capital Rules as of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Credit RWAs</td><td></td><td></td></tr><tr><td>Derivatives</td><td>$124,286</td><td>$136,841</td></tr><tr><td>Commitments, guarantees and loans</td><td>115,744</td><td>111,391</td></tr><tr><td>Securities financing transactions</td><td>71,319</td><td>71,392</td></tr><tr><td>Equity investments</td><td>41,428</td><td>37,687</td></tr><tr><td>Other</td><td>58,636</td><td>62,807</td></tr><tr><td>Total Credit RWAs</td><td>411,413</td><td>420,118</td></tr><tr><td>Market RWAs</td><td></td><td></td></tr><tr><td>Regulatory VaR</td><td>9,750</td><td>12,000</td></tr><tr><td>Stressed VaR</td><td>22,475</td><td>21,738</td></tr><tr><td>Incremental risk</td><td>7,875</td><td>9,513</td></tr><tr><td>Comprehensive risk</td><td>5,338</td><td>5,725</td></tr><tr><td>Specific risk</td><td>39,825</td><td>55,013</td></tr><tr><td>Total Market RWAs</td><td>85,263</td><td>103,989</td></tr><tr><td>Total RWAs</td><td>$496,676</td><td>$524,107</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="2">Basel III Advanced Rules as of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Credit RWAs</td><td></td><td></td></tr><tr><td>Derivatives</td><td>$105,096</td><td>$113,671</td></tr><tr><td>Commitments, guarantees and loans</td><td>122,792</td><td>114,523</td></tr><tr><td>Securities financing transactions</td><td>14,673</td><td>14,901</td></tr><tr><td>Equity investments</td><td>44,095</td><td>40,110</td></tr><tr><td>Other</td><td>63,431</td><td>60,877</td></tr><tr><td>Total Credit RWAs</td><td>350,087</td><td>344,082</td></tr><tr><td>Market RWAs</td><td></td><td></td></tr><tr><td>Regulatory VaR</td><td>9,750</td><td>12,000</td></tr><tr><td>Stressed VaR</td><td>22,475</td><td>21,738</td></tr><tr><td>Incremental risk</td><td>7,875</td><td>9,513</td></tr><tr><td>Comprehensive risk</td><td>4,550</td><td>4,717</td></tr><tr><td>Specific risk</td><td>39,825</td><td>55,013</td></tr><tr><td>Total Market RWAs</td><td>84,475</td><td>102,981</td></tr><tr><td>Total Operational RWAs</td><td>115,088</td><td>130,588</td></tr><tr><td>Total RWAs</td><td>$549,650</td><td>$577,651</td></tr></table>

In the tables above:

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

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

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

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

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.



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

<table><tr><td rowspan="2"></td><td colspan="2">Year Ended December 2015</td></tr><tr><td>Standardized</td><td>Basel III Advanced</td></tr><tr><td>Risk-Weighted Assets</td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$619,216</td><td>$570,313</td></tr><tr><td>Credit RWAs</td><td></td><td></td></tr><tr><td>Change in deductions for transitional provisions</td><td>(1,073)</td><td>(1,073)</td></tr><tr><td>Change in:</td><td></td><td></td></tr><tr><td>Derivatives</td><td>(43,930)</td><td>(8,830)</td></tr><tr><td>Commitments, guarantees and loans</td><td>21,608</td><td>19,314</td></tr><tr><td>Securities financing transactions</td><td>(20,724)</td><td>(717)</td></tr><tr><td>Equity investments</td><td>131</td><td>934</td></tr><tr><td>Other</td><td>(8,589)</td><td>6,510</td></tr><tr><td>Change in Credit RWAs</td><td>(52,577)</td><td>16,138</td></tr><tr><td>Market RWAs</td><td></td><td></td></tr><tr><td>Change in:</td><td></td><td></td></tr><tr><td>Regulatory VaR</td><td>1,762</td><td>1,762</td></tr><tr><td>Stressed VaR</td><td>(7,887)</td><td>(7,887)</td></tr><tr><td>Incremental risk</td><td>(7,437)</td><td>(7,437)</td></tr><tr><td>Comprehensive risk</td><td>(4,130)</td><td>(3,433)</td></tr><tr><td>Specific risk</td><td>(24,840)</td><td>(24,905)</td></tr><tr><td>Change in Market RWAs</td><td>(42,532)</td><td>(41,900)</td></tr><tr><td>Operational RWAs</td><td></td><td></td></tr><tr><td>Change in operational risk</td><td>—</td><td>33,100</td></tr><tr><td>Change in Operational RWAs</td><td>—</td><td>33,100</td></tr><tr><td>Ending balance</td><td>$524,107</td><td>$577,651</td></tr></table>

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

Basel III Advanced Credit RWAs as of December 2015 increased by $16.14 billion compared with December 2014, primarily reflecting an increase in lending activity. This increase was partially offset by a decrease in RWAs related to derivatives, due to lower counterparty credit risk. Basel III Advanced Market RWAs as of December 2015 decreased by $41.90 billion compared with December 2014, primarily due to decreased specific risk, as a result of reduced risk exposures. Basel III Advanced Operational RWAs as of December 2015 increased by $33.10 billion compared with December 2014, substantially all of which is associated with mortgage-related legal matters and regulatory proceedings. See “Definition of Risk-Weighted Assets” above for a description of the calculations of Credit RWAs, Market RWAs and Operational RWAs, including the differences in the calculation of Credit RWAs under each of the Standardized Capital Rules and the Basel III Advanced Rules.

## Bank Subsidiaries

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

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

<table><tr><td rowspan="2"></td><td colspan="2">Minimum Ratio as of December</td><td rowspan="2">“Well-capitalized” Minimum Ratio</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>CET1 ratio</td><td>5.125%</td><td>4.5%</td><td>6.5%</td></tr><tr><td>Tier 1 capital ratio</td><td>6.625%</td><td>6.0%</td><td>8.0%</td></tr><tr><td>Total capital ratio</td><td>8.625%</td><td>8.0%</td><td>10.0%</td></tr><tr><td>Tier 1 leverage ratio</td><td>4.000%</td><td>4.0%</td><td>5.0%</td></tr></table>

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



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

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

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Standardized</td><td></td><td></td></tr><tr><td>Common Equity Tier 1</td><td>$ 24,485</td><td>$ 23,017</td></tr><tr><td>Tier 1 capital</td><td>24,485</td><td>23,017</td></tr><tr><td>Tier 2 capital</td><td>2,382</td><td>2,311</td></tr><tr><td>Total capital</td><td>$ 26,867</td><td>$ 25,328</td></tr><tr><td>Basel III Advanced</td><td></td><td></td></tr><tr><td>Common Equity Tier 1</td><td>$ 24,485</td><td>$ 23,017</td></tr><tr><td>Tier 1 capital</td><td>24,485</td><td>23,017</td></tr><tr><td>Standardized Tier 2 capital</td><td>2,382</td><td>2,311</td></tr><tr><td>Allowance for losses on loans and lending commitments</td><td>(382)</td><td>(311)</td></tr><tr><td>Tier 2 capital</td><td>2,000</td><td>2,000</td></tr><tr><td>Total capital</td><td>$ 26,485</td><td>$ 25,017</td></tr><tr><td>RWAs</td><td></td><td></td></tr><tr><td>Standardized</td><td>$204,232</td><td>$202,197</td></tr><tr><td>Basel III Advanced</td><td>131,051</td><td>131,059</td></tr><tr><td>CET1 ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>12.0%</td><td>11.4%</td></tr><tr><td>Basel III Advanced</td><td>18.7%</td><td>17.6%</td></tr><tr><td>Tier 1 capital ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>12.0%</td><td>11.4%</td></tr><tr><td>Basel III Advanced</td><td>18.7%</td><td>17.6%</td></tr><tr><td>Total capital ratio</td><td></td><td></td></tr><tr><td>Standardized</td><td>13.2%</td><td>12.5%</td></tr><tr><td>Basel III Advanced</td><td>20.2%</td><td>19.1%</td></tr><tr><td>Tier 1 leverage ratio</td><td>14.4%</td><td>16.4%</td></tr></table>

The increase in GS Bank USA’s Standardized and Advanced capital ratios from December 2015 to December 2016 is primarily due to an increase in Common Equity Tier 1 capital, principally due to net earnings for 2016.
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 December 2016 and December 2015, GSIB was in compliance with all regulatory capital requirements.

## 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. (FINRA). 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 2016 and December 2015, GS&Co. had regulatory net capital, as defined by Rule 15c3-1, of $17.17 billion and $14.75 billion, respectively, which exceeded the amount required by $14.66 billion and $12.37 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 December 2016 and December 2015, GS&Co. had tentative net capital and net capital in excess of both the minimum and the notification requirements.

Goldman Sachs Execution & Clearing, L.P. (GSEC) was also one of the firm’s primary U.S. regulated broker-dealer subsidiaries prior to transferring substantially all of its clearing business to GS&Co. in 2016. As of December 2015, GSEC had regulatory net capital, calculated in accordance with the “Alternative Net Capital Requirement” as permitted by Rule 15c3-1, of $1.71 billion, which exceeded the amount required by $1.59 billion.



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 December 2016 and December 2015, these subsidiaries were in compliance with their local capital adequacy requirements.

## Restrictions on Payments

Group Inc.’s ability to withdraw capital from its regulated subsidiaries is limited by minimum equity capital requirements applicable to those subsidiaries, provisions of applicable law and regulations and other regulatory restrictions that limit the ability of those subsidiaries to declare and pay dividends without prior regulatory approval (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 Federal Reserve Board, 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 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 2016 and December 2015, Group Inc. was required to maintain $46.49 billion and $48.09 billion, respectively, of minimum equity capital in its regulated subsidiaries in order to satisfy the regulatory requirements of such subsidiaries.

## Other

The deposits of GS Bank USA are insured by the FDIC to the extent provided by law. The Federal Reserve Board requires that GS Bank USA maintain cash reserves with the Federal Reserve Bank of New York. The amount deposited by GS Bank USA held at the Federal Reserve Bank of New York was $74.24 billion and $49.36 billion as of December 2016 and December 2015, respectively, which exceeded required reserve amounts by $74.09 billion and $49.25 billion as of December 2016 and December 2015, respectively. The increase in the amount deposited by GS Bank USA held at the Federal Reserve Bank of New York from December 2015 to December 2016 is primarily a result of the acquisition of GE Capital Bank’s online deposit platform in April 2016. See Note 14 for further information about this acquisition.

## Note 21.

## Earnings Per Common Share

Basic earnings per common share (EPS) is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding and RSUs for which no future service is required as a condition to the delivery of the underlying common stock (collectively, basic shares). Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable for stock options and for RSUs for which future service is required as a condition to the delivery of the underlying common stock.

The table below presents the computations of basic and diluted EPS.

<table><tr><td rowspan="2">in millions, except per share amounts</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Net earnings applicable to common shareholders</td><td>$7,087</td><td>$5,568</td><td>$8,077</td></tr><tr><td>Weighted average number of basic shares</td><td>427.4</td><td>448.9</td><td>458.9</td></tr><tr><td>Effect of dilutive securities:</td><td></td><td></td><td></td></tr><tr><td>RSUs</td><td>4.7</td><td>5.3</td><td>6.1</td></tr><tr><td>Stock options</td><td>3.0</td><td>4.4</td><td>8.2</td></tr><tr><td>Dilutive securities</td><td>7.7</td><td>9.7</td><td>14.3</td></tr><tr><td>Weighted average number of basic shares and dilutive securities</td><td>435.1</td><td>458.6</td><td>473.2</td></tr><tr><td>Basic EPS</td><td>$16.53</td><td>$12.35</td><td>$17.55</td></tr><tr><td>Diluted EPS</td><td>16.29</td><td>12.14</td><td>17.07</td></tr></table>

In the table above, unvested share-based awards that have non-forfeitable rights to dividends or dividend equivalents are treated as a separate class of securities in calculating EPS. The impact of applying this methodology was a reduction in basic EPS of $0.05 for 2016, 2015 and 2014.

The diluted EPS computations in the table above do not include antidilutive RSUs and common shares underlying antidilutive stock options of 2.8 million for 2016, and 6.0 million for both 2015 and 2014.



## Note 22.

## Transactions with Affiliated Funds

The firm has formed numerous nonconsolidated investment funds with third-party investors. As the firm generally acts as the investment manager for these funds, it is entitled to receive management fees and, in certain cases, advisory fees or incentive fees from these funds. Additionally, the firm invests alongside the third-party investors in certain funds.

The tables below present fees earned from affiliated funds, fees receivable from affiliated funds and the aggregate carrying value of the firm’s interests in affiliated funds.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Fees earned from funds</td><td>$2,777</td><td>$3,293</td><td>$3,232</td></tr><tr><td rowspan="2">\( in millions</td><td colspan="3">As of December</td></tr><tr><td>2016</td><td>2015</td><td></td></tr><tr><td>Fees receivable from funds</td><td>$ 554</td><td>$ 599</td><td></td></tr><tr><td>Aggregate carrying value of interests in funds</td><td>6,841</td><td>7,768</td><td></td></tr></table>

The firm may periodically determine to waive certain management fees on selected money market funds. Management fees of $104 million were waived for the year ended December 2016.

The Volcker Rule restricts the firm from providing financial support to covered funds (as defined in the rule) after the expiration of any applicable conformance period. As a general matter, in the ordinary course of business, the firm does not expect to provide additional voluntary financial support to any covered funds but may choose to do so with respect to funds that are not subject to the Volcker Rule; however, in the event that such support is provided, the amount is not expected to be material.

As of both December 2016 and December 2015, the firm had an outstanding guarantee, as permitted under the Volcker Rule, on behalf of its funds of $300 million. The firm has voluntarily provided this guarantee in connection with a financing agreement with a third-party lender executed by one of the firm's real estate funds that is not covered by the Volcker Rule. As of December 2016 and December 2015, except as noted above, the firm has not provided any additional financial support to its affiliated funds.

In addition, in the ordinary course of business, the firm may also engage in other activities with its affiliated funds including, among others, securities lending, trade execution, market making, custody, and acquisition and bridge financing. See Note 18 for the firm’s investment commitments related to these funds.

## Note 23.

## Interest Income and Interest Expense

Interest is recorded over the life of the instrument on an accrual basis based on contractual interest rates. The table below presents the firm’s sources of interest income and interest expense.

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Interest income</td><td></td><td></td><td></td></tr><tr><td>Deposits with banks</td><td>$ 452</td><td>$ 241</td><td>$ 227</td></tr><tr><td>Securities borrowed, securities purchased under agreements to resell and federal funds sold</td><td>691</td><td>17</td><td>(78)</td></tr><tr><td>Financial instruments owned, at fair value</td><td>5,444</td><td>5,862</td><td>7,537</td></tr><tr><td>Loans receivable</td><td>1,843</td><td>1,191</td><td>708</td></tr><tr><td>Other interest</td><td>1,261</td><td>1,141</td><td>1,210</td></tr><tr><td>Total interest income</td><td>9,691</td><td>8,452</td><td>9,604</td></tr><tr><td>Interest expense</td><td></td><td></td><td></td></tr><tr><td>Deposits</td><td>878</td><td>408</td><td>333</td></tr><tr><td>Securities loaned and securities sold under agreements to repurchase</td><td>442</td><td>330</td><td>431</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>1,251</td><td>1,319</td><td>1,741</td></tr><tr><td>Short-term secured and unsecured borrowings</td><td>446</td><td>429</td><td>447</td></tr><tr><td>Long-term secured and unsecured borrowings</td><td>4,242</td><td>3,878</td><td>3,460</td></tr><tr><td>Other interest</td><td>(155)</td><td>(976)</td><td>(855)</td></tr><tr><td>Total interest expense</td><td>7,104</td><td>5,388</td><td>5,557</td></tr><tr><td>Net interest income</td><td>$2,587</td><td>$3,064</td><td>$4,047</td></tr></table>

## In the table above:

• Securities borrowed, securities purchased under agreements to resell and federal funds sold includes rebates paid and interest income on securities borrowed.

• Other interest income includes interest income on customer debit balances and other interest-earning assets.

• Other interest expense includes rebates received on other interest-bearing liabilities and interest expense on customer credit balances.



## Note 24.

## Income Taxes

## Provision for Income Taxes

Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities. The firm reports interest expense related to income tax matters in “Provision for taxes” and income tax penalties in “Other expenses.”

The tables below present the components of the provision for taxes and a reconciliation of the U.S. federal statutory income tax rate to the firm’s effective income tax rate.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Current taxes</td><td></td><td></td><td></td></tr><tr><td>U.S. federal</td><td>$1,032</td><td>$1,116</td><td>$1,908</td></tr><tr><td>State and local</td><td>139</td><td>(12)</td><td>576</td></tr><tr><td>Non-U.S.</td><td>1,184</td><td>1,166</td><td>901</td></tr><tr><td>Total current tax expense</td><td>2,355</td><td>2,270</td><td>3,385</td></tr><tr><td>Deferred taxes</td><td></td><td></td><td></td></tr><tr><td>U.S. federal</td><td>399</td><td>397</td><td>190</td></tr><tr><td>State and local</td><td>51</td><td>62</td><td>38</td></tr><tr><td>Non-U.S.</td><td>101</td><td>(34)</td><td>267</td></tr><tr><td>Total deferred tax expense</td><td>551</td><td>425</td><td>495</td></tr><tr><td>Provision for taxes</td><td>$2,906</td><td>$2,695</td><td>$3,880</td></tr></table>

In the table above, for 2016 and 2015, state and local current taxes includes the impact of settlements of state and local examinations.

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>U.S. federal statutory income tax rate</td><td>35.0%</td><td>35.0%</td><td>35.0%</td></tr><tr><td>State and local taxes, net of U.S. federal income tax effects</td><td>0.9%</td><td>0.3%</td><td>3.2%</td></tr><tr><td>Tax credits</td><td>(2.0)%</td><td>(1.7)%</td><td>(1.1)%</td></tr><tr><td>Non-U.S. operations</td><td>(6.7)%</td><td>(12.1)%</td><td>(5.8)%</td></tr><tr><td>Tax-exempt income, including dividends</td><td>(0.3)%</td><td>(0.7)%</td><td>(0.3)%</td></tr><tr><td>Non-deductible legal expenses</td><td>1.0%</td><td>10.2%</td><td>—</td></tr><tr><td>Other</td><td>0.3%</td><td>(0.3)%</td><td>0.4%</td></tr><tr><td>Effective income tax rate</td><td>28.2%</td><td>30.7%</td><td>31.4%</td></tr></table>

In the table above:

• Non-U.S. operations includes the impact of permanently reinvested earnings.

• State and local taxes, net of U.S. federal income tax effects, for 2016 and 2015, includes the impact of settlements of state and local examinations.

• Substantially all of the non-deductible legal expenses for 2015 relate to provisions for the settlement agreement with the RMBS Working Group.

## Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized and primarily relate to the ability to utilize losses in various tax jurisdictions. Tax assets and liabilities are presented as a component of “Other assets” and “Other liabilities and accrued expenses,” respectively.

The table below presents the significant components of deferred tax assets and liabilities, excluding the impact of netting within tax jurisdictions.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Deferred tax assets</td><td></td><td></td></tr><tr><td>Compensation and benefits</td><td>$2,461</td><td>$2,744</td></tr><tr><td>ASC 740 asset related to unrecognized tax benefits</td><td>231</td><td>197</td></tr><tr><td>Non-U.S. operations</td><td>967</td><td>1,200</td></tr><tr><td>Net operating losses</td><td>427</td><td>426</td></tr><tr><td>Occupancy-related</td><td>100</td><td>80</td></tr><tr><td>Other comprehensive income-related</td><td>757</td><td>521</td></tr><tr><td>Other, net</td><td>394</td><td>836</td></tr><tr><td>Subtotal</td><td>5,337</td><td>6,004</td></tr><tr><td>Valuation allowance</td><td>(115)</td><td>(73)</td></tr><tr><td>Total deferred tax assets</td><td>$5,222</td><td>$5,931</td></tr><tr><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>$1,200</td><td>$1,254</td></tr><tr><td>Unrealized gains</td><td>342</td><td>853</td></tr><tr><td>Total deferred tax liabilities</td><td>$1,542</td><td>$2,107</td></tr></table>

The firm has recorded deferred tax assets of $427 million and $426 million as of December 2016 and December 2015, respectively, in connection with U.S. federal, state and local and foreign net operating loss carryforwards. The firm also recorded a valuation allowance of $67 million and $24 million as of December 2016 and December 2015, respectively, related to these net operating loss carryforwards.



As of December 2016, the U.S. federal and state and local net operating loss carryforwards were $207 million and $800 million, respectively. If not utilized, the U.S. federal net operating loss carryforward and the state and local net operating loss carryforward will begin to expire in 2017. If these carryforwards expire, they will not have a material impact on the firm's results of operations. As of December 2016, foreign net operating loss carryforwards were $1.39 billion, substantially all of which do not expire. The firm had no foreign tax credit carryforwards and no related net deferred income tax assets as of December 2016 and December 2015.

The firm had no capital loss carryforwards and no related net deferred income tax assets as of December 2016 and December 2015.

The valuation allowance increased by $42 million during 2016 and increased by $9 million during 2015. The increases in 2016 and 2015 were primarily due to an increase in deferred tax assets from which the firm does not expect to realize any benefit.

The firm permanently reinvests eligible earnings of certain foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if such earnings were repatriated. As of December 2016 and December 2015, this policy resulted in an unrecognized net deferred tax liability of $6.18 billion and $5.66 billion, respectively, attributable to reinvested earnings of $31.24 billion and $28.55 billion, respectively.

## Unrecognized Tax Benefits

The firm recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the consolidated financial statements.

The accrued liability for interest expense related to income tax matters and income tax penalties was $141 million and $101 million as of December 2016 and December 2015, respectively. The firm recognized interest expense and income tax penalties of $27 million, $17 million and $45 million for 2016, 2015 and 2014, respectively. It is reasonably possible that unrecognized tax benefits could change significantly during the twelve months subsequent to December 2016 due to potential audit settlements. However, at this time it is not possible to estimate any potential change.
The table below presents the changes in the liability for unrecognized tax benefits. This liability is included in “Other liabilities and accrued expenses.” See Note 17 for further information.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended or as of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Beginning balance</td><td>$ 825</td><td>$ 871</td><td>$ 1,765</td></tr><tr><td>Increases based on tax positions related to the current year</td><td>113</td><td>65</td><td>204</td></tr><tr><td>Increases based on tax positions related to prior years</td><td>188</td><td>158</td><td>263</td></tr><tr><td>Decreases based on tax positions related to prior years</td><td>(88)</td><td>(205)</td><td>(241)</td></tr><tr><td>Decreases related to settlements</td><td>(186)</td><td>(87)</td><td>(1,112)</td></tr><tr><td>Exchange rate fluctuations</td><td>—</td><td>23</td><td>(8)</td></tr><tr><td>Ending balance</td><td>$ 852</td><td>$ 825</td><td>$ 871</td></tr><tr><td>Related deferred income tax asset</td><td>231</td><td>197</td><td>172</td></tr><tr><td>Net unrecognized tax benefit</td><td>$ 621</td><td>$ 628</td><td>$ 699</td></tr></table>

## Regulatory Tax Examinations

The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong and various states, such as New York. The tax years under examination vary by jurisdiction. The firm does not expect completion of these audits to have a material impact on the firm’s financial condition but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.

The table below presents the earliest tax years that remain subject to examination by major jurisdiction.

<table><tr><td>Jurisdiction</td><td>As of December 2016</td></tr><tr><td>U.S. Federal</td><td>2011</td></tr><tr><td>New York State and City</td><td>2007</td></tr><tr><td>United Kingdom</td><td>2014</td></tr><tr><td>Japan</td><td>2014</td></tr><tr><td>Hong Kong</td><td>2007</td></tr></table>

During the second quarter of 2016, the Joint Committee on Taxation finalized its review of the U.S. Federal examinations of fiscal 2008 through calendar 2010. The completion of the review did not have a material impact on the firm’s effective income tax rate. The examinations of 2011 and 2012 began in 2013.

The firm has been accepted into the Compliance Assurance Process program by the IRS for each of the tax years from 2013 through 2017. This program allows the firm to work with the IRS to identify and resolve potential U.S. federal tax issues before the filing of tax returns. The 2013 through 2015 tax years remain subject to post-filing review.



New York State and City examinations for the firm (excluding GS Bank USA) of fiscal 2007 through calendar 2010 are ongoing. New York State and City examinations for GS Bank USA have been completed through 2014.

In 2016, the firm concluded examinations with the Japan tax authorities related to 2010 through 2013. In 2016, the firm concluded examinations with the Hong Kong tax authorities related to 2006. The completion of these examinations did not have a material impact on the firm’s effective income tax rate.

All years including and subsequent to the years in the table above remain open to examination by the taxing authorities. The firm believes that the liability for unrecognized tax benefits it has established is adequate in relation to the potential for additional assessments.

## Note 25.

## Business Segments

The firm reports its activities in the following four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management.

## Basis of Presentation

In reporting segments, certain of the firm’s business lines have been aggregated where they have similar economic characteristics and are similar in each of the following areas: (i) the nature of the services they provide, (ii) their methods of distribution, (iii) the types of clients they serve and (iv) the regulatory environments in which they operate.

The cost drivers of the firm taken as a whole, compensation, headcount and levels of business activity, are broadly similar in each of the firm’s business segments. Compensation and benefits expenses in the firm’s segments reflect, among other factors, the overall performance of the firm, as well as the performance of individual businesses. Consequently, pre-tax margins in one segment of the firm’s business may be significantly affected by the performance of the firm’s other business segments.
The firm allocates assets (including allocations of global core liquid assets and cash, secured client financing and other assets), revenues and expenses among the four business segments. Due to the integrated nature of these segments, estimates and judgments are made in allocating certain assets, revenues and expenses. The allocation process is based on the manner in which management currently views the performance of the segments. Transactions between segments are based on specific criteria or approximate third-party rates.

The table below presents the firm’s net revenues, pre-tax earnings and total assets by segment. Management believes that this information provides a reasonable representation of each segment’s contribution to consolidated pre-tax earnings and total assets.

<table><tr><td rowspan="2">\( \text{in millions} \)</td><td colspan="3">Year Ended or as of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Investment Banking</td><td></td><td></td><td></td></tr><tr><td>Financial Advisory</td><td>$ 2,932</td><td>$ 3,470</td><td>$ 2,474</td></tr><tr><td>Equity underwriting</td><td>891</td><td>1,546</td><td>1,750</td></tr><tr><td>Debt underwriting</td><td>2,450</td><td>2,011</td><td>2,240</td></tr><tr><td>Total Underwriting</td><td>3,341</td><td>3,557</td><td>3,990</td></tr><tr><td>Total net revenues</td><td>6,273</td><td>7,027</td><td>6,464</td></tr><tr><td>Operating expenses</td><td>3,437</td><td>3,713</td><td>3,688</td></tr><tr><td>Pre-tax earnings</td><td>$ 2,836</td><td>$ 3,314</td><td>$ 2,776</td></tr><tr><td>Segment assets</td><td>$ 1,824</td><td>$ 2,564</td><td>$ 1,844</td></tr><tr><td>Institutional Client Services</td><td></td><td></td><td></td></tr><tr><td>Fixed Income, Currency and Commodities Client Execution</td><td>$ 7,556</td><td>$ 7,322</td><td>$ 8,461</td></tr><tr><td>Equities client execution</td><td>2,194</td><td>3,028</td><td>2,079</td></tr><tr><td>Commissions and fees</td><td>3,078</td><td>3,156</td><td>3,153</td></tr><tr><td>Securities services</td><td>1,639</td><td>1,645</td><td>1,504</td></tr><tr><td>Total Equities</td><td>6,911</td><td>7,829</td><td>6,736</td></tr><tr><td>Total net revenues</td><td>14,467</td><td>15,151</td><td>15,197</td></tr><tr><td>Operating expenses</td><td>9,713</td><td>13,938</td><td>10,880</td></tr><tr><td>Pre-tax earnings</td><td>$ 4,754</td><td>$ 1,213</td><td>$ 4,317</td></tr><tr><td>Segment assets</td><td>$645,689</td><td>$663,394</td><td>$695,674</td></tr><tr><td>Investing &amp; Lending</td><td></td><td></td><td></td></tr><tr><td>Equity securities</td><td>$ 2,573</td><td>$ 3,781</td><td>$ 4,579</td></tr><tr><td>Debt securities and loans</td><td>1,507</td><td>1,655</td><td>2,246</td></tr><tr><td>Total net revenues</td><td>4,080</td><td>5,436</td><td>6,825</td></tr><tr><td>Operating expenses</td><td>2,386</td><td>2,402</td><td>2,819</td></tr><tr><td>Pre-tax earnings</td><td>$ 1,694</td><td>$ 3,034</td><td>$ 4,006</td></tr><tr><td>Segment assets</td><td>$198,181</td><td>$179,428</td><td>$143,790</td></tr><tr><td>Investment Management</td><td></td><td></td><td></td></tr><tr><td>Management and other fees</td><td>$ 4,798</td><td>$ 4,887</td><td>$ 4,800</td></tr><tr><td>Incentive fees</td><td>421</td><td>780</td><td>776</td></tr><tr><td>Transaction revenues</td><td>569</td><td>539</td><td>466</td></tr><tr><td>Total net revenues</td><td>5,788</td><td>6,206</td><td>6,042</td></tr><tr><td>Operating expenses</td><td>4,654</td><td>4,841</td><td>4,647</td></tr><tr><td>Pre-tax earnings</td><td>$ 1,134</td><td>$ 1,365</td><td>$ 1,395</td></tr><tr><td>Segment assets</td><td>$ 14,471</td><td>$ 16,009</td><td>$ 14,534</td></tr><tr><td>Total net revenues</td><td>$ 30,608</td><td>$ 33,820</td><td>$ 34,528</td></tr><tr><td>Total operating expenses</td><td>20,304</td><td>25,042</td><td>22,171</td></tr><tr><td>Total pre-tax earnings</td><td>$ 10,304</td><td>$ 8,778</td><td>$ 12,357</td></tr><tr><td>Total assets</td><td>$860,165</td><td>$861,395</td><td>$855,842</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

In the table above:

• Revenues and expenses directly associated with each segment are included in determining pre-tax earnings.

• Net revenues in the firm’s segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. Net interest is included in segment net revenues as it is consistent with the way in which management assesses segment performance.

• Overhead expenses not directly allocable to specific segments are allocated ratably based on direct segment expenses.

• All operating expenses have been allocated to the firm’s segments except for charitable contributions of $114 million for 2016, $148 million for 2015 and $137 million for 2014.

• Total operating expenses includes net provisions for litigation and regulatory proceedings of $396 million for 2016, $4.01 billion (of which $3.37 billion was related to the settlement agreement with the RMBS Working Group) for 2015 and $754 million for 2014.

The table below presents the amounts of net interest income by segment included in net revenues.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Investment Banking</td><td>$ —</td><td>$ —</td><td>$ —</td></tr><tr><td>Institutional Client Services</td><td>1,456</td><td>2,472</td><td>3,679</td></tr><tr><td>Investing &amp; Lending</td><td>880</td><td>418</td><td>237</td></tr><tr><td>Investment Management</td><td>251</td><td>174</td><td>131</td></tr><tr><td>Total net interest income</td><td>$2,587</td><td>$3,064</td><td>$4,047</td></tr></table>

The table below presents the amounts of depreciation and amortization expense by segment included in pre-tax earnings.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Investment Banking</td><td>$ 126</td><td>$ 123</td><td>$ 135</td></tr><tr><td>Institutional Client Services</td><td>489</td><td>462</td><td>525</td></tr><tr><td>Investing &amp; Lending</td><td>215</td><td>253</td><td>530</td></tr><tr><td>Investment Management</td><td>168</td><td>153</td><td>147</td></tr><tr><td>Total depreciation and amortization</td><td>$ 998</td><td>$ 991</td><td>$1,337</td></tr></table>

## Geographic Information

Due to the highly integrated nature of international financial markets, the firm manages its businesses based on the profitability of the enterprise as a whole. The methodology for allocating profitability to geographic regions is dependent on estimates and management judgment because a significant portion of the firm’s activities require cross-border coordination in order to facilitate the needs of the firm’s clients.

Geographic results are generally allocated as follows:

• Investment Banking: location of the client and investment banking team.

• Institutional Client Services: Fixed Income, Currency and Commodities Client Execution, and Equities (excluding Securities Services): location of the market-making desk; Securities Services: location of the primary market for the underlying security.

• Investing & Lending: Investing: location of the investment; Lending: location of the client.

• Investment Management: location of the sales team.

The table below presents the total net revenues, pre-tax earnings and net earnings of the firm by geographic region allocated based on the methodology referred to above, as well as the percentage of total net revenues, pre-tax earnings and net earnings (excluding Corporate) for each geographic region. In the table below, Asia includes Australia and New Zealand.

<table><tr><td rowspan="2">\( in millions</td><td colspan="4">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td><td></td></tr><tr><td>Net revenues</td><td></td><td></td><td></td><td></td></tr><tr><td>Americas</td><td>$18,144</td><td>60%</td><td>$19,202</td><td>56%</td></tr><tr><td>Europe, Middle East and Africa</td><td>8,040</td><td>26%</td><td>8,981</td><td>27%</td></tr><tr><td>Asia</td><td>4,424</td><td>14%</td><td>5,637</td><td>17%</td></tr><tr><td>Total net revenues</td><td>$30,608</td><td>100%</td><td>$33,820</td><td>100%</td></tr><tr><td>Pre-tax earnings</td><td></td><td></td><td></td><td></td></tr><tr><td>Americas</td><td>$ 6,352</td><td>61%</td><td>$ 3,359</td><td>37%</td></tr><tr><td>Europe, Middle East and Africa</td><td>2,883</td><td>28%</td><td>3,364</td><td>38%</td></tr><tr><td>Asia</td><td>1,183</td><td>11%</td><td>2,203</td><td>25%</td></tr><tr><td>Subtotal</td><td>10,418</td><td>100%</td><td>8,926</td><td>100%</td></tr><tr><td>Corporate</td><td>(114)</td><td></td><td>(148)</td><td></td></tr><tr><td>Total pre-tax earnings</td><td>$10,304</td><td></td><td>$ 8,778</td><td>$12,357</td></tr><tr><td>Net earnings</td><td></td><td></td><td></td><td></td></tr><tr><td>Americas</td><td>$ 4,337</td><td>58%</td><td>$ 1,587</td><td>26%</td></tr><tr><td>Europe, Middle East and Africa</td><td>2,270</td><td>30%</td><td>2,914</td><td>47%</td></tr><tr><td>Asia</td><td>870</td><td>12%</td><td>1,686</td><td>27%</td></tr><tr><td>Subtotal</td><td>7,477</td><td>100%</td><td>6,187</td><td>100%</td></tr><tr><td>Corporate</td><td>(79)</td><td></td><td>(104)</td><td></td></tr><tr><td>Total net earnings</td><td>$ 7,398</td><td></td><td>$ 6,083</td><td>$ 8,477</td></tr></table>



# THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

In the table above:

• Americas pre-tax earnings includes provisions of $3.37 billion recorded during 2015 for the settlement agreement with the RMBS Working Group.

• Corporate pre-tax earnings includes charitable contributions that have not been allocated to the firm’s geographic regions.

• Substantially all of the amounts in Americas were attributable to the U.S.

## Note 26.

## Credit Concentrations

Credit concentrations may arise from market making, client facilitation, investing, underwriting, lending and collateralized transactions and may be impacted by changes in economic, industry or political factors. The firm seeks to mitigate credit risk by actively monitoring exposures and obtaining collateral from counterparties as deemed appropriate.

While the firm’s activities expose it to many different industries and counterparties, the firm routinely executes a high volume of transactions with asset managers, investment funds, commercial banks, brokers and dealers, clearing houses and exchanges, which results in significant credit concentrations.

In the ordinary course of business, the firm may also be subject to a concentration of credit risk to a particular counterparty, borrower or issuer, including sovereign issuers, or to a particular clearing house or exchange.

The table below presents the credit concentrations in cash instruments held by the firm. Amounts in the table below are included in “Financial instruments owned, at fair value.”

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>U.S. government and federal agency obligations</td><td>$57,657</td><td>$63,844</td></tr><tr><td>% of total assets</td><td>6.7%</td><td>7.4%</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>$29,381</td><td>$31,772</td></tr><tr><td>% of total assets</td><td>3.4%</td><td>3.7%</td></tr></table>

As of December 2016 and December 2015, the firm did not have credit exposure to any other counterparty that exceeded 2% of total assets.
To reduce credit exposures, the firm may enter into agreements with counterparties that permit the firm to offset receivables and payables with such counterparties and/or enable the firm to obtain collateral on an upfront or contingent basis. Collateral obtained by the firm related to derivative assets is principally cash and is held by the firm or a third-party custodian. Collateral obtained by the firm related to resale agreements and securities borrowed transactions is primarily U.S. government and federal agency obligations and non-U.S. government and agency obligations. See Note 10 for further information about collateralized agreements and financings.

The table below presents U.S. government and federal agency obligations and non-U.S. government and agency obligations that collateralize resale agreements and securities borrowed transactions. Because the firm’s primary credit exposure on such transactions is to the counterparty to the transaction, the firm would be exposed to the collateral issuer only in the event of counterparty default. In the table below, non-U.S. government and agency obligations primarily consist of securities issued by the governments of France, the U.K., Japan and Germany.

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>U.S. government and federal agency obligations</td><td>$89,721</td><td>$107,198</td></tr><tr><td>Non-U.S. government and agency obligations</td><td>80,234</td><td>74,326</td></tr></table>



Note 27.

## Legal Proceedings

The firm is involved in a number of judicial, regulatory and arbitration proceedings (including those described below) concerning matters arising in connection with the conduct of the firm’s businesses. Many of these proceedings are in early stages, and many of these cases seek an indeterminate amount of damages.

Under ASC 450, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the firm is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the firm believes the risk of loss is more than slight.

With respect to matters described below for which management has been able to estimate a range of reasonably possible loss where (i) actual or potential plaintiffs have claimed an amount of money damages, (ii) the firm is being, or threatened to be, sued by purchasers in a securities offering and is not being indemnified by a party that the firm believes will pay the full amount of any judgment, or (iii) the purchasers are demanding that the firm repurchase securities, management has estimated the upper end of the range of reasonably possible loss as being equal to (a) in the case of (i), the amount of money damages claimed, (b) in the case of (ii), the difference between the initial sales price of the securities that the firm sold in such offering and the estimated lowest subsequent price of such securities prior to the action being commenced and (c) in the case of (iii), the price that purchasers paid for the securities less the estimated value, if any, as of December 2016 of the relevant securities, in each of cases (i), (ii) and (iii), taking into account any other factors believed to be relevant to the particular matter or matters of that type. As of the date hereof, the firm has estimated the upper end of the range of reasonably possible aggregate loss for such matters and for any other matters described below where management has been able to estimate a range of reasonably possible aggregate loss to be approximately $1.8 billion in excess of the aggregate reserves for such matters.

Management is generally unable to estimate a range of reasonably possible loss for matters other than those included in the estimate above, including where (i) actual or potential plaintiffs have not claimed an amount of money damages, except in those instances where management can otherwise determine an appropriate amount, (ii) matters are in early stages, (iii) matters relate to regulatory investigations or reviews, except in those instances where management can otherwise determine an appropriate amount, (iv) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (v) there is uncertainty as to the outcome of pending appeals or motions, (vi) there are significant factual issues to be resolved, and/or (vii) there are novel legal issues presented. For example, the firm’s potential liabilities with respect to future mortgage-related “put-back” claims described below may ultimately result in an increase in the firm’s liabilities, but are not included in management’s estimate of reasonably possible loss. As another example, the firm’s potential liabilities with respect to the investigations and reviews described below in “Regulatory Investigations and Reviews and Related Litigation” also generally are not included in management’s estimate of reasonably possible loss. However, management does not believe, based on currently available information, that the outcomes of such other matters will have a material adverse effect on the firm’s financial condition, though the outcomes could be material to the firm’s operating results for any particular period, depending, in part, upon the operating results for such period. See Note 18 for further information about mortgage-related contingencies.



Mortgage-Related Matters. Beginning in April 2010, a number of purported securities law class actions were filed in the U.S. District Court for the Southern District of New York challenging the adequacy of Group Inc.'s public disclosure of, among other things, the firm's activities in the CDO market, the firm's conflict of interest management, and the SEC investigation that led to GS&Co. entering into a consent agreement with the SEC, settling all claims made against GS&Co. by the SEC in connection with the ABACUS 2007-AC1 CDO offering (ABACUS 2007-AC1 transaction), pursuant to which GS&Co. paid $550 million of disgorgement and civil penalties. The consolidated amended complaint filed on July 25, 2011, which names as defendants Group Inc. and certain officers and employees of Group Inc. and its affiliates, generally alleges violations of Sections 10(b) and 20(a) of the Exchange Act and seeks unspecified damages. On June 21, 2012, the district court dismissed the claims based on Group Inc.'s not disclosing that it had received a "Wells" notice from the staff of the SEC related to the ABACUS 2007-AC1 transaction, but permitted the plaintiffs' other claims to proceed. The district court granted class certification on September 24, 2015, but the appellate court granted defendants' petition for review on January 26, 2016. On February 1, 2016, the district court stayed proceedings in the district court pending the appellate court's decision.

In June 2012, the Board received a demand from a shareholder that the Board investigate and take action relating to the firm’s mortgage-related activities and to stock sales by certain directors and executives of the firm. On February 15, 2013, this shareholder filed a putative shareholder derivative action in New York Supreme Court, New York County, against Group Inc. and certain current or former directors and employees, based on these activities and stock sales. The derivative complaint includes allegations of breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and corporate waste, and seeks, among other things, unspecified monetary damages, disgorgement of profits and certain corporate governance and disclosure reforms. On May 28, 2013, Group Inc. informed the shareholder that the Board completed its investigation and determined to refuse the demand. On June 20, 2013, the shareholder made a books and records demand requesting materials relating to the Board’s determination. The parties have agreed to stay proceedings in the putative derivative action pending resolution of the books and records demand.
In addition, the Board has received books and records demands from several shareholders for materials relating to, among other subjects, the firm’s mortgage servicing and foreclosure activities, participation in federal programs providing assistance to financial institutions and homeowners, loan sales to Fannie Mae and Freddie Mac, mortgage-related activities and conflicts management.

Various alleged purchasers of mortgage pass-through certificates and other mortgage-related products (including Massachusetts Mutual Life Insurance Company and the FDIC (as receiver for Guaranty Bank) have filed complaints in state and federal court against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material fact and material omissions and generally seeking rescission and/or damages. Certain of these complaints allege fraud and seek punitive damages. Certain of these complaints also name other firms as defendants.

As of the date hereof, the aggregate amount of mortgage-related securities sold to plaintiffs in active cases described in the preceding paragraph where those plaintiffs are seeking rescission of such securities was approximately $261 million (which does not reflect adjustment for any subsequent paydowns or distributions or any residual value of such securities, statutory interest or any other adjustments that may be claimed). This amount does not include the potential claims by these or other purchasers in the same or other mortgage-related offerings that have not been described above, or claims that have been dismissed.

The firm has entered into agreements with Deutsche Bank National Trust Company and U.S. Bank National Association to toll the relevant statute of limitations with respect to claims for repurchase of residential mortgage loans based on alleged breaches of representations related to $11.1 billion original notional face amount of securitizations issued by trusts for which they act as trustees.

The firm has received subpoenas or requests for information from, and is engaged in discussions with, certain regulators and law enforcement agencies with which it has not entered into settlement agreements as part of inquiries or investigations relating to mortgage-related matters.



GT Advanced Technologies Securities Litigation. GS&Co. is among the underwriters named as defendants in several putative securities class actions filed in October 2014 in the U.S. District Court for the District of New Hampshire. In addition to the underwriters, the defendants include certain directors and officers of GT Advanced Technologies Inc. (GT). As to the underwriters, the complaints generally allege misstatements and omissions in connection with the December 2013 offerings by GT of approximately $86 million of common stock and $214 million principal amount of convertible senior notes, assert claims under the federal securities laws, and seek compensatory damages in an unspecified amount and rescission. On July 20, 2015, the plaintiffs filed a consolidated amended complaint. On October 7, 2015, the defendants moved to dismiss. GS&Co. underwrote 3,479,769 shares of common stock and $75 million principal amount of notes for an aggregate offering price of approximately $105 million. On October 6, 2014, GT filed for Chapter 11 bankruptcy.

SunEdison Bankruptcy Litigation. GS Bank USA is among the defendants named in an adversary proceeding filed on October 20, 2016 in the U.S. Bankruptcy Court for the Southern District of New York arising from the bankruptcy of SunEdison. The complaint alleges that amounts transferred and liens granted by SunEdison to its secured creditors, including GS Bank USA, prior to filing for bankruptcy were fraudulent and preferential transfers. Plaintiffs seek to recoup those transfers, avoid those liens and disallow certain claims of the secured creditors. GS Bank USA received pre-filing payments from SunEdison aggregating $169 million that are subject to the recoupment claims and holds $75 million of secured debt subject to the avoidance and disallowance claims. Defendants moved to dismiss on November 22, 2016.
Currencies-Related Litigation. GS&Co. and Group Inc. are among the defendants named in a putative class action filed in the U.S. District Court for the Southern District of New York on September 26, 2016 on behalf of putative indirect purchasers of foreign exchange instruments. The complaint generally alleges that defendants violated federal antitrust laws in connection with an alleged conspiracy to manipulate the foreign currency exchange markets and asserts claims under federal and state antitrust laws and seeks injunctive relief, as well as treble damages in an unspecified amount. Defendants moved to dismiss on January 23, 2017.

Group Inc., GS&Co. and GS Canada are among the defendants named in putative class actions related to trading in foreign exchange markets, filed beginning in September 2015 in the Superior Court of Justice in Ontario, Canada and the Superior Court of Quebec, Canada, on behalf of direct and indirect purchasers of foreign exchange instruments traded in Canada. The complaints generally allege a conspiracy to manipulate the foreign currency exchange markets and assert claims under Canada’s Competition Act and common law. The Ontario and Quebec complaints seek, among other things, compensatory damages in the amounts of 1 billion Canadian dollars and 100 million Canadian dollars, respectively, as well as restitution and 50 million Canadian dollars in punitive, exemplary and aggravated damages. In December 2016, the courts preliminarily approved a settlement of the claims against the Goldman Sachs defendants. The firm has paid the full amount of the proposed settlement into trust pending final settlement approval.

Financial Advisory Services. Group Inc. and certain of its affiliates are from time to time parties to various civil litigation and arbitration proceedings and other disputes with clients and third parties relating to the firm’s financial advisory activities. These claims generally seek, among other things, compensatory damages and, in some cases, punitive damages, and in certain cases allege that the firm did not appropriately disclose or deal with conflicts of interest.



Cobalt International Energy Securities Litigation. Cobalt International Energy, Inc. (Cobalt), certain of its officers and directors (including employees of affiliates of Group Inc. who served as directors of Cobalt), affiliates of shareholders of Cobalt (including Group Inc.) and the underwriters (including GS&Co.) for certain offerings of Cobalt's securities are defendants in a putative securities class action filed on November 30, 2014 in the U.S. District Court for the Southern District of Texas. The consolidated amended complaint, filed on May 1, 2015, asserts claims under the federal securities laws, seeks compensatory and rescissory damages in unspecified amounts and alleges material misstatements and omissions concerning Cobalt in connection with a $1.67 billion February 2012 offering of Cobalt common stock, a $1.38 billion December 2012 offering of Cobalt's convertible notes, a $1.00 billion January 2013 offering of Cobalt's common stock, a $1.33 billion May 2013 offering of Cobalt's common stock, and a $1.30 billion May 2014 offering of Cobalt's convertible notes. The consolidated amended complaint alleges that, among others, Group Inc. and GS&Co. are liable as controlling persons with respect to all five offerings. The consolidated amended complaint also seeks damages from GS&Co. in connection with its acting as an underwriter of 14,430,000 shares of common stock representing an aggregate offering price of approximately $465 million, $690 million principal amount of convertible notes, and approximately $508 million principal amount of convertible notes in the February 2012, December 2012 and May 2014 offerings, respectively, for an aggregate offering price of approximately $1.66 billion. On January 19, 2016, the court granted, with leave to replead, the underwriter defendants' motions to dismiss as to claims by plaintiffs who purchased Cobalt securities after April 30, 2013, but denied the motions to dismiss in all other respects. On November 3, 2016, plaintiffs moved for class certification.

Cobalt, certain of its officers and directors (including employees of affiliates of Group Inc. who served as directors of Cobalt), certain shareholders of Cobalt (including funds affiliated with Group Inc.), and affiliates of these shareholders (including Group Inc.) are defendants in putative shareholder derivative actions filed beginning on May 6, 2016 in Texas District Court, Harris County. As to the director and officer defendants (including employees of affiliates of Group Inc. who served as directors of Cobalt), the petitions generally allege that they breached their fiduciary duties under state law by making materially false and misleading statements concerning Cobalt. As to the shareholder defendants and their affiliates (including Group Inc. and several affiliated funds), the original petition also alleges that they breached their fiduciary duties by selling Cobalt securities in the common stock offerings described above on the basis of inside information. The petitions seek, among other things, unspecified monetary damages and disgorgement of proceeds from the sale of Cobalt common stock. Defendants moved to dismiss the original petition on July 8, 2016.

Adeptus Health Securities Litigation. GS&Co. is among the underwriters named as defendants in several putative securities class actions, filed beginning in October 2016 in the U.S. District Court for the Eastern District of Texas. In addition to the underwriters, the defendants include Adeptus Health Inc. (Adeptus), its sponsor, and certain of directors and officers of Adeptus. As to the underwriters, the complaints generally allege misstatements and omissions in connection with the $124 million June 2014 initial public offering, the $154 million May 2015 secondary equity offering, the $411 million July 2015 secondary equity offering, and the $175 million June 2016 secondary equity offering. The complaints assert claims under the federal securities laws and seek, among other things, unspecified monetary damages. GS&Co. underwrote 1.69 million shares of common stock in the June 2014 initial public offering representing an aggregate offering price of approximately $37 million, 962,378 shares of common stock in the May 2015 offering representing an aggregate offering price of approximately $61 million, 1.76 million shares of common stock in the July 2015 offering representing an aggregate offering price of approximately $184 million, and all the shares of common stock in the June 2016 offering representing an aggregate offering price of approximately $175 million.



Investment Management Services. Group Inc. and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with clients relating to losses allegedly sustained as a result of the firm’s investment management services. These claims generally seek, among other things, restitution or other compensatory damages and, in some cases, punitive damages.

TerraForm Global and SunEdison Securities Litigation. GS&Co. is among the underwriters, placement agents and initial purchasers named as defendants in several putative class actions and individual actions filed beginning in October 2015 relating to the $675 million July 2015 initial public offering of the common stock of TerraForm Global, Inc. (TerraForm Global), the August 2015 public offering of $650 million of SunEdison, Inc. (SunEdison) convertible preferred stock, the June 2015 private placement of $335 million of TerraForm Global Class D units, and the August 2015 Rule 144A offering of $810 million principal amount of TerraForm Global senior notes. SunEdison is TerraForm Global's controlling shareholder and sponsor. Beginning in October 2016, the pending cases were transferred to the U.S. District Court for the Southern District of New York, and on January 16, 2017, certain plaintiffs filed a consolidated amended complaint relating to TerraForm Global's initial public offering. The defendants also include TerraForm Global, SunEdison and certain of their directors and officers. The complaints generally allege misstatements and omissions in connection with the offerings, assert claims under federal securities laws and, in certain actions, state laws, and seek compensatory damages in an unspecified amount, as well as rescission or rescissory damages. TerraForm Global sold 154,800 Class D units, representing an aggregate offering price of approximately $155 million, to the individual plaintiffs. GS&Co., as underwriter, sold 138,890 shares of SunEdison convertible preferred stock in the offering, representing an aggregate offering price of approximately $139 million and sold 2,340,000 shares of TerraForm Global common stock in the initial public offering representing an aggregate offering price of approximately $35 million. GS&Co., as initial purchaser, sold approximately $49 million principal amount of TerraForm Global senior notes in the Rule 144A offering. On April 21, 2016, SunEdison filed for Chapter 11 bankruptcy.

Valeant Pharmaceuticals International Securities Litigation. GS&Co. and Goldman Sachs Canada Inc. (GS Canada) are among the underwriters and initial purchasers named as defendants in a putative class action filed on March 2, 2016 in the Superior Court of Quebec, Canada. In addition to the underwriters and initial purchasers, the defendants include Valeant Pharmaceuticals International, Inc. (Valeant), certain directors and officers of Valeant and Valeant's auditor. As to GS&Co. and GS Canada, the complaint generally alleges misstatements and omissions in connection with the offering materials for the June 2013 public offering of $2.3 billion of common stock, the June 2013 Rule 144A offering of $3.2 billion principal amount of senior notes, and the November 2013 Rule 144A offering of $900 million principal amount of senior notes. The complaint asserts claims under the Quebec Securities Act and the Civil Code of Quebec and seeks compensatory damages in an unspecified amount.

GS&Co. is among the initial purchasers named as defendants in a putative class action filed on June 24, 2016 in the U.S. District Court for the District of New Jersey. In addition to the initial purchasers for Valeant's Rule 144A debt offerings, the defendants include Valeant, certain directors and officers of Valeant, Valeant's auditor and the underwriters for a common stock offering in which GS&Co. did not participate. As to GS&Co., the complaint generally alleges misstatements and omissions in connection with the June 2013 and November 2013 Rule 144A offerings described above, asserts claims under the federal securities laws, and seeks rescission and compensatory damages in an unspecified amount. Defendants moved to dismiss on September 13, 2016.

GS&Co. and GS Canada, as sole underwriters, sold 27,058,824 shares of common stock in the June 2013 offering representing an aggregate offering price of approximately $2.3 billion and, as initial purchasers, sold approximately $1.3 billion and $293 million in principal amount of senior notes in the June 2013 and November 2013 Rule 144A offerings, respectively.



Interest Rate Swap Antitrust Litigation. Group Inc., GS&Co., GSI, GS Bank USA and Goldman Sachs Financial Markets, L.P. (GSFM) are among the defendants named in putative antitrust class actions relating to the trading of interest rate swaps, filed beginning in November 2015 and consolidated in the U.S. District Court for the Southern District of New York. The second consolidated amended complaint filed on December 9, 2016 generally alleges a conspiracy among the defendants since at least January 1, 2007 to preclude exchange trading of interest rate swaps. The complaint seeks declaratory and injunctive relief, as well as treble damages in an unspecified amount. Defendants moved to dismiss on January 20, 2017.

Group Inc., GS&Co., GSI, GS Bank USA and GSFM are among the defendants named in antitrust actions relating to the trading of interest rate swaps filed in the U.S. District Court for the Southern District of New York beginning in April 2016 by two operators of swap execution facilities and certain of their affiliates. These actions have been consolidated with the class action described above for pretrial proceedings. The second consolidated amended complaint filed on December 9, 2016 generally asserts claims under federal and state antitrust laws and state common law in connection with an alleged conspiracy among the defendants to preclude trading of interest rate swaps on the plaintiffs' respective swap execution facilities and seeks declaratory and injunctive relief, as well as treble damages in an unspecified amount. Defendants moved to dismiss on January 20, 2017.

Commodities-Related Litigation. GSI is among the defendants named in putative class actions relating to trading in platinum and palladium, filed beginning on November 25, 2014 and most recently amended on July 27, 2015, in the U.S. District Court for the Southern District of New York. The complaints generally allege that the defendants violated federal antitrust laws and the Commodity Exchange Act in connection with an alleged conspiracy to manipulate a benchmark for physical platinum and palladium prices and seek declaratory and injunctive relief, as well as treble damages in an unspecified amount. On September 21, 2015, the defendants moved to dismiss.

Employment-Related Matters. On September 15, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York by three female former employees alleging that Group Inc. and GS&Co. have systematically discriminated against female employees in respect of compensation, promotion, assignments, mentoring and performance evaluations. The complaint alleges a class consisting of all female employees employed at specified levels in specified areas by Group Inc. and GS&Co. since July 2002, and asserts claims under federal and New York City discrimination laws. The complaint seeks class action status, injunctive relief and unspecified amounts of compensatory, punitive and other damages. On July 17, 2012, the district court issued a decision granting in part Group Inc.'s and GS&Co.'s motion to strike certain of plaintiffs' class allegations on the ground that plaintiffs lacked standing to pursue certain equitable remedies and denying Group Inc.'s and GS&Co.'s motion to strike plaintiffs' class allegations in their entirety as premature. On March 21, 2013, the U.S. Court of Appeals for the Second Circuit held that arbitration should be compelled with one of the named plaintiffs, who as a managing director was a party to an arbitration agreement with the firm. On March 10, 2015, the magistrate judge to whom the district judge assigned the remaining plaintiffs' May 2014 motion for class certification recommended that the motion be denied in all respects. On August 3, 2015, the magistrate judge denied plaintiffs' motion for reconsideration of that recommendation and granted the plaintiffs' motion to intervene two female individuals, one of whom was employed by the firm as of September 2010 and the other of whom ceased to be an employee of the firm subsequent to the magistrate judge's decision. On June 6, 2016, the district court affirmed the magistrate judge's decision on intervention. On September 28, 2015, and by a supplemental motion filed July 11, 2016 (after the second intervenor ceased to be an employee), the defendants moved to dismiss the claims of the intervenors for lack of standing and mootness.

U.S. Treasury Securities-Related Litigation. GS&Co. is among the primary dealers named as defendants in several putative class actions relating to the market for U.S. Treasury securities, filed beginning in July 2015 and consolidated in the U.S. District Court for the Southern District of New York. The complaints generally allege that the defendants violated the federal antitrust laws and the Commodity Exchange Act in connection with an alleged conspiracy to manipulate the when-issued market and auctions for U.S. Treasury securities, as well as related futures and options, and seek declaratory and injunctive relief, treble damages in an unspecified amount and restitution.



ISDAFIX-Related Litigation. Group Inc. is among the defendants named in several putative class actions relating to trading in interest rate derivatives, filed beginning in September 2014 and most recently amended on February 12, 2015 in the U.S. District Court for the Southern District of New York. The plaintiffs assert claims under the federal antitrust laws and state common law in connection with an alleged conspiracy to manipulate the ISDAFIX benchmarks and seek declaratory and injunctive relief, as well as treble damages in an unspecified amount. On December 19, 2016, the court preliminarily approved a settlement of the claims against Group Inc. The firm has paid the full amount of the proposed settlement into an escrow fund.

Regulatory Investigations and Reviews and Related Litigation. Group Inc. and certain of its affiliates are subject to a number of other investigations and reviews by, and in some cases have received subpoenas and requests for documents and information from, various governmental and regulatory bodies and self-regulatory organizations and litigation and shareholder requests relating to various matters relating to the firm’s businesses and operations, including:

• The 2008 financial crisis;

• The public offering process;

• The firm’s investment management and financial advisory services;

• Conflicts of interest;

• Research practices, including research independence and interactions between research analysts and other firm personnel, including investment banking personnel, as well as third parties;

• Transactions involving government-related financings and other matters, including those related to 1Malaysia Development Berhad (1MDB), a sovereign wealth fund in Malaysia, municipal securities, including wall-cross procedures and conflict of interest disclosure with respect to state and municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal offerings, political contribution rules, municipal advisory services and the possible impact of credit default swap transactions on municipal issuers;
• The offering, auction, sales, trading and clearance of corporate and government securities, currencies, commodities and other financial products and related sales and other communications and activities, including compliance with the SEC’s short sale rule, algorithmic, high-frequency and quantitative trading, the firm’s U.S. alternative trading system (dark pool), futures trading, options trading, when-issued trading, transaction reporting, technology systems and controls, securities lending practices, trading and clearance of credit derivative instruments and interest rate swaps, commodities activities and metals storage, private placement practices, allocations of and trading in securities, and trading activities and communications in connection with the establishment of benchmark rates, such as currency rates;

• Compliance with the U.S. Foreign Corrupt Practices Act;

• The firm’s hiring and compensation practices;

• The firm’s system of risk management and controls; and

• Insider trading, the potential misuse and dissemination of material nonpublic information regarding corporate and governmental developments and the effectiveness of the firm’s insider trading controls and information barriers.

The firm is cooperating with all such governmental and regulatory investigations and reviews.

## Note 28.

## Employee Benefit Plans

The firm sponsors various pension plans and certain other postretirement benefit plans, primarily healthcare and life insurance. The firm also provides certain benefits to former or inactive employees prior to retirement.

## Defined Benefit Pension Plans and Postretirement Plans

Employees of certain non-U.S. subsidiaries participate in various defined benefit pension plans. These plans generally provide benefits based on years of credited service and a percentage of the employee’s eligible compensation. The firm maintains a defined benefit pension plan for certain U.K. employees. As of April 2008, the U.K. defined benefit plan was closed to new participants and frozen for existing participants as of March 31, 2016. The non-U.S. plans do not have a material impact on the firm’s consolidated results of operations.



The firm also maintains a defined benefit pension plan for substantially all U.S. employees hired prior to November 1, 2003. As of November 2004, this plan was closed to new participants and frozen for existing participants. In addition, the firm maintains unfunded postretirement benefit plans that provide medical and life insurance for eligible retirees and their dependents covered under these programs. These plans do not have a material impact on the firm’s consolidated results of operations.

The firm recognizes the funded status of its defined benefit pension and postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation, in the consolidated statements of financial condition. As of December 2016, “Other assets” and “Other liabilities and accrued expenses” included $72 million (related to overfunded pension plans) and $592 million, respectively, related to these plans. As of December 2015, “Other assets” and “Other liabilities and accrued expenses” included $329 million (related to overfunded pension plans) and $561 million, respectively, related to these plans.

## Defined Contribution Plans

The firm contributes to employer-sponsored U.S. and non-U.S. defined contribution plans. The firm’s contribution to these plans was $236 million for 2016, $231 million for 2015 and $223 million for 2014.

## Note 29.

## Employee Incentive Plans

The cost of employee services received in exchange for a share-based award is generally measured based on the grant-date fair value of the award. Share-based awards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Share-based awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense. See Note 3 for information about the adoption of ASU No. 2016-09.

The firm pays cash dividend equivalents on outstanding RSUs. Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense. The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.
The firm generally issues new shares of common stock upon delivery of share-based awards. In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement and the grant-date value of the award.

## Stock Incentive Plan

The firm sponsors a stock incentive plan, The Goldman Sachs Amended and Restated Stock Incentive Plan (2015) (2015 SIP), which provides for grants of RSUs, restricted stock, dividend equivalent rights, incentive stock options, nonqualified stock options, stock appreciation rights, and other share-based awards, each of which may be subject to performance conditions. On May 21, 2015, shareholders approved the 2015 SIP. The 2015 SIP replaced The Goldman Sachs Amended and Restated Stock Incentive Plan (2013) (2013 SIP) previously in effect, and applies to awards granted on or after the date of approval.

As of December 2016, 73.0 million shares were available for grant under the 2015 SIP. If any shares of common stock underlying awards granted under the 2015 SIP or 2013 SIP are not delivered due to forfeiture, termination or cancellation or are surrendered or withheld, those shares will again become available to be delivered under the 2015 SIP. Shares available for grant are also subject to adjustment for certain changes in corporate structure as permitted under the 2015 SIP. The 2015 SIP is scheduled to terminate on the date of the annual meeting of shareholders that occurs in 2019.

## Restricted Stock Units

The firm grants RSUs to employees under the 2015 SIP, which are valued based on the closing price of the underlying shares on the date of grant after taking into account a liquidity discount for any applicable post-vesting and delivery transfer restrictions. RSUs generally vest and underlying shares of common stock deliver as outlined in the applicable award agreements. Employee award agreements generally provide that vesting is accelerated in certain circumstances, such as on retirement, death, disability and conflicted employment. Delivery of the underlying shares of common stock is conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements.



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

The table below presents the activity related to RSUs.

<table><tr><td></td><td colspan="2">Restricted Stock Units Outstanding</td><td colspan="2">Weighted Average Grant-Date Fair Value of Restricted Stock Units Outstanding</td></tr><tr><td></td><td>Future Service Required</td><td>No Future Service Required</td><td>Future Service Required</td><td>No Future Service Required</td></tr><tr><td>Outstanding, December 2015</td><td>5,649,156</td><td>22,082,601</td><td>$159.82</td><td>$148.00</td></tr><tr><td>Granted</td><td>4,452,358</td><td>11,071,140</td><td>138.48</td><td>134.90</td></tr><tr><td>Forfeited</td><td>(501,094)</td><td>(387,417)</td><td>153.98</td><td>149.60</td></tr><tr><td>Delivered</td><td>—</td><td>(14,541,074)</td><td>—</td><td>142.85</td></tr><tr><td>Vested</td><td>(3,977,181)</td><td>3,977,181</td><td>154.44</td><td>154.44</td></tr><tr><td>Outstanding, December 2016</td><td>5,623,239</td><td>22,202,431</td><td>147.25</td><td>145.97</td></tr></table>

In the table above:

• The weighted average grant-date fair value of RSUs granted during 2016, 2015 and 2014 was $135.92, $160.19 and $151.40, respectively. The fair value of the RSUs granted during 2016, 2015 and 2014 includes a liquidity discount of 10.5%, 9.2% and 13.8%, respectively, to reflect post-vesting and delivery transfer restrictions of up to 4 years.

• The aggregate fair value of awards that vested during 2016, 2015 and 2014 was $2.26 billion, $2.40 billion and $2.39 billion, respectively.

• Delivered RSUs include RSUs that were cash settled.

• RSUs outstanding include restricted stock subject to future service requirements as of December 2016 and December 2015 of 39,957 and 6,354 shares, respectively.

In the first quarter of 2017, the firm granted to its employees 8.4 million year-end RSUs, of which 3.2 million RSUs require future service as a condition of delivery for the related shares of common stock. These awards are subject to additional conditions as outlined in the award agreements. Generally, shares underlying these awards, net of required withholding tax, deliver over a three-year period but are subject to post-vesting and delivery transfer restrictions through January 2022. These grants are not included in the table above.

## Stock Options

Stock options generally vest as outlined in the applicable stock option agreement. In general, options expire on the tenth anniversary of the grant date, although they may be subject to earlier termination or cancellation under certain circumstances in accordance with the terms of the applicable stock option agreement and the SIP in effect at the time of grant.
The table below presents the activity related to outstanding stock options, all of which were granted in 2006 through 2008.

<table><tr><td></td><td>Options Outstanding</td><td>Weighted Average Exercise Price</td><td>Aggregate Intrinsic Value (in millions)</td><td>Weighted Average Remaining Life (years)</td></tr><tr><td>Outstanding, December 2015</td><td>14,756,275</td><td>$128.79</td><td>$891</td><td>2.38</td></tr><tr><td>Exercised</td><td>(6,795,087)</td><td>135.16</td><td></td><td></td></tr><tr><td>Outstanding, December 2016</td><td>7,961,188</td><td>123.36</td><td>924</td><td>1.61</td></tr><tr><td>Exercisable, December 2016</td><td>7,961,188</td><td>123.36</td><td></td><td>1.61</td></tr></table>

In the table above:

• The total intrinsic value of options exercised during 2016, 2015 and 2014 was $436 million, $531 million and $2.03 billion, respectively.

• Options outstanding as of December 2016, consist of 5.13 million options with an exercise price of $78.78 and a remaining life of 2.00 years, and 2.83 million options with an exercise price of $204.16 and a remaining life of 0.92 years.

The table below presents the share-based compensation and the related excess tax benefit.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Share-based compensation</td><td>$2,170</td><td>$2,304</td><td>$2,101</td></tr><tr><td>Excess net tax benefit for options exercised</td><td>79</td><td>134</td><td>549</td></tr><tr><td>Excess net tax benefit for other share-based awards</td><td>147</td><td>406</td><td>788</td></tr></table>

In the table above, excess net tax benefit for other share-based awards represents the net tax benefit recognized in additional paid-in capital on stock options exercised, the delivery of common stock underlying share-based awards and dividend equivalents paid on RSUs. Following the adoption of ASU 2016-09, such amounts will be recognized prospectively in income tax expense. See Note 3 for further information about this ASU.

As of December 2016, there was $381 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.50 years.



## Note 30.

## Parent Company

## Group Inc. — Condensed Statements of Earnings

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Revenues</td><td></td><td></td><td></td></tr><tr><td>Dividends from subsidiaries:</td><td></td><td></td><td></td></tr><tr><td>Bank subsidiaries</td><td>$ 53</td><td>$ 32</td><td>$ 16</td></tr><tr><td>Nonbank subsidiaries</td><td>5,465</td><td>3,181</td><td>2,739</td></tr><tr><td>Other revenues</td><td>155</td><td>(132)</td><td>826</td></tr><tr><td>Total non-interest revenues</td><td>5,673</td><td>3,081</td><td>3,581</td></tr><tr><td>Interest income</td><td>4,140</td><td>3,519</td><td>3,769</td></tr><tr><td>Interest expense</td><td>4,543</td><td>4,165</td><td>3,802</td></tr><tr><td>Net interest loss</td><td>(403)</td><td>(646)</td><td>(33)</td></tr><tr><td>Net revenues, including net interest loss</td><td>5,270</td><td>2,435</td><td>3,548</td></tr><tr><td>Operating expenses</td><td></td><td></td><td></td></tr><tr><td>Compensation and benefits</td><td>343</td><td>498</td><td>411</td></tr><tr><td>Other expenses</td><td>332</td><td>188</td><td>282</td></tr><tr><td>Total operating expenses</td><td>675</td><td>686</td><td>693</td></tr><tr><td>Pre-tax earnings</td><td>4,595</td><td>1,749</td><td>2,855</td></tr><tr><td>Provision/(benefit) for taxes</td><td>(518)</td><td>(828)</td><td>(292)</td></tr><tr><td>Undistributed earnings of subsidiaries</td><td>2,285</td><td>3,506</td><td>5,330</td></tr><tr><td>Net earnings</td><td>7,398</td><td>6,083</td><td>8,477</td></tr><tr><td>Preferred stock dividends</td><td>311</td><td>515</td><td>400</td></tr><tr><td>Net earnings applicable to common shareholders</td><td>7,087</td><td>5,568</td><td>8,077</td></tr></table>

## Supplemental Disclosure:

Dividends from nonbank subsidiaries include cash dividends of $3.46 billion, $2.29 billion and $2.62 billion for 2016, 2015 and 2014, respectively.

## Group Inc. — Condensed Statements of Financial Condition

<table><tr><td rowspan="2">\( in millions</td><td colspan="2">As of December</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents:</td><td></td><td></td></tr><tr><td>With third party banks</td><td>$ 81</td><td>$ 36</td></tr><tr><td>With subsidiary bank</td><td>3,000</td><td>1,300</td></tr><tr><td>Loans to and receivables from subsidiaries:</td><td></td><td></td></tr><tr><td>Bank subsidiaries</td><td>9,131</td><td>9,494</td></tr><tr><td>Nonbank subsidiaries</td><td>179,899</td><td>179,826</td></tr><tr><td>Investments in subsidiaries and other affiliates:</td><td></td><td></td></tr><tr><td>Bank subsidiaries</td><td>25,571</td><td>23,985</td></tr><tr><td>Nonbank subsidiaries and other affiliates</td><td>67,203</td><td>61,533</td></tr><tr><td>Financial instruments owned, at fair value</td><td>4,524</td><td>4,410</td></tr><tr><td>Other assets</td><td>6,273</td><td>7,472</td></tr><tr><td>Total assets</td><td>$295,682</td><td>$288,056</td></tr><tr><td>Liabilities and shareholders&#x27; equity</td><td></td><td></td></tr><tr><td>Payables to subsidiaries</td><td>$ 875</td><td>$ 591</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>775</td><td>443</td></tr><tr><td>Unsecured short-term borrowings:</td><td></td><td></td></tr><tr><td>With third parties (includes $3,256 as of December 2016 and $4,924 as of December 2015, at fair value)</td><td>27,159</td><td>29,547</td></tr><tr><td>With subsidiaries</td><td>999</td><td>628</td></tr><tr><td>Unsecured long-term borrowings:</td><td></td><td></td></tr><tr><td>With third parties (includes $17,591 as of December 2016 and $16,194 as of December 2015, at fair value)</td><td>172,164</td><td>164,718</td></tr><tr><td>With subsidiaries</td><td>5,233</td><td>3,854</td></tr><tr><td>Other liabilities and accrued expenses</td><td>1,584</td><td>1,547</td></tr><tr><td>Total liabilities</td><td>208,789</td><td>201,328</td></tr></table>

<table><tr><td colspan="3">Shareholders&#x27; equity</td></tr><tr><td>Preferred stock</td><td>11,203</td><td>11,200</td></tr><tr><td>Common stock</td><td>9</td><td>9</td></tr><tr><td>Share-based awards</td><td>3,914</td><td>4,151</td></tr><tr><td>Additional paid-in capital</td><td>52,638</td><td>51,340</td></tr><tr><td>Retained earnings</td><td>89,039</td><td>83,386</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(1,216)</td><td>(718)</td></tr><tr><td>Stock held in treasury, at cost</td><td>(68,694)</td><td>(62,640)</td></tr><tr><td>Total shareholders&#x27; equity</td><td>86,893</td><td>86,728</td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$295,682</td><td>$288,056</td></tr></table>

## Supplemental Disclosures:

Loans to and receivables from nonbank subsidiaries primarily includes overnight loans, the proceeds of which can be used to satisfy the short-term obligations of Group Inc.

As of December 2016, unsecured long-term borrowings with subsidiaries by maturity date are $3.83 billion in 2018, $90 million in 2019, $100 million in 2020, $132 million in 2021, and $1.08 billion in 2022-thereafter.



## Group Inc. — Condensed Statements of Cash Flows

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Cash flows from operating activities</td><td></td><td></td><td></td></tr><tr><td>Net earnings</td><td>$ 7,398</td><td>$ 6,083</td><td>$ 8,477</td></tr><tr><td>Adjustments to reconcile net earnings to net cash provided by operating activities:</td><td></td><td></td><td></td></tr><tr><td>Undistributed earnings of subsidiaries</td><td>(2,285)</td><td>(3,506)</td><td>(5,330)</td></tr><tr><td>Depreciation and amortization</td><td>52</td><td>50</td><td>42</td></tr><tr><td>Deferred income taxes</td><td>134</td><td>86</td><td>(4)</td></tr><tr><td>Share-based compensation</td><td>193</td><td>178</td><td>188</td></tr><tr><td>Loss/(gain) related to extinguishment of junior subordinated debt</td><td>3</td><td>(34)</td><td>(289)</td></tr><tr><td>Changes in operating assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>Financial instruments owned, at fair value</td><td>(1,580)</td><td>(620)</td><td>6,766</td></tr><tr><td>Financial instruments sold, but not yet purchased, at fair value</td><td>332</td><td>274</td><td>(252)</td></tr><tr><td>Other, net</td><td>(993)</td><td>(56)</td><td>(5,793)</td></tr><tr><td>Net cash provided by operating activities</td><td>3,254</td><td>2,455</td><td>3,805</td></tr><tr><td>Cash flows from investing activities</td><td></td><td></td><td></td></tr><tr><td>Purchase of property, leasehold improvements and equipment</td><td>(79)</td><td>(33)</td><td>(15)</td></tr><tr><td>Issuances of short-term loans to subsidiaries, net</td><td>(3,994)</td><td>(24,417)</td><td>(4,099)</td></tr><tr><td>Issuance of term loans to subsidiaries</td><td>(28,498)</td><td>(8,632)</td><td>(8,803)</td></tr><tr><td>Repayments of term loans by subsidiaries</td><td>32,265</td><td>24,196</td><td>3,979</td></tr><tr><td>Capital distributions from/(contributions to) subsidiaries, net</td><td>(3,265)</td><td>(1,500)</td><td>865</td></tr><tr><td>Net cash used for investing activities</td><td>(3,571)</td><td>(10,386)</td><td>(8,073)</td></tr><tr><td>Cash flows from financing activities</td><td></td><td></td><td></td></tr><tr><td>Unsecured short-term borrowings, net</td><td>2,112</td><td>(2,684)</td><td>963</td></tr><tr><td>Proceeds from issuance of long-term borrowings</td><td>40,708</td><td>42,795</td><td>37,101</td></tr><tr><td>Repayment of long-term borrowings, including the current portion</td><td>(33,314)</td><td>(27,726)</td><td>(27,931)</td></tr><tr><td>Purchase of APEX, trust preferred securities and senior guaranteed trust securities</td><td>(1,171)</td><td>(1)</td><td>(1,801)</td></tr><tr><td>Common stock repurchased</td><td>(6,078)</td><td>(4,135)</td><td>(5,469)</td></tr><tr><td>Dividends and dividend equivalents paid on common stock, preferred stock and share-based awards</td><td>(1,706)</td><td>(1,681)</td><td>(1,454)</td></tr><tr><td>Proceeds from issuance of preferred stock, net of issuance costs</td><td>1,303</td><td>1,993</td><td>1,980</td></tr><tr><td>Proceeds from issuance of common stock, including exercise of share-based awards</td><td>6</td><td>259</td><td>123</td></tr><tr><td>Excess tax benefit related to share-based awards</td><td>202</td><td>407</td><td>782</td></tr><tr><td>Cash settlement of share-based awards</td><td>—</td><td>(2)</td><td>(1)</td></tr><tr><td>Net cash provided by financing activities</td><td>2,062</td><td>9,225</td><td>4,293</td></tr><tr><td>Net increase in cash and cash equivalents</td><td>1,745</td><td>1,294</td><td>25</td></tr><tr><td>Cash and cash equivalents, beginning balance</td><td>1,336</td><td>42</td><td>17</td></tr><tr><td>Cash and cash equivalents, ending balance</td><td>$ 3,081</td><td>$ 1,336</td><td>$ 42</td></tr></table>

## Supplemental Disclosures:

Cash payments for third-party interest, net of capitalized interest, were $4.72 billion, $3.54 billion and $4.31 billion for 2016, 2015 and 2014, respectively.

Cash payments for income taxes, net of refunds, were $61 million, $1.28 billion and $2.35 billion for 2016, 2015 and 2014, respectively.

Cash flows related to common stock repurchased includes common stock repurchased in the prior period for which settlement occurred during the current period and excludes common stock repurchased during the current period for which settlement occurred in the following period.

Non-cash activities during the year ended December 2016:

• Group Inc. exchanged $1.04 billion of APEX for $1.31 billion of Series E and Series F Preferred Stock. See Note 19 for further information.

• Group Inc. exchanged $127 million of senior guaranteed trust securities for $124 million of Group Inc.'s junior subordinated debt.

Non-cash activities during the year ended December 2015:

• Group Inc. exchanged $262 million of Trust Preferred Securities and common beneficial interests held by Group Inc. for $296 million of Group Inc.'s junior subordinated debt.

• Group Inc. exchanged $6.12 billion in financial instruments owned, at fair value, held by Group Inc. for $5.20 billion of loans to and $918 million of equity in certain of its subsidiaries.

Non-cash activities during the year ended December 2014:

• Group Inc. exchanged $1.58 billion of Trust Preferred Securities, common beneficial interests and senior guaranteed trust securities held by Group Inc. for $1.87 billion of Group Inc.'s junior subordinated debt.



## Quarterly Results (unaudited)

The tables below present the firm’s unaudited quarterly results for 2016 and 2015. These quarterly results were prepared in accordance with U.S. GAAP and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results. These adjustments are of a normal, recurring nature. The timing and magnitude of changes in the firm’s discretionary compensation accruals (included in operating expenses) can have a significant effect on results in a given quarter.

Three Months Ended

<table><tr><td>in millions, except per share data</td><td>December 2016</td><td>September 2016</td><td>June 2016</td><td>March 2016</td></tr><tr><td>Non-interest revenues</td><td>$7,834</td><td>$7,554</td><td>$7,178</td><td>$ 5,455</td></tr><tr><td>Interest income</td><td>2,424</td><td>2,389</td><td>2,530</td><td>2,348</td></tr><tr><td>Interest expense</td><td>2,088</td><td>1,775</td><td>1,776</td><td>1,465</td></tr><tr><td>Net interest income</td><td>336</td><td>614</td><td>754</td><td>883</td></tr><tr><td>Net revenues, including net interest income</td><td>8,170</td><td>8,168</td><td>7,932</td><td>6,338</td></tr><tr><td>Operating expenses</td><td>4,773</td><td>5,300</td><td>5,469</td><td>4,762</td></tr><tr><td>Pre-tax earnings</td><td>3,397</td><td>2,868</td><td>2,463</td><td>1,576</td></tr><tr><td>Provision for taxes</td><td>1,050</td><td>774</td><td>641</td><td>441</td></tr><tr><td>Net earnings</td><td>2,347</td><td>2,094</td><td>1,822</td><td>1,135</td></tr><tr><td>Preferred stock dividends</td><td>194</td><td>(6)</td><td>188</td><td>(65)</td></tr><tr><td>Net earnings applicable to common shareholders</td><td>$2,153</td><td>$2,100</td><td>$1,634</td><td>$ 1,200</td></tr><tr><td>Earnings per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 5.17</td><td>$ 4.96</td><td>$ 3.77</td><td>$ 2.71</td></tr><tr><td>Diluted</td><td>5.08</td><td>4.88</td><td>3.72</td><td>2.68</td></tr><tr><td>Dividends declared per common share</td><td>0.65</td><td>0.65</td><td>0.65</td><td>0.65</td></tr></table>

Three Months Ended

<table><tr><td>in millions, except per share data</td><td>December 2015</td><td>September 2015</td><td>June 2015</td><td>March 2015</td></tr><tr><td>Non-interest revenues</td><td>$6,573</td><td>$6,019</td><td>$8,406</td><td>$ 9,758</td></tr><tr><td>Interest income</td><td>2,148</td><td>2,119</td><td>2,150</td><td>2,035</td></tr><tr><td>Interest expense</td><td>1,448</td><td>1,277</td><td>1,487</td><td>1,176</td></tr><tr><td>Net interest income</td><td>700</td><td>842</td><td>663</td><td>859</td></tr><tr><td>Net revenues, including net interest income</td><td>7,273</td><td>6,861</td><td>9,069</td><td>10,617</td></tr><tr><td>Operating expenses</td><td>6,201</td><td>4,815</td><td>7,343</td><td>6,683</td></tr><tr><td>Pre-tax earnings</td><td>1,072</td><td>2,046</td><td>1,726</td><td>3,934</td></tr><tr><td>Provision for taxes</td><td>307</td><td>620</td><td>678</td><td>1,090</td></tr><tr><td>Net earnings</td><td>765</td><td>1,426</td><td>1,048</td><td>2,844</td></tr><tr><td>Preferred stock dividends</td><td>191</td><td>96</td><td>132</td><td>96</td></tr><tr><td>Net earnings applicable to common shareholders</td><td>$ 574</td><td>$1,330</td><td>$ 916</td><td>$ 2,748</td></tr><tr><td>Earnings per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 1.28</td><td>$ 2.95</td><td>$ 2.01</td><td>$ 6.05</td></tr><tr><td>Diluted</td><td>1.27</td><td>2.90</td><td>1.98</td><td>5.94</td></tr><tr><td>Dividends declared per common share</td><td>0.65</td><td>0.65</td><td>0.65</td><td>0.60</td></tr></table>

## Common Stock Price Range

The table below presents the high and low sales prices per share of the firm’s common stock.

Year Ended December

<table><tr><td rowspan="2"></td><td colspan="2">2016</td><td colspan="2">2015</td><td colspan="2">2014</td></tr><tr><td>High</td><td>Low</td><td>High</td><td>Low</td><td>High</td><td>Low</td></tr><tr><td>First quarter</td><td>$177.50</td><td>$139.05</td><td>$195.73</td><td>$172.26</td><td>$181.13</td><td>$159.77</td></tr><tr><td>Second quarter</td><td>168.90</td><td>138.20</td><td>218.77</td><td>186.96</td><td>171.08</td><td>151.65</td></tr><tr><td>Third quarter</td><td>172.42</td><td>142.62</td><td>214.61</td><td>167.49</td><td>188.58</td><td>161.53</td></tr><tr><td>Fourth quarter</td><td>245.57</td><td>160.25</td><td>199.90</td><td>169.87</td><td>198.06</td><td>171.26</td></tr></table>

As of February 10, 2017, there were 8,177 holders of record of the firm’s common stock.

On February 10, 2017, the last reported sales price for the firm’s common stock on the New York Stock Exchange was $242.72 per share.

## Common Stock Performance

The graph and table below compare the performance of an investment in the firm’s common stock from December 31, 2011 (the last trading day before the firm’s 2012 fiscal year) through December 31, 2016, with the S&P 500 Index and the S&P 500 Financials Index. The graph and table assume $100 was invested on December 31, 2011 in each of the firm’s common stock, the S&P 500 Index and the S&P 500 Financials Index, and the dividends were reinvested on the date of payment without payment of any commissions. The performance shown represents past performance and should not be considered an indication of future performance.






## Selected Financial Data

<table><tr><td rowspan="2"></td><td colspan="5">Year Ended or as of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Income statement data (\( in millions)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Non-interest revenues</td><td>$ 28,021</td><td>$ 30,756</td><td>$ 30,481</td><td>$ 30,814</td><td>$ 30,283</td></tr><tr><td>Interest income</td><td>9,691</td><td>8,452</td><td>9,604</td><td>10,060</td><td>11,381</td></tr><tr><td>Interest expense</td><td>7,104</td><td>5,388</td><td>5,557</td><td>6,668</td><td>7,501</td></tr><tr><td>Net interest income</td><td>2,587</td><td>3,064</td><td>4,047</td><td>3,392</td><td>3,880</td></tr><tr><td>Net revenues, including net interest income</td><td>30,608</td><td>33,820</td><td>34,528</td><td>34,206</td><td>34,163</td></tr><tr><td>Compensation and benefits</td><td>11,647</td><td>12,678</td><td>12,691</td><td>12,613</td><td>12,944</td></tr><tr><td>Non-compensation expenses</td><td>8,657</td><td>12,364</td><td>9,480</td><td>9,856</td><td>10,012</td></tr><tr><td>Pre-tax earnings</td><td>$ 10,304</td><td>$ 8,778</td><td>$ 12,357</td><td>$ 11,737</td><td>$ 11,207</td></tr><tr><td>Balance sheet data (\) in millions)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Total assets</td><td>$860,165</td><td>$861,395</td><td>$855,842</td><td>$911,124</td><td>$938,205</td></tr><tr><td>Deposits</td><td>124,098</td><td>97,519</td><td>82,880</td><td>70,696</td><td>69,995</td></tr><tr><td>Other secured financings (long-term)</td><td>8,405</td><td>10,520</td><td>7,249</td><td>7,524</td><td>8,965</td></tr><tr><td>Unsecured long-term borrowings</td><td>189,086</td><td>175,422</td><td>167,302</td><td>160,695</td><td>167,084</td></tr><tr><td>Total liabilities</td><td>773,272</td><td>774,667</td><td>773,045</td><td>832,657</td><td>862,489</td></tr><tr><td>Total shareholders&#x27; equity</td><td>86,893</td><td>86,728</td><td>82,797</td><td>78,467</td><td>75,716</td></tr><tr><td>Common share data (in millions, except per share amounts)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings per common share:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 16.53</td><td>12.35</td><td>17.55</td><td>16.34</td><td>14.63</td></tr><tr><td>Diluted</td><td>16.29</td><td>12.14</td><td>17.07</td><td>15.46</td><td>14.13</td></tr><tr><td>Dividends declared per common share</td><td>2.60</td><td>2.55</td><td>2.25</td><td>2.05</td><td>1.77</td></tr><tr><td>Book value per common share</td><td>182.47</td><td>171.03</td><td>163.01</td><td>152.48</td><td>144.67</td></tr><tr><td>Basic shares</td><td>414.8</td><td>441.6</td><td>451.5</td><td>467.4</td><td>480.5</td></tr><tr><td>Average common shares:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>427.4</td><td>448.9</td><td>458.9</td><td>471.3</td><td>496.2</td></tr><tr><td>Diluted</td><td>435.1</td><td>458.6</td><td>473.2</td><td>499.6</td><td>516.1</td></tr><tr><td>Selected data (unaudited)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Return on average common shareholders&#x27; equity</td><td>9.4%</td><td>7.4%</td><td>11.2%</td><td>11.0%</td><td>10.7%</td></tr><tr><td>Total staff:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Americas</td><td>18,100</td><td>19,000</td><td>17,400</td><td>16,600</td><td>16,400</td></tr><tr><td>Non-Americas</td><td>16,300</td><td>17,800</td><td>16,600</td><td>16,300</td><td>16,000</td></tr><tr><td>Total staff</td><td>34,400</td><td>36,800</td><td>34,000</td><td>32,900</td><td>32,400</td></tr><tr><td>Assets under supervision (\) in billions)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Asset class:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Alternative investments</td><td>$ 154</td><td>148</td><td>143</td><td>142</td><td>151</td></tr><tr><td>Equity</td><td>266</td><td>252</td><td>236</td><td>208</td><td>153</td></tr><tr><td>Fixed income</td><td>601</td><td>546</td><td>516</td><td>446</td><td>411</td></tr><tr><td>Total long-term assets under supervision</td><td>1,021</td><td>946</td><td>895</td><td>796</td><td>715</td></tr><tr><td>Liquidity products</td><td>358</td><td>306</td><td>283</td><td>246</td><td>250</td></tr><tr><td>Total assets under supervision</td><td>$ 1,379</td><td>$ 1,252</td><td>$ 1,178</td><td>$ 1,042</td><td>$ 965</td></tr></table>

## In the table above:

• The impact of adopting ASU No. 2015-03 was a reduction to both total assets and total liabilities of $398 million, $383 million and $350 million as of December 2014, December 2013 and December 2012, respectively. See Note 3 to the consolidated financial statements for further information about ASU No. 2015-03.

• Basic shares represent common shares outstanding and restricted stock units granted to employees with no future service requirements.

## Statistical Disclosures

## Distribution of Assets, Liabilities and Shareholders' Equity

The tables below present a summary of average balances and interest rates. Assets, liabilities and interest are classified as U.S. and non-U.S. based on the location of the legal entity in which the assets and liabilities are held.

<table><tr><td rowspan="2"></td><td colspan="3">Average Balance for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>$ in millions</td><td></td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 89,804</td><td>$ 60,501</td><td>$ 56,606</td></tr><tr><td>Non-U.S.</td><td>15,670</td><td>14,898</td><td>17,320</td></tr><tr><td>Total deposits with banks</td><td>105,474</td><td>75,399</td><td>73,926</td></tr><tr><td>U.S.</td><td>177,930</td><td>193,512</td><td>206,994</td></tr><tr><td>Non-U.S.</td><td>129,150</td><td>111,168</td><td>108,766</td></tr><tr><td>Total securities borrowed, securities purchased under agreements to resell and federal funds sold</td><td>307,080</td><td>304,680</td><td>315,760</td></tr><tr><td>U.S.</td><td>147,862</td><td>167,727</td><td>192,089</td></tr><tr><td>Non-U.S.</td><td>102,387</td><td>97,152</td><td>101,163</td></tr><tr><td>Total financial instruments owned, at fair value</td><td>250,249</td><td>264,879</td><td>293,252</td></tr><tr><td>U.S.</td><td>43,367</td><td>34,521</td><td>21,459</td></tr><tr><td>Non-U.S.</td><td>4,609</td><td>2,440</td><td>966</td></tr><tr><td>Total loans receivable</td><td>47,976</td><td>36,961</td><td>22,425</td></tr><tr><td>U.S.</td><td>37,525</td><td>41,022</td><td>47,930</td></tr><tr><td>Non-U.S.</td><td>32,732</td><td>45,235</td><td>43,131</td></tr><tr><td>Total other interest-earning assets</td><td>70,257</td><td>86,257</td><td>91,061</td></tr><tr><td>Total interest-earning assets</td><td>781,036</td><td>768,176</td><td>796,424</td></tr><tr><td>Cash and due from banks</td><td>13,985</td><td>13,803</td><td>8,642</td></tr><tr><td>Other non-interest-earning assets</td><td>91,875</td><td>91,970</td><td>89,195</td></tr><tr><td>Total assets</td><td>$886,896</td><td>$873,949</td><td>$894,261</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 97,255</td><td>$ 73,063</td><td>$ 62,595</td></tr><tr><td>Non-U.S.</td><td>17,605</td><td>13,885</td><td>10,569</td></tr><tr><td>Total interest-bearing deposits</td><td>114,860</td><td>86,948</td><td>73,164</td></tr><tr><td>U.S.</td><td>52,388</td><td>59,885</td><td>79,517</td></tr><tr><td>Non-U.S.</td><td>31,936</td><td>29,777</td><td>52,394</td></tr><tr><td>Total securities loaned and securities sold under agreements to repurchase</td><td>84,324</td><td>89,662</td><td>131,911</td></tr><tr><td>U.S.</td><td>36,273</td><td>36,609</td><td>39,708</td></tr><tr><td>Non-U.S.</td><td>35,797</td><td>36,066</td><td>42,511</td></tr><tr><td>Total financial instruments sold, but not yet purchased, at fair value</td><td>72,070</td><td>72,675</td><td>82,219</td></tr><tr><td>U.S.</td><td>43,684</td><td>42,743</td><td>45,841</td></tr><tr><td>Non-U.S.</td><td>13,656</td><td>14,447</td><td>18,751</td></tr><tr><td>Total short-term borrowings</td><td>57,340</td><td>57,190</td><td>64,592</td></tr><tr><td>U.S.</td><td>182,808</td><td>172,160</td><td>164,568</td></tr><tr><td>Non-U.S.</td><td>10,488</td><td>8,843</td><td>7,201</td></tr><tr><td>Total long-term borrowings</td><td>193,296</td><td>181,003</td><td>171,769</td></tr><tr><td>U.S.</td><td>147,177</td><td>156,248</td><td>153,600</td></tr><tr><td>Non-U.S.</td><td>59,852</td><td>62,672</td><td>62,311</td></tr><tr><td>Total other interest-bearing liabilities</td><td>207,029</td><td>218,920</td><td>215,911</td></tr><tr><td>Total interest-bearing liabilities</td><td>728,919</td><td>706,398</td><td>739,566</td></tr><tr><td>Non-interest-bearing deposits</td><td>2,996</td><td>1,986</td><td>799</td></tr><tr><td>Other non-interest-bearing liabilities</td><td>68,323</td><td>79,251</td><td>73,057</td></tr><tr><td>Total liabilities</td><td>800,238</td><td>787,635</td><td>813,422</td></tr><tr><td>Shareholders&#x27; equity</td><td></td><td></td><td></td></tr><tr><td>Preferred stock</td><td>11,304</td><td>10,585</td><td>8,585</td></tr><tr><td>Common stock</td><td>75,354</td><td>75,729</td><td>72,254</td></tr><tr><td>Total shareholders&#x27; equity</td><td>86,658</td><td>86,314</td><td>80,839</td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$886,896</td><td>$873,949</td><td>$894,261</td></tr><tr><td>Percentage of interest-earning assets and interest-bearing liabilities attributable to non-U.S. operations</td><td></td><td></td><td></td></tr><tr><td>Assets</td><td>36.43%</td><td>35.26%</td><td>34.07%</td></tr><tr><td>Liabilities</td><td>23.23%</td><td>23.46%</td><td>26.20%</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Supplemental Financial Information

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Interest for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Assets</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 382</td><td>$ 143</td><td>$ 146</td></tr><tr><td>Non-U.S.</td><td>70</td><td>98</td><td>81</td></tr><tr><td>Total deposits with banks</td><td>452</td><td>241</td><td>227</td></tr><tr><td>U.S.</td><td>361</td><td>(369)</td><td>(511)</td></tr><tr><td>Non-U.S.</td><td>330</td><td>386</td><td>433</td></tr><tr><td>Total securities borrowed, securities purchased under agreements to resell and federal funds sold</td><td>691</td><td>17</td><td>(78)</td></tr><tr><td>U.S.</td><td>3,762</td><td>4,083</td><td>5,130</td></tr><tr><td>Non-U.S.</td><td>1,682</td><td>1,779</td><td>2,407</td></tr><tr><td>Total financial instruments owned, at fair value</td><td>5,444</td><td>5,862</td><td>7,537</td></tr><tr><td>U.S.</td><td>1,620</td><td>1,101</td><td>650</td></tr><tr><td>Non-U.S.</td><td>223</td><td>90</td><td>58</td></tr><tr><td>Total loans receivable</td><td>1,843</td><td>1,191</td><td>708</td></tr><tr><td>U.S.</td><td>914</td><td>754</td><td>723</td></tr><tr><td>Non-U.S.</td><td>347</td><td>387</td><td>487</td></tr><tr><td>Total other interest-earning assets</td><td>1,261</td><td>1,141</td><td>1,210</td></tr><tr><td>Total interest-earning assets</td><td>9,691</td><td>8,452</td><td>9,604</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 780</td><td>$ 354</td><td>$ 286</td></tr><tr><td>Non-U.S.</td><td>98</td><td>54</td><td>47</td></tr><tr><td>Total interest-bearing deposits</td><td>878</td><td>408</td><td>333</td></tr><tr><td>U.S.</td><td>325</td><td>221</td><td>206</td></tr><tr><td>Non-U.S.</td><td>117</td><td>109</td><td>225</td></tr><tr><td>Total securities loaned and securities sold under agreements to repurchase</td><td>442</td><td>330</td><td>431</td></tr><tr><td>U.S.</td><td>607</td><td>644</td><td>828</td></tr><tr><td>Non-U.S.</td><td>644</td><td>675</td><td>913</td></tr><tr><td>Total financial instruments sold, but not yet purchased, at fair value</td><td>1,251</td><td>1,319</td><td>1,741</td></tr><tr><td>U.S.</td><td>401</td><td>401</td><td>413</td></tr><tr><td>Non-U.S.</td><td>45</td><td>28</td><td>34</td></tr><tr><td>Total short-term borrowings</td><td>446</td><td>429</td><td>447</td></tr><tr><td>U.S.</td><td>4,175</td><td>3,722</td><td>3,327</td></tr><tr><td>Non-U.S.</td><td>67</td><td>156</td><td>133</td></tr><tr><td>Total long-term borrowings</td><td>4,242</td><td>3,878</td><td>3,460</td></tr><tr><td>U.S.</td><td>(658)</td><td>(1,378)</td><td>(1,222)</td></tr><tr><td>Non-U.S.</td><td>503</td><td>402</td><td>367</td></tr><tr><td>Total other interest-bearing liabilities</td><td>(155)</td><td>(976)</td><td>(855)</td></tr><tr><td>Total interest-bearing liabilities</td><td>7,104</td><td>5,388</td><td>5,557</td></tr><tr><td>Net interest income</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>1,409</td><td>1,748</td><td>2,300</td></tr><tr><td>Non-U.S.</td><td>1,178</td><td>1,316</td><td>1,747</td></tr><tr><td>Net interest income</td><td>2,587</td><td>3,064</td><td>4,047</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="3">Average Rate for the Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Assets</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>0.43%</td><td>0.24%</td><td>0.26%</td></tr><tr><td>Non-U.S.</td><td>0.45%</td><td>0.66%</td><td>0.47%</td></tr><tr><td>Total deposits with banks</td><td>0.43%</td><td>0.32%</td><td>0.31%</td></tr><tr><td>U.S.</td><td>0.20%</td><td>(0.19)%</td><td>(0.25)%</td></tr><tr><td>Non-U.S.</td><td>0.26%</td><td>0.35%</td><td>0.40%</td></tr><tr><td>Total securities borrowed, securities purchased under agreements to resell and federal funds sold</td><td>0.23%</td><td>0.01%</td><td>(0.02)%</td></tr><tr><td>U.S.</td><td>2.54%</td><td>2.43%</td><td>2.67%</td></tr><tr><td>Non-U.S.</td><td>1.64%</td><td>1.83%</td><td>2.38%</td></tr><tr><td>Total financial instruments owned, at fair value</td><td>2.18%</td><td>2.21%</td><td>2.57%</td></tr><tr><td>U.S.</td><td>3.74%</td><td>3.19%</td><td>3.03%</td></tr><tr><td>Non-U.S.</td><td>4.84%</td><td>3.69%</td><td>6.00%</td></tr><tr><td>Total loans receivable</td><td>3.84%</td><td>3.22%</td><td>3.16%</td></tr><tr><td>U.S.</td><td>2.44%</td><td>1.84%</td><td>1.51%</td></tr><tr><td>Non-U.S.</td><td>1.06%</td><td>0.86%</td><td>1.13%</td></tr><tr><td>Total other interest-earning assets</td><td>1.79%</td><td>1.32%</td><td>1.33%</td></tr><tr><td>Total interest-earning assets</td><td>1.24%</td><td>1.10%</td><td>1.21%</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>0.80%</td><td>0.48%</td><td>0.46%</td></tr><tr><td>Non-U.S.</td><td>0.56%</td><td>0.39%</td><td>0.44%</td></tr><tr><td>Total interest-bearing deposits</td><td>0.76%</td><td>0.47%</td><td>0.46%</td></tr><tr><td>U.S.</td><td>0.62%</td><td>0.37%</td><td>0.26%</td></tr><tr><td>Non-U.S.</td><td>0.37%</td><td>0.37%</td><td>0.43%</td></tr><tr><td>Total securities loaned and securities sold under agreements to repurchase</td><td>0.52%</td><td>0.37%</td><td>0.33%</td></tr><tr><td>U.S.</td><td>1.67%</td><td>1.76%</td><td>2.09%</td></tr><tr><td>Non-U.S.</td><td>1.80%</td><td>1.87%</td><td>2.15%</td></tr><tr><td>Total financial instruments sold, but not yet purchased, at fair value</td><td>1.74%</td><td>1.81%</td><td>2.12%</td></tr><tr><td>U.S.</td><td>0.92%</td><td>0.94%</td><td>0.90%</td></tr><tr><td>Non-U.S.</td><td>0.33%</td><td>0.19%</td><td>0.18%</td></tr><tr><td>Total short-term borrowings</td><td>0.78%</td><td>0.75%</td><td>0.69%</td></tr><tr><td>U.S.</td><td>2.28%</td><td>2.16%</td><td>2.02%</td></tr><tr><td>Non-U.S.</td><td>0.64%</td><td>1.76%</td><td>1.85%</td></tr><tr><td>Total long-term borrowings</td><td>2.19%</td><td>2.14%</td><td>2.01%</td></tr><tr><td>U.S.</td><td>(0.45)%</td><td>(0.88)%</td><td>(0.80)%</td></tr><tr><td>Non-U.S.</td><td>0.84%</td><td>0.64%</td><td>0.59%</td></tr><tr><td>Total other interest-bearing liabilities</td><td>(0.07)%</td><td>(0.45)%</td><td>(0.40)%</td></tr><tr><td>Total interest-bearing liabilities</td><td>0.97%</td><td>0.76%</td><td>0.75%</td></tr><tr><td>Interest rate spread</td><td>0.27%</td><td>0.34%</td><td>0.46%</td></tr><tr><td>U.S.</td><td>0.28%</td><td>0.35%</td><td>0.44%</td></tr><tr><td>Non-U.S.</td><td>0.41%</td><td>0.49%</td><td>0.64%</td></tr><tr><td>Net yield on interest-earning assets</td><td>0.33%</td><td>0.40%</td><td>0.51%</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Supplemental Financial Information

In the tables above:

• Derivative instruments and commodities are included in other non-interest-earning assets and other non-interest-bearing liabilities.

• Total other interest-earning assets primarily consists of certain receivables from customers and counterparties.

• Substantially all of the total other interest-bearing liabilities consists of certain payables to customers and counterparties.

• Interest rates for borrowings include the effects of interest rate swaps accounted for as hedges.

• The impact of adopting ASU No. 2015-03 was a reduction to both average total assets and average total liabilities of $402 million for the year ended December 2014. See Note 3 to the consolidated financial statements for further information about this ASU.

• In December 2016, the firm reclassified amounts related to cash and securities segregated for regulatory and other purposes that were previously included in total other interest-earning assets to total deposits with banks, total securities borrowed, securities purchased under agreements to resell and federal funds sold, and total financial instruments owned, at fair value. The firm also reclassified amounts related to cash segregated for regulatory and other purposes that were previously included in other non-interest-earnings assets to cash and due from banks. Previously reported amounts have been conformed to the current presentation. See Note 3 to the consolidated financial statements for further information about this reclassification.

## Changes in Net Interest Income, Volume and Rate Analysis

The tables below present an analysis of the effect on net interest income of volume and rate changes. In this analysis, changes due to volume/rate variance have been allocated to volume.

<table><tr><td rowspan="3"></td><td colspan="3">Year Ended December 2016 versus December 2015</td></tr><tr><td colspan="2">Increase (decrease) due to change in:</td><td></td></tr><tr><td>Volume</td><td>Rate</td><td>Net Change</td></tr><tr><td>$ in millions</td><td></td><td></td><td></td></tr><tr><td>Interest-earning assets</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 125</td><td>$ 114</td><td>$ 239</td></tr><tr><td>Non-U.S.</td><td>3</td><td>(31)</td><td>(28)</td></tr><tr><td>Total deposits with banks</td><td>128</td><td>83</td><td>211</td></tr><tr><td>U.S.</td><td>(32)</td><td>762</td><td>730</td></tr><tr><td>Non-U.S.</td><td>46</td><td>(102)</td><td>(56)</td></tr><tr><td>Total securities borrowed, securities purchased under agreements to resell and federal funds sold</td><td>14</td><td>660</td><td>674</td></tr><tr><td>U.S.</td><td>(505)</td><td>184</td><td>(321)</td></tr><tr><td>Non-U.S.</td><td>86</td><td>(183)</td><td>(97)</td></tr><tr><td>Total financial instruments owned, at fair value</td><td>(419)</td><td>1</td><td>(418)</td></tr><tr><td>U.S.</td><td>330</td><td>189</td><td>519</td></tr><tr><td>Non-U.S.</td><td>105</td><td>28</td><td>133</td></tr><tr><td>Total loans receivable</td><td>435</td><td>217</td><td>652</td></tr><tr><td>U.S.</td><td>(85)</td><td>245</td><td>160</td></tr><tr><td>Non-U.S.</td><td>(133)</td><td>93</td><td>(40)</td></tr><tr><td>Total other interest-earning assets</td><td>(218)</td><td>338</td><td>120</td></tr><tr><td>Change in interest income</td><td>(60)</td><td>1,299</td><td>1,239</td></tr><tr><td>Interest-bearing liabilities</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>194</td><td>232</td><td>426</td></tr><tr><td>Non-U.S.</td><td>21</td><td>23</td><td>44</td></tr><tr><td>Total interest-bearing deposits</td><td>215</td><td>255</td><td>470</td></tr><tr><td>U.S.</td><td>(47)</td><td>151</td><td>104</td></tr><tr><td>Non-U.S.</td><td>8</td><td>—</td><td>8</td></tr><tr><td>Total securities loaned and securities sold under agreements to repurchase</td><td>(39)</td><td>151</td><td>112</td></tr><tr><td>U.S.</td><td>(6)</td><td>(31)</td><td>(37)</td></tr><tr><td>Non-U.S.</td><td>(5)</td><td>(26)</td><td>(31)</td></tr><tr><td>Total financial instruments sold, but not yet purchased, at fair value</td><td>(11)</td><td>(57)</td><td>(68)</td></tr><tr><td>U.S.</td><td>9</td><td>(9)</td><td>—</td></tr><tr><td>Non-U.S.</td><td>(3)</td><td>20</td><td>17</td></tr><tr><td>Total short-term borrowings</td><td>6</td><td>11</td><td>17</td></tr><tr><td>U.S.</td><td>243</td><td>210</td><td>453</td></tr><tr><td>Non-U.S.</td><td>11</td><td>(100)</td><td>(89)</td></tr><tr><td>Total long-term borrowings</td><td>254</td><td>110</td><td>364</td></tr><tr><td>U.S.</td><td>41</td><td>679</td><td>720</td></tr><tr><td>Non-U.S.</td><td>(24)</td><td>125</td><td>101</td></tr><tr><td>Total other interest-bearing liabilities</td><td>17</td><td>804</td><td>821</td></tr><tr><td>Change in interest expense</td><td>442</td><td>1,274</td><td>1,716</td></tr><tr><td>Change in net interest income</td><td>(502)</td><td>25</td><td>(477)</td></tr></table>



## THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Supplemental Financial Information

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December 2015 versus December 2014</td></tr><tr><td>Increase (decrease) due to change in:</td><td></td><td></td></tr><tr><td>$ in millions</td><td>Volume</td><td>Rate</td><td>Net Change</td></tr><tr><td>Interest-earning assets</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 9</td><td>$ (12)</td><td>$ (3)</td></tr><tr><td>Non-U.S.</td><td>(16)</td><td>33</td><td>17</td></tr><tr><td>Total deposits with banks</td><td>(7)</td><td>21</td><td>14</td></tr><tr><td>U.S.</td><td>26</td><td>116</td><td>142</td></tr><tr><td>Non-U.S.</td><td>8</td><td>(55)</td><td>(47)</td></tr><tr><td>Total securities borrowed, securities purchased under agreements to resell and federal funds sold</td><td>34</td><td>61</td><td>95</td></tr><tr><td>U.S.</td><td>(593)</td><td>(454)</td><td>(1,047)</td></tr><tr><td>Non-U.S.</td><td>(73)</td><td>(555)</td><td>(628)</td></tr><tr><td>Total financial instruments owned, at fair value</td><td>(666)</td><td>(1,009)</td><td>(1,675)</td></tr><tr><td>U.S.</td><td>416</td><td>35</td><td>451</td></tr><tr><td>Non-U.S.</td><td>54</td><td>(22)</td><td>32</td></tr><tr><td>Total loans receivable</td><td>470</td><td>13</td><td>483</td></tr><tr><td>U.S.</td><td>(127)</td><td>158</td><td>31</td></tr><tr><td>Non-U.S.</td><td>18</td><td>(118)</td><td>(100)</td></tr><tr><td>Total other interest-earning assets</td><td>(109)</td><td>40</td><td>(69)</td></tr><tr><td>Change in interest income</td><td>(278)</td><td>(874)</td><td>(1,152)</td></tr><tr><td>Interest-bearing liabilities</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>51</td><td>17</td><td>68</td></tr><tr><td>Non-U.S.</td><td>13</td><td>(6)</td><td>7</td></tr><tr><td>Total interest-bearing deposits</td><td>64</td><td>11</td><td>75</td></tr><tr><td>U.S.</td><td>(72)</td><td>87</td><td>15</td></tr><tr><td>Non-U.S.</td><td>(83)</td><td>(33)</td><td>(116)</td></tr><tr><td>Total securities loaned and securities sold under agreements to repurchase</td><td>(155)</td><td>54</td><td>(101)</td></tr><tr><td>U.S.</td><td>(55)</td><td>(129)</td><td>(184)</td></tr><tr><td>Non-U.S.</td><td>(121)</td><td>(117)</td><td>(238)</td></tr><tr><td>Total financial instruments sold, but not yet purchased, at fair value</td><td>(176)</td><td>(246)</td><td>(422)</td></tr><tr><td>U.S.</td><td>(29)</td><td>17</td><td>(12)</td></tr><tr><td>Non-U.S.</td><td>(8)</td><td>2</td><td>(6)</td></tr><tr><td>Total short-term borrowings</td><td>(37)</td><td>19</td><td>(18)</td></tr><tr><td>U.S.</td><td>164</td><td>231</td><td>395</td></tr><tr><td>Non-U.S.</td><td>29</td><td>(6)</td><td>23</td></tr><tr><td>Total long-term borrowings</td><td>193</td><td>225</td><td>418</td></tr><tr><td>U.S.</td><td>(23)</td><td>(133)</td><td>(156)</td></tr><tr><td>Non-U.S.</td><td>2</td><td>33</td><td>35</td></tr><tr><td>Total other interest-bearing liabilities</td><td>(21)</td><td>(100)</td><td>(121)</td></tr><tr><td>Change in interest expense</td><td>(132)</td><td>(37)</td><td>(169)</td></tr><tr><td>Change in net interest income</td><td>(146)</td><td>(837)</td><td>(983)</td></tr></table>

## Deposits

The table below presents a summary of the firm’s interest-bearing deposits.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">Year Ended December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Average balances</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td></td><td></td><td></td></tr><tr><td>Savings and demand</td><td>$ 59,357</td><td>$44,486</td><td>$41,785</td></tr><tr><td>Time</td><td>37,898</td><td>28,577</td><td>20,810</td></tr><tr><td>Total U.S.</td><td>97,255</td><td>73,063</td><td>62,595</td></tr><tr><td>Non-U.S.</td><td></td><td></td><td></td></tr><tr><td>Demand</td><td>8,041</td><td>5,703</td><td>4,571</td></tr><tr><td>Time</td><td>9,564</td><td>8,182</td><td>5,998</td></tr><tr><td>Total Non-U.S.</td><td>17,605</td><td>13,885</td><td>10,569</td></tr><tr><td>Total</td><td>$114,860</td><td>$86,948</td><td>$73,164</td></tr></table>

<table><tr><td>Average interest rates</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td></td><td></td><td></td></tr><tr><td>Savings and demand</td><td>0.56%</td><td>0.27%</td><td>0.23%</td></tr><tr><td>Time</td><td>1.18%</td><td>0.83%</td><td>0.91%</td></tr><tr><td>Total U.S.</td><td>0.80%</td><td>0.48%</td><td>0.46%</td></tr><tr><td>Non-U.S.</td><td></td><td></td><td></td></tr><tr><td>Demand</td><td>0.29%</td><td>0.19%</td><td>0.18%</td></tr><tr><td>Time</td><td>0.78%</td><td>0.53%</td><td>0.65%</td></tr><tr><td>Total Non-U.S.</td><td>0.56%</td><td>0.39%</td><td>0.44%</td></tr><tr><td>Total</td><td>0.76%</td><td>0.47%</td><td>0.46%</td></tr></table>

As of December 2016, deposits in U.S. and non-U.S. offices include $2.56 billion and $8.53 billion, respectively, of time deposits that were greater than $100,000. The table below presents maturities of these time deposits held in U.S. offices.

<table><tr><td>$ in millions</td><td>As of December 2016</td></tr><tr><td>3 months or less</td><td>$ 687</td></tr><tr><td>3 to 6 months</td><td>891</td></tr><tr><td>6 to 12 months</td><td>386</td></tr><tr><td>Greater than 12 months</td><td>597</td></tr><tr><td>Total U.S. time deposits greater than $100,000</td><td>$2,561</td></tr></table>



## Short-Term and Other Borrowed Funds

The table below presents a summary of the firm’s securities loaned and securities sold under agreements to repurchase, and short-term borrowings. These borrowings generally mature within one year of the financial statement date and include borrowings that are redeemable at the option of the holder within one year of the financial statement date.

<table><tr><td rowspan="2">\( in millions</td><td colspan="3">As of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td></tr><tr><td colspan="4">Securities loaned and securities sold under agreements to repurchase</td></tr><tr><td>Amounts outstanding at year-end</td><td>$79,340</td><td>$89,683</td><td>$ 93,785</td></tr><tr><td>Average outstanding during the year</td><td>84,324</td><td>89,662</td><td>131,911</td></tr><tr><td>Maximum month-end outstanding</td><td>89,142</td><td>97,466</td><td>178,049</td></tr><tr><td colspan="4">Weighted average interest rate</td></tr><tr><td>During the year</td><td>0.52%</td><td>0.37%</td><td>0.33%</td></tr><tr><td>At year-end</td><td>0.44%</td><td>0.39%</td><td>0.31%</td></tr><tr><td colspan="4">Short-term borrowings</td></tr><tr><td>Amounts outstanding at year-end</td><td>$52,383</td><td>$57,020</td><td>$ 60,099</td></tr><tr><td>Average outstanding during the year</td><td>57,340</td><td>57,190</td><td>64,592</td></tr><tr><td>Maximum month-end outstanding</td><td>61,840</td><td>60,522</td><td>68,570</td></tr><tr><td colspan="4">Weighted average interest rate</td></tr><tr><td>During the year</td><td>0.78%</td><td>0.75%</td><td>0.69%</td></tr><tr><td>At year-end</td><td>0.94%</td><td>0.80%</td><td>0.68%</td></tr></table>

In the table above:

• Amounts outstanding at year-end for short-term borrowings includes short-term secured financings of $13.12 billion, $14.23 billion and $15.56 billion as of December 2016, December 2015 and December 2014, respectively.

• The weighted average interest rates for these borrowings include the effect of hedging activities.

## Loan Portfolio

The table below presents a summary of the firm’s loans receivable. Loans receivable are classified as U.S. and non-U.S. based on the location of the legal entity in which such loans are held.

<table><tr><td rowspan="2">\( in millions</td><td colspan="5">As of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>U.S.</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Corporate loans</td><td>$23,821</td><td>$19,909</td><td>$14,020</td><td>$ 6,910</td><td>$2,187</td></tr><tr><td>Loans to private wealth management clients</td><td>12,386</td><td>12,824</td><td>10,989</td><td>6,545</td><td>4,057</td></tr><tr><td>Loans backed by:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>2,813</td><td>3,186</td><td>1,876</td><td>727</td><td>245</td></tr><tr><td>Residential real estate</td><td>3,777</td><td>2,187</td><td>311</td><td>—</td><td>—</td></tr><tr><td>Other loans</td><td>2,872</td><td>3,495</td><td>821</td><td>—</td><td>—</td></tr><tr><td>Total U.S.</td><td>45,669</td><td>41,601</td><td>28,017</td><td>14,182</td><td>6,489</td></tr><tr><td>Non-U.S.</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Corporate loans</td><td>1,016</td><td>831</td><td>290</td><td>131</td><td>—</td></tr><tr><td>Loans to private wealth management clients</td><td>1,442</td><td>1,137</td><td>300</td><td>13</td><td>14</td></tr><tr><td>Loans backed by:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>1,948</td><td>2,085</td><td>549</td><td>708</td><td>—</td></tr><tr><td>Residential real estate</td><td>88</td><td>129</td><td>10</td><td>—</td><td>—</td></tr><tr><td>Other loans</td><td>18</td><td>38</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total non-U.S.</td><td>4,512</td><td>4,220</td><td>1,149</td><td>852</td><td>14</td></tr><tr><td>Total loans receivable, gross</td><td>50,181</td><td>45,821</td><td>29,166</td><td>15,034</td><td>6,503</td></tr><tr><td>Allowance for loan losses</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>476</td><td>381</td><td>205</td><td>115</td><td>24</td></tr><tr><td>Non-U.S.</td><td>33</td><td>33</td><td>23</td><td>24</td><td>—</td></tr><tr><td>Total allowance for loan losses</td><td>509</td><td>414</td><td>228</td><td>139</td><td>24</td></tr><tr><td>Total loans receivable</td><td>$49,672</td><td>$45,407</td><td>$28,938</td><td>$14,895</td><td>$6,479</td></tr></table>

## Allowance for Loan Losses

The table below presents changes in the allowance for loan losses. In the table below, provisions and allowance for loan losses primarily relate to corporate loans and loans extended to private wealth management clients that are held in legal entities located in the U.S.

<table><tr><td rowspan="2">\( in millions</td><td colspan="5">As of December</td></tr><tr><td>2016</td><td>2015</td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Allowance for loan losses</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Beginning balance</td><td>$414</td><td>$228</td><td>$139</td><td>$ 24</td><td>$ 8</td></tr><tr><td>Charge-offs</td><td>(8)</td><td>(1)</td><td>(3)</td><td>—</td><td>—</td></tr><tr><td>Provision for loan losses</td><td>138</td><td>187</td><td>92</td><td>115</td><td>16</td></tr><tr><td>Other</td><td>(35)</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Ending balance</td><td>$509</td><td>$414</td><td>$228</td><td>$139</td><td>$24</td></tr></table>



## Maturities and Sensitivity to Changes in Interest Rates

The table below presents the firm’s gross loans receivable by tenor and a distribution of such loans receivable between fixed and floating interest rates.

<table><tr><td rowspan="2"></td><td colspan="4">Maturities and Sensitivity to Changes in Interest Rates as of December 2016</td></tr><tr><td>Less than 1 year</td><td>1 - 5 years</td><td>Greater than 5 years</td><td>Total</td></tr><tr><td>$ in millions</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td></td><td></td><td></td><td></td></tr><tr><td>Corporate loans</td><td>$ 2,213</td><td>$16,853</td><td>$4,755</td><td>$23,821</td></tr><tr><td>Loans to private wealth management clients</td><td>9,701</td><td>2,685</td><td>—</td><td>12,386</td></tr><tr><td>Loans backed by:</td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>59</td><td>2,386</td><td>368</td><td>2,813</td></tr><tr><td>Residential real estate</td><td>588</td><td>567</td><td>2,622</td><td>3,777</td></tr><tr><td>Other loans</td><td>157</td><td>1,568</td><td>1,147</td><td>2,872</td></tr><tr><td>Total U.S.</td><td>12,718</td><td>24,059</td><td>8,892</td><td>45,669</td></tr><tr><td>Non-U.S.</td><td></td><td></td><td></td><td></td></tr><tr><td>Corporate loans</td><td>101</td><td>723</td><td>192</td><td>1,016</td></tr><tr><td>Loans to private wealth management clients</td><td>1,442</td><td>—</td><td>—</td><td>1,442</td></tr><tr><td>Loans backed by:</td><td></td><td></td><td></td><td></td></tr><tr><td>Commercial real estate</td><td>25</td><td>1,864</td><td>59</td><td>1,948</td></tr><tr><td>Residential real estate</td><td>—</td><td>88</td><td>—</td><td>88</td></tr><tr><td>Other loans</td><td>—</td><td>18</td><td>—</td><td>18</td></tr><tr><td>Total non-U.S.</td><td>1,568</td><td>2,693</td><td>251</td><td>4,512</td></tr><tr><td>Total loans receivable, gross</td><td>$14,286</td><td>$26,752</td><td>$9,143</td><td>$50,181</td></tr><tr><td>Loans at fixed interest rates</td><td>$ 35</td><td>$ 1,752</td><td>$ 2,374</td><td>$ 4,161</td></tr><tr><td>Loans at variable interest rates</td><td>14,251</td><td>25,000</td><td>6,769</td><td>46,020</td></tr><tr><td>Total</td><td>$14,286</td><td>$26,752</td><td>$9,143</td><td>$50,181</td></tr></table>

## Cross-border Outstandings

Cross-border outstandings are based on the Federal Financial Institutions Examination Council’s (FFIEC) guidelines for reporting cross-border information and represent the amounts that the firm may not be able to obtain from a foreign country due to country-specific events, including unfavorable economic and political conditions, economic and social instability, and changes in government policies.

Credit exposure represents the potential for loss due to the default or deterioration in credit quality of a counterparty or an issuer of securities or other instruments the firm holds and is measured based on the potential loss in an event of non-payment by a counterparty. Credit exposure is reduced through the effect of risk mitigants, such as netting agreements with counterparties that permit the firm to offset receivables and payables with such counterparties or obtaining collateral from counterparties. The table below does not include all the effects of such risk mitigants and does not represent the firm’s credit exposure.
The table below presents cross-border outstandings and commitments for each country in which cross-border outstandings exceed 0.75% of consolidated assets in accordance with the FFIEC guidelines and include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash financial instruments, but exclude derivative instruments. Securities purchased under agreements to resell and securities borrowed are presented gross, without reduction for related securities collateral held. Margin loans (included in receivables) are presented based on the amount of collateral advanced by the counterparty. Substantially all commitments in the tables below consist of commitments to extend credit and forward starting resale and securities borrowing agreements. Beginning in December 2016, securities purchased under agreements to resell and securities borrowed transactions with agency lenders are presented based on the country of the underlying counterparty rather than the country of the agency lender. Amounts as of December 2015 and December 2014 have been conformed to the current presentation.

<table><tr><td>$ in millions</td><td>Banks</td><td>Governments</td><td>Other</td><td>Total</td><td>Commitments</td></tr><tr><td colspan="6">As of December 2016</td></tr><tr><td>Cayman Islands</td><td>$</td><td>$</td><td>-\)</td><td>$34,756</td><td>$34,759</td></tr><tr><td>France</td><td>6,333</td><td>1,858</td><td>18,576</td><td>26,767</td><td>9,598</td></tr><tr><td>Germany</td><td>3,183</td><td>14,061</td><td>9,250</td><td>26,494</td><td>7,281</td></tr><tr><td>Japan</td><td>9,860</td><td>721</td><td>6,310</td><td>16,891</td><td>7,476</td></tr><tr><td>Italy</td><td>3,220</td><td>3,211</td><td>1,608</td><td>8,039</td><td>1,228</td></tr><tr><td>Canada</td><td>814</td><td>333</td><td>6,164</td><td>7,311</td><td>1,279</td></tr><tr><td>China</td><td>1,189</td><td>158</td><td>5,662</td><td>7,009</td><td>—</td></tr><tr><td>Singapore</td><td>190</td><td>6,165</td><td>505</td><td>6,860</td><td>97</td></tr><tr><td>South Korea</td><td>107</td><td>3,563</td><td>2,847</td><td>6,517</td><td>4</td></tr><tr><td colspan="6">As of December 2015</td></tr><tr><td>Cayman Islands</td><td>1</td><td>$</td><td>—</td><td>$39,602</td><td>$39,603</td></tr><tr><td>France</td><td>5,596</td><td>2,904</td><td>23,853</td><td>32,353</td><td>4,795</td></tr><tr><td>Japan</td><td>10,254</td><td>297</td><td>11,648</td><td>22,199</td><td>9,684</td></tr><tr><td>Germany</td><td>4,080</td><td>7,969</td><td>8,497</td><td>20,546</td><td>5,008</td></tr><tr><td>Italy</td><td>4,326</td><td>3,691</td><td>2,647</td><td>10,664</td><td>2,634</td></tr><tr><td>Canada</td><td>1,173</td><td>310</td><td>8,642</td><td>10,125</td><td>1,404</td></tr><tr><td>U.K.</td><td>2,170</td><td>42</td><td>7,138</td><td>9,350</td><td>15,075</td></tr><tr><td>China</td><td>2,189</td><td>424</td><td>6,068</td><td>8,681</td><td>111</td></tr><tr><td>Singapore</td><td>192</td><td>7,462</td><td>502</td><td>8,156</td><td>14</td></tr><tr><td>South Korea</td><td>79</td><td>5,545</td><td>1,914</td><td>7,538</td><td>2</td></tr><tr><td colspan="6">As of December 2014</td></tr><tr><td>Cayman Islands</td><td>2</td><td>$</td><td>—</td><td>$35,828</td><td>$35,830</td></tr><tr><td>Japan</td><td>13,931</td><td>375</td><td>19,649</td><td>33,955</td><td>11,413</td></tr><tr><td>France</td><td>4,730</td><td>4,932</td><td>18,289</td><td>27,951</td><td>12,214</td></tr><tr><td>Germany</td><td>5,362</td><td>5,252</td><td>10,647</td><td>21,261</td><td>4,631</td></tr><tr><td>China</td><td>2,474</td><td>6,221</td><td>4,984</td><td>13,679</td><td>6</td></tr><tr><td>Singapore</td><td>179</td><td>9,518</td><td>485</td><td>10,182</td><td>23</td></tr><tr><td>South Korea</td><td>528</td><td>7,550</td><td>1,791</td><td>9,869</td><td>—</td></tr><tr><td>Italy</td><td>3,331</td><td>4,198</td><td>2,215</td><td>9,744</td><td>783</td></tr><tr><td>U.K.</td><td>1,870</td><td>282</td><td>5,996</td><td>8,148</td><td>11,755</td></tr><tr><td>Canada</td><td>1,201</td><td>1,102</td><td>5,465</td><td>7,768</td><td>1,519</td></tr><tr><td>Mexico</td><td>52</td><td>6,162</td><td>594</td><td>6,808</td><td>103</td></tr><tr><td>Netherlands</td><td>1,588</td><td>123</td><td>5,071</td><td>6,782</td><td>1,890</td></tr></table>



## Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants on accounting and financial disclosure during the last two years.

## Item 9A. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by Goldman Sachs' management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fourth quarter of our year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 of this Form 10-K.

## Item 9B. Other Information

Not applicable.

## PART III

## Item 10. Directors, Executive Officers and Corporate Governance

Information relating to our executive officers is included on page 45 of this Form 10-K. Information relating to our directors, including our audit committee and audit committee financial experts and the procedures by which shareholders can recommend director nominees, and our executive officers will be in our definitive Proxy Statement for our 2017 Annual Meeting of Shareholders, which will be filed within 120 days of the end of 2016 (2017 Proxy Statement) and is incorporated herein by reference. Information relating to our Code of Business Conduct and Ethics, which applies to our senior financial officers, is included under “Available Information” in Part I, Item 1 of this Form 10-K.

## Item 11. Executive Compensation

Information relating to our executive officer and director compensation and the compensation committee of the Board will be in the 2017 Proxy Statement and is incorporated herein by reference.

## Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management will be in the 2017 Proxy Statement and is incorporated herein by reference.



The following table provides information as of December 31, 2016 regarding securities to be issued on exercise of outstanding stock options or pursuant to outstanding restricted stock units and securities remaining available for issuance under our equity compensation plans that were in effect during 2016.

<table><tr><td>Plan Category</td><td>Securities to be Issued Upon Exercise of Outstanding Options and Rights (a)</td><td>Weighted Average Exercise Price of Outstanding Options (b)</td><td>Securities Remaining Available For Future Issuance Under Equity Compensation Plans (c)</td></tr><tr><td>Equity compensation plans approved by security holders</td><td>35,785,180</td><td>$123.36</td><td>72,991,954</td></tr><tr><td>Equity compensation plans not approved by security holders</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>35,785,180</td><td>72,991,954</td><td></td></tr></table>

In the table above:

• Securities to be Issued Upon Exercise of Outstanding Options and Rights includes: (i) 7,961,188 shares of common stock that may be issued upon exercise of outstanding options and (ii) 27,823,992 shares that may be issued pursuant to outstanding restricted stock units. These awards are subject to vesting and other conditions to the extent set forth in the respective award agreements, and the underlying shares will be delivered net of any required tax withholding.

• The Weighted Average Exercise Price of Outstanding Options relates only to the options described above. Shares underlying restricted stock units are deliverable without the payment of any consideration, and therefore these awards have not been taken into account in calculating the weighted average exercise price.

• Securities Remaining Available For Future Issuance Under Equity Compensation Plans represents shares remaining to be issued under our current stock incentive plan (SIP), excluding shares reflected in column (a). If any shares of common stock underlying awards granted under our current SIP or our SIP adopted in 2013 are not delivered due to forfeiture, termination or cancellation or are surrendered or withheld, those shares will again become available to be delivered under our current SIP. Shares available for grant are also subject to adjustment for certain changes in corporate structure as permitted under our current SIP.

## Item 13. Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions and director independence will be in the 2017 Proxy Statement and is incorporated herein by reference.

## Item 14. Principal Accounting Fees and Services

Information regarding principal accounting fees and services will be in the 2017 Proxy Statement and is incorporated herein by reference.

## PART IV

## Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this Report:

## 1. Consolidated Financial Statements

The consolidated financial statements required to be filed in this Form 10-K are included in Part II, Item 8 hereof.

## 2. Exhibits

2.1 Plan of Incorporation (incorporated by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (No. 333-74449)).

3.1 Restated Certificate of Incorporation of The Goldman Sachs Group, Inc., amended as of August 2, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2016).

3.2 Amended and Restated By-Laws of The Goldman Sachs Group, Inc., amended as of February 18, 2016 (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015).

4.1 Indenture, dated as of May 19, 1999, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 6 to the Registrant’s Registration Statement on Form 8-A, filed on June 29, 1999).



4.2 Subordinated Debt Indenture, dated as of February 20, 2004, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 28, 2003).

4.3 Warrant Indenture, dated as of February 14, 2006, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.34 to the Registrant's Post-Effective Amendment No. 3 to Form S-3, filed on March 1, 2006).

4.4 Senior Debt Indenture, dated as of December 4, 2007, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.69 to the Registrant's Post-Effective Amendment No. 10 to Form S-3, filed on December 4, 2007).

4.5 Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.82 to the Registrant's Post-Effective Amendment No. 11 to Form S-3 (No. 333-130074), filed on July 17, 2008).

4.6 Fourth Supplemental Indenture, dated as of December 31, 2016, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee, with respect to the Senior Debt Indenture, dated as of July 16, 2008 (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on January 6, 2017).

4.7 Senior Debt Indenture, dated as of October 10, 2008, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.70 to the Registrant's Registration Statement on Form S-3 (No. 333-154173), filed on October 10, 2008).

4.8 First Supplemental Indenture, dated as of February 20, 2015, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York Mellon, as trustee, with respect to the Senior Debt Indenture, dated as of October 10, 2008 (incorporated by reference to Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014).
4.9 Ninth Supplemental Subordinated Debt Indenture, dated as of May 20, 2015, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee, with respect to the Subordinated Debt Indenture, dated as of February 20, 2004 (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on May 22, 2015).

Certain instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.

10.1 The Goldman Sachs Amended and Restated Stock Incentive Plan (2015) (incorporated by reference to Annex B to the Registrant's Definitive Proxy Statement on Schedule 14A, filed on April 10, 2015). \( ^{†} $ 

10.2 The Goldman Sachs Amended and Restated Restricted Partner Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended February 24, 2006). \( ^{†} $ 

10.3 Form of Employment Agreement for Participating Managing Directors (applicable to executive officers) (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (No. 333-75213)). \( ^{†} $ 

10.4 Form of Agreement Relating to Noncompetition and Other Covenants (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1 (No. 333-75213)).†

10.5 Tax Indemnification Agreement, dated as of May 7, 1999, by and among The Goldman Sachs Group, Inc. and various parties (incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1 (No. 333-75213)).

10.6 Amended and Restated Shareholders' Agreement, effective as of January 15, 2015, among The Goldman Sachs Group, Inc. and various parties (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014).

10.7 Instrument of Indemnification (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1 (No. 333-75213)).



10.8 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 26, 1999).

10.9 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.44 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 26, 1999).

10.10 Form of Indemnification Agreement, dated as of July 5, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended August 25, 2000).

10.11 Amendment No. 1, dated as of September 5, 2000, to the Tax Indemnification Agreement, dated as of May 7, 1999 (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the period ended August 25, 2000).

10.12 Letter, dated February 6, 2001, from The Goldman Sachs Group, Inc. to Mr. James A. Johnson (incorporated by reference to Exhibit 10.65 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 24, 2000).†

10.13 Letter, dated December 18, 2002, from The Goldman Sachs Group, Inc. to Mr. William W. George (incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 29, 2002).†

10.14 Form of Amendment, dated November 27, 2004, to Agreement Relating to Noncompetition and Other Covenants, dated May 7, 1999 (incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 26, 2004).†

10.15 The Goldman Sachs Group, Inc. Non-Qualified Deferred Compensation Plan for U.S. Participating Managing Directors (terminated as of December 15, 2008) (incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 2007).†

10.16 Form of Year-End Option Award Agreement (incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 28, 2008).†

10.17 Form of Non-Employee Director Option Award Agreement (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2009).†

10.18 Form of Non-Employee Director RSU Award Agreement (pre-2015) (incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014).†

10.19 Ground Lease, dated August 23, 2005, between Battery Park City Authority d/b/a/ Hugh L. Carey Battery Park City Authority, as Landlord, and Goldman Sachs Headquarters LLC, as Tenant (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on August 26, 2005).

10.20 General Guarantee Agreement, dated January 30, 2006, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman, Sachs & Co. (incorporated by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 25, 2005).

10.21 Goldman, Sachs & Co. Executive Life Insurance Policy and Certificate with Metropolitan Life Insurance Company for Participating Managing Directors (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended August 25, 2006).†

10.22 Form of Goldman, Sachs & Co. Executive Life Insurance Policy with Pacific Life & Annuity Company for Participating Managing Directors, including policy specifications and form of restriction on Policy Owner's Rights (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended August 25, 2006).†

10.23 Form of Second Amendment, dated November 25, 2006, to Agreement Relating to Noncompetition and Other Covenants, dated May 7, 1999, as amended effective November 27, 2004 (incorporated by reference to Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 24, 2006).†

10.24 Description of PMD Retiree Medical Program (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended February 29, 2008).†



10.25 Letter, dated June 28, 2008, from The Goldman Sachs Group, Inc. to Mr. Lakshmi N. Mittal (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K, filed on June 30, 2008). †

10.26 General Guarantee Agreement, dated December 1, 2008, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman Sachs Bank USA (incorporated by reference to Exhibit 4.80 to the Registrant's Post-Effective Amendment No. 2 to Form S-3, filed on March 19, 2009).

10.27 Form of One-Time RSU Award Agreement (pre-2015) (incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.28 Amendments to Certain Non-Employee Director Equity Award Agreements (incorporated by reference to Exhibit 10.69 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 28, 2008). †

10.29 Form of Year-End RSU Award Agreement (not fully vested) (pre-2015) (incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.30 Form of Year-End RSU Award Agreement (fully vested) (pre-2015) (incorporated by reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.31 Form of Year-End RSU Award Agreement (Base and/or Supplemental) (pre-2015) (incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.32 Form of Year-End Short-Term RSU Award Agreement (pre-2015) (incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.33 Form of Year-End Restricted Stock Award Agreement (fully vested) (pre-2015) (incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2013). †

10.34 Form of Year-End Restricted Stock Award Agreement (Base and/or Supplemental) (pre-2015) (incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †
10.35 Form of Year-End Short-Term Restricted Stock Award Agreement (pre-2015) (incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.36 Form of Fixed Allowance RSU Award Agreement (pre-2015) (incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014). †

10.37 Form of Deed of Gift (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2010). †

10.38 The Goldman Sachs Long-Term Performance Incentive Plan, dated December 17, 2010 (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on December 23, 2010). †

10.39 Form of Performance-Based Restricted Stock Unit Award Agreement (pre-2015) (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on December 23, 2010). †

10.40 Form of Performance-Based Option Award Agreement (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on December 23, 2010). †

10.41 Form of Performance-Based Cash Compensation Award Agreement (pre-2015) (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on December 23, 2010). †

10.42 Amended and Restated General Guarantee Agreement, dated November 21, 2011, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman Sachs Bank USA (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on November 21, 2011).

10.43 Form of Aircraft Time Sharing Agreement (incorporated by reference to Exhibit 10.61 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2011). †

10.44 Description of Compensation Arrangements with Executive Officer (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). †

10.45 The Goldman Sachs Group, Inc. Clawback Policy, effective as of January 1, 2015 (incorporated by reference to Exhibit 10.53 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014).



10.46 Form of Non-Employee Director RSU Award Agreement. †

10.47 Form of One-Time RSU Award Agreement. †

10.48 Form of Year-End RSU Award Agreement (not fully vested). †

10.49 Form of Year-End RSU Award Agreement (fully vested). †

10.50 Form of Year-End RSU Award Agreement (Base and/or Supplemental). †

10.51 Form of Year-End Short-Term RSU Award Agreement. †

10.52 Form of Year-End Restricted Stock Award Agreement (not fully vested) (incorporated by reference to Exhibit 10.55 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2015). †

10.53 Form of Year-End Restricted Stock Award Agreement (fully vested) (incorporated by reference to Exhibit 10.56 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2015). †

10.54 Form of Year-End Short-Term Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.57 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2015). †

10.55 Form of Fixed Allowance RSU Award Agreement. †

10.56 Form of Fixed Allowance Restricted Stock Award Agreement. †

10.57 Form of Fixed Allowance Deferred Cash Award Agreement (incorporated by reference to Exhibit 10.59 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2015). †

10.58 Form of Performance-Based Restricted Stock Unit Award Agreement. †

10.59 Form of Performance-Based Cash Compensation Award Agreement (incorporated by reference to Exhibit 10.61 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2015). †

10.60 Form of Signature Card for Equity Awards. †

12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
21.1 List of significant subsidiaries of The Goldman Sachs Group, Inc.

23.1 Consent of Independent Registered Public Accounting Firm.

31.1 Rule 13a-14(a) Certifications.

32.1 Section 1350 Certifications (This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934).

99.1 Report of Independent Registered Public Accounting Firm on Selected Financial Data.

99.2 Debt and trust securities registered under Section 12(b) of the Exchange Act.

101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Earnings for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, (ii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, (iii) the Consolidated Statements of Financial Condition as of December 31, 2016 and December 31, 2015, (iv) the Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, and (vi) the notes to the Consolidated Financial Statements.

† This exhibit is a management contract or a compensatory plan or arrangement.



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE GOLDMAN SACHS GROUP, INC.

By: /s/ Harvey M. Schwartz
Name: Harvey M. Schwartz
Title: President and Co-Chief Operating Officer; Chief Financial Officer
Date: February 24, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By: /s/ Lloyd C. Blankfein
Name: Lloyd C. Blankfein
Capacity: Director, Chairman and Chief Executive Officer (Principal Executive Officer)
Date: February 24, 2017

By: /s/ M. Michele Burns
Name: M. Michele Burns
Capacity: Director
Date: February 24, 2017

By: /s/ Mark A. Flaherty
Name: Mark A. Flaherty
Capacity: Director
Date: February 24, 2017

By: /s/ William W. George
Name: William W. George
Capacity: Director
Date: February 24, 2017

By: /s/ James A. Johnson
Name: James A. Johnson
Capacity: Director
Date: February 24, 2017

By: /s/ Ellen J. Kullman
Name: Ellen J. Kullman
Capacity: Director
Date: February 24, 2017
By: /s/ Lakshmi N. Mittal
Name: Lakshmi N. Mittal
Capacity: Director
Date: February 24, 2017

By: /s/ Adebayo O. Ogunlesi
Name: Adebayo O. Ogunlesi
Capacity: Director
Date: February 24, 2017

By: /s/ Peter Oppenheimer
Name: Peter Oppenheimer
Capacity: Director
Date: February 24, 2017

By: /s/ Debora L. Spar
Name: Debora L. Spar
Capacity: Director
Date: February 24, 2017

By: /s/ Mark E. Tucker
Name: Mark E. Tucker
Capacity: Director
Date: February 24, 2017

By: /s/ David A. Viniar
Name: David A. Viniar
Capacity: Director
Date: February 24, 2017

By: /s/ Mark O. Winkelman
Name: Mark O. Winkelman
Capacity: Director
Date: February 24, 2017

By: /s/ Harvey M. Schwartz
Name: Harvey M. Schwartz
Capacity: President and Co-Chief Operating Officer; Chief Financial Officer (Principal Financial Officer)
Date: February 24, 2017

By: /s/ Sarah E. Smith
Name: Sarah E. Smith
Capacity: Principal Accounting Officer
Date: February 24, 2017



## Executive Offices

The Goldman Sachs Group, Inc.
200 West Street
New York, New York 10282
1-212-902-1000
www.goldmansachs.com

## Common Stock

The common stock of The Goldman Sachs Group, Inc. is listed on the New York Stock Exchange and trades under the ticker symbol "GS."

## Shareholder Inquiries

Information about the firm, including all quarterly earnings releases and financial filings with the U.S. Securities and Exchange Commission, can be accessed via our Web site at www.goldmansachs.com.

Shareholder inquiries can also be directed to Investor Relations via email at gs-investor-relations@goldmansachs.com or by calling 1-212-902-0300.



## The papers used in the printing of this Annual Report are certified by the Forest Stewardship Council \( ^{®} \)  which promotes environmentally appropriate, socially beneficial and economically viable management of the world’s forests. These papers contain a mix of pulp that is derived from FSC \( ^{®} \)  certified well-managed forests; post-consumer recycled paper fibers and other controlled sources. Sandy Alexander Inc FSC \( ^{®} \)  “Chain of Custody” certification is BVQI-C020268.

## 2016 Annual Report on Form 10-K

Copies of the firm’s 2016 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission can be accessed via our Web site at www.goldmansachs.com/investor-relations.

Copies can also be obtained by contacting Investor Relations via email at gs-investor-relations@goldmansachs.com or by calling 1-212-902-0300.

## Transfer Agent and Registrar for Common Stock

Questions from registered shareholders of The Goldman Sachs Group, Inc. regarding lost or stolen stock certificates, dividends, changes of address and other issues related to registered share ownership should be addressed to:

Computershare
P.O. Box 30170
College Station, TX 77842-3170
U.S. and Canada: 1-800-419-2595
International: 1-201-680-6541
www.computershare.com

## Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP
300 Madison Avenue
New York, New York 10017