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The Goldman Sachs Group, Inc. (NYSE:GS)

Fixed Income Investor Conference Call

May 1, 2014 11:30 ET

Executives

Harvey Schwartz - Chief Financial Officer

Liz Robinson - Treasurer

Analysts

David MacGown - Morgan Stanley

Robert Smalley - UBS

Larry Vitale - Moore Capital

Brian Monteleone - Barclays

Operator

Good morning. My name is Denis and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs Fixed Income Investor Conference Call. Also this call is being recorded today, Thursday, May 1, 2014. Thank you. Ms. Miner, you may begin your conference.

Heather Miner - Investor Relations

Good afternoon. This is Heather Miner from Investor Relations at Goldman Sachs. Welcome to our Fixed Income Investor Conference Call.

Today’s call may include forward-looking statements. These statements represent the firm’s belief regarding future events that by their nature are uncertain and outside of the firm’s control. The firm’s actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm’s future results and financial condition, please see the description of risk factors in our current Annual Report on Form 10-K for the year ended December 2013.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our estimated capital, leverage, and liquidity ratios, estimated risk-weighted assets, total assets and Global Core Excess. And you should also read the information on the calculation of non-GAAP financial measures that’s posted on the Investor Relations portion of our website www.gs.com. This audiocast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent.

Our Chief Financial Officer, Harvey Schwartz will provide an update of the firm’s credit profile and stress testing practices and our Treasurer, Liz Robinson will review the firm’s liquidity position and funding strategy. We have posted slides on the Investor Relations portion of our website at gs.com. Following the prepared comments, Harvey and Liz will be happy to take your questions. Harvey?

Harvey Schwartz - Chief Financial Officer

Thanks, Heather and thanks to all of you for joining us today. Turning Slide 1, we want to start by reviewing the meaningful enhancements we have made to our balance sheet since 2007. This slide summarizes the significant improvement in our credit profile. We have reduced assets by 18%. Our global liquidity reserve has almost tripled and our level 3 assets are down by over 40%.

Our funding program had been significantly enhanced with improved term and increased diversity of our funding sources. Common equity has grown by more than 80%. Due to new math, leverage has been cut by more than half. Supporting our strength in balance sheet is a robust risk management infrastructure. We continue to mark to market the vast majority of our balance sheet on a daily basis. Across the balance sheet, regardless of the risk measure you use, total size, level 3 assets, capital or liquidity, we have made a significant transformation. However, we are not complacent. We are always looking to improve and will continue to refine our approach. With that as a background, let’s dive into each of these areas in more detail.

On Slide 2, you can see we have significantly reduced our balance sheet since 2007. Over that period, our financial instruments owned are down 26%. While we have reduced inventory and risk, we maintain a high velocity balance sheet. As you can see in the chart on the right, any 5% of our market making inventory turns over in six months or less. As Liz will discuss later, we also take a very conservative approach to funding the balance sheet and ensuring that term funding is well in excess of our needs. Balance sheet limits are reviewed regularly as we assessed client demand and manage our risk profile.

Turning to Slide 3, here we show that significant improvement in the asset quality of our balance sheet. As of the first quarter, we had $41 billion of level 3 assets reflecting only 4.5% of our total assets. Importantly, as level 3 assets have declined, we have grown shareholders’ equity substantially.

Let’s move to Slide 4. While we have made significant changes to our balance sheet since 2007, the change is more pronounced when you exclude our lower risk assets. If you back out cash, segregated cash and securities and collateralize agreements, we have reduced assets by more than $150 billion to $471 billion. Over that period we grew total equity by 85% importantly common equity has represented the vast majority of the growth. The reduction in risk combined with a significantly higher level of equity had driven leverage to a record low. Adjusting out lower risk assets, leverage is down nearly 60% since 2007. Importantly for creditors, new regulatory capital requirements will constrain industry releveraging in the future.

Moving to Slide 5, let’s spend a moment on our regulatory capital ratios. The Federal Reserve has approved a firm to come off the parallel run. And therefore, starting in the second quarter our capital ratios are determined under the transitional provisions of Basel III. As a result, the transitional ratios are not only the most relevant but will also a better assessment of risk-based capitalization. Our transitional ratio benefits from a phase-in of capital deductions. The most significant of which is a $9 billion charge for our investments in certain funds where we invest alongside clients.

Under Volcker Rule, we are required to significantly reduce those investments. On the left side of the slide, we detailed that our Basel III common equity Tier 1 ratio on a transitional basis was 11.3% using the advanced approach. Under the standardize approach our transitional ratio was 10.9%. As you can see on the right hand side of the slide, our risk weighted assets under the advanced approach are approximately $600 billion, $355 billion in credit risk, $155 billion in market risk and $90 billion in operational risk.

Let me make a few brief points on the supplementary leverage ratio. Given that the proposed rule hasn’t been finalized and won’t take effect until 2018, today we are not taking any significant actions. When we have a final rule there are multiple options that we can pursue. On the capital side of the equation, we will benefit from a natural tailwind over time as we comply with Volcker Rule and reduce the $9 billion capital deduction. With respect to the asset side of the equation there are also steps we can take if needed. For example, as of quarter end we had over $260 billion of assets associated with secured client financing activities, these are generally lower risk collateralized assets, we can openly decide if needed to reduce the lower returning portion within these balances. Regarding the new proposal our best estimate as of March 31 including our recent $2 billion preferred stock issuance is 4.3%. If you further incorporate the capital impact of reducing our fund investments to comply with Volcker Rule, we estimate it would be 4.9%.

Moving to Slide 6, let’s spend a moment of stress testing, an important part of risk management at Goldman Sachs. The firm has a long history of stress testing which is critical to evaluating the risk that we take. By the late 1990s, the firm developed currency focused sovereign stress test and credit spread widening stress test for our major credit books. These are the initial stress tests form the foundation of what we today. Over time we have continued to expand use of stress tests. Our current stress testing processes now cover market, credit, liquidity and capital related risks. Recent regulatory enhancements on stress testing have been an important development for U.S. financial institutions. The DFAST and CCAR tests are conservative and objective and have done a lot to validate the credit worthiness of the U.S. financial system.

I will now turn it over to Liz who will discuss our liquidity and funding strategy. Liz?

Liz Robinson - Treasurer

Thanks Harvey. As you all know, liquidity risk management is a top priority for Goldman Sachs. Slide 7 is an overview of pillars of our liquidity risk management framework. First, we hold material amounts of cash and highly liquid securities to pre-fund our potential liquidity needs in a stressed environment. We also focus on conservative asset and liability management to position ourselves appropriately for longer duration stress in the financing markets. As Harvey mentioned, we have a comprehensive process to manage the size and composition of our balance sheet. And we finance our assets with liabilities that are conservatively structured in terms, maturity spacing and counterparty diversification. As we just discuss our use of stress test which also underpin both excess liquidity and asset liability management. We leverage our experience personnel and robust technology and infrastructure to measure, monitor, and mitigate risk across our various businesses and legal entities.

On Slide 8, we show details of the size and composition of our liquidity pool which we refer to as a Global Core Excess or GCE. As we have discussed in the past, the most significant portion of the GCE is made up of U.S. government obligation and overnight cash deposits, which are mainly at the Federal Reserve. And you can see, we hold this pool across both the parent company and our major global subsidiaries areas provide appropriate liquidity in all of our legal entities. The size of our GCE and its allocation across legal entities is principally driven by an internally developed quantitative stress test. The MLO or Modeled Liquidity Outflow quantifies potential liquidity outflows in a highly stressed scenario. The MLO is measured on our current exposures on a daily basis at a granular level for each of our material legal entities. We have significantly enhanced this model for insights we have gained over the last five years and considerable investments in technology.

For example, we can access the liquidity impact of market moves on our positions across several thousand market scenarios measuring our liquidity sensitivity to single asset class moves like greater equities or broader multi-asset class market moves. We can also measure the sensitivity of our MLO to various idiosyncratic and market-wide scenarios giving us transparency into higher liquidity profile can change under different scenarios. We conservatively pre-fund for a number of factors including customers’ behavior, trading risk and market moves.

For example, we pre-fund for contingent collateral outflows related to items such as a two notch downgrade in our credit rating. The detailed analytical work that goes into modeling the MLO helps both my team and the relevant business people understand the key liquidity drivers at results in coordinated efforts to find solutions that reduced our liquidity risk in commercially sensible way.

We’ve reinforced best practices by allocating the cost of the GCE to each business units by providing managers with proper tools are able to more optimally utilized our liquidity resources. We currently hold GCE that is well in excess of our internal risk models reflecting a qualitative management overlay and a desire to remain conservatively positioned. We are also well-positioned to play offense to the extent client activity improves.

With respect to the liquidity coverage ratio, while it is not yet finalized we estimate that we continue to exceed the fully phased in requirement. While our GCE’s design to mitigate a severe near-term liquidity event, our asset liability management framework which we begin to cover on Slide 9 is designed to appropriately position our balance sheet for longer term stress in the funding market. On this slide, we show a high level cut of the assets on our balance sheet and a different types of liabilities that we used to finance them. We have an active centralized process through monitor and managed the size and composition of our balance sheet. To allocate balance sheet limits, we evaluate asset liquidity in normal and stress environment, business strategy and expected holding periods, and anticipated returns relative to resource consumption.

As we think about the appropriate funding source for each asset class, we layer in an incremental assessment of asset price transparency, legal entity liability sources and the relative comps for financing. We also look independently at the liability side of our balance sheet to ensure that we conservatively managed our funding book and avoid significant maturity concentration. You can see that equity and long-term debt are significant source of funding from many of our assets including less liquid longer term position.

Slide 10 drills down into our core funding sources. Here we show the contribution of funding from our equity and liability excluding customer payables and trading liabilities. We have significant components of long-term funding with 45% of our core funding coming from equity and long-term unsecured debt. I’ll talk more about our long-term debt program in a minute, but I should note that more than half of our short-term unsecured debt is the current portion of our long-term debt. We have only $1 billion in commercial paper outstanding. Deposits have grown overtime to become meaningful contributor at 13%. Deposits include $20 billion of brokerage CDs with weighted average maturity of 13 years. We are also currently focused on growing our international deposits which reached close to $10 billion at the end of the first quarter. So nearly 60% of our core funding comes from equity, long-term unsecured debt and deposits. As it relates to our $182 billion in secured funding roughly half is comprised of funding for GCE eligible collateral which reflects high quality government repo largely done for client facilitation.

Before we go into the detail on our secured funding, let’s discuss our secured funding philosophy on Slide 11. We believe secured financing is an appropriate source of funding for our broker dealers as the underlying collateral provides a credit mitigant for the counterparty enhancing its durability stability and it provides diversity to our overall funding sources. Our principles are design to ensure the following significant term, counterparty diversification, excess capacity, prefunded excess liquidity and conservative stress testing. As we explained in the past we are extremely focused on the first two points term and diversification. And I will put some data around that in a moment. On point three, we have a long standing practice of raising secured financing capacity in excess of what we need to finance our current position.

Excess secured funding represents committed financing that exceeds our current inventory requirements. In effect, we have put in place committed term financing against a pre-agreed range of acceptable collateral and concentration. Providing optionality in the assets we can finance over time. This excess funding plays both a defensive role of being available if other funding rolls off, but it also plays an offensive role to enable us to prefund potential growth in our inventory or customer activity. On point four, we raised excess long-term unsecured funding to mitigate secured funding risk.

We reserve GCE against our conservatively modeled risk of secured funding rolling off in the near-term. We size that roll over risk using a stress test called funding at risk or FaR. The FaR stress test enables us to conservatively manage our secured funding book by asset class and across time periods. These simulations take into account our aggregate capacity, trade tenors, counterparty concentration as well as the collateral schedules, role probabilities and fundable inventory. For us an incredibly valuable tool because it supplements metrics such as weighted average maturity and helps to ensure durability of funding. We also run stress test to assess and bound the potential currency deficits for maturity mismatches in our government match book activities which we refer to as cash gaps.

Slide 12, lays out some of the key metrics of our core secured funding book excluding the funding for GCE eligible collateral. First, we focus on maturities as long contractual maturities provide the greatest stability to the book. As the liquidity drives the weighted average maturities for each of the collateral types with much greater term being applied as assets become less liquid. On the chart you can see that the weighted average maturity of repo ranges from over 60 days for non-GCE eligible governments to well over a year for non-investment grade fixed income inventory. The all-in WAM of our book exceeds 120 days. We also started to diversify counterparties in order to reduce our dependence on any individual counterparty or type of counterparty. As of the first quarter we sourced secured funding for more than 150 counterparties.

We have well in excess of 50 counterparties that fund our most liquid inventories but still more than 25 at the less liquid end of the spectrum. In order to achieve this diversification, we have sourced capacity away from the traditional repo product and have increased our sourcing efforts in the form of secured notes and secured loans. We have also focused on reducing our reliance on traditional U.S. money market lenders and increased our focus on global corporates.

Turning to Slide 13, you can see a snapshot of our long-term unsecured funding activity. We have been an active issuer so far in 2014 with roughly $12 billion of long-term vanilla unsecured debt raised across a broad range of tenors, currencies and channels. Additionally, we sold $2 billion in perpetual preferred last week. While that was predominately a capital oriented transaction it also provides a long-term funding source for the firm. Our funding strategy continues to focus on diversification with non-U.S. dollar currency issuances representing 44% of our year-to-date issuance. We’ve also been more focused on staggering our maturities because we tend to issue it’s a beginning of the year, we have a purposely executing deals with non-round tanners like our 5.5 year on the dollar issuance or 7.7 year euro bond resulting in prudently space maturities.

As you can see over the last three years, we have roughly matched our maturities with new issuance. We expect that this issuance pattern will continue in the absence of the material shift in the size or composition of our balance sheet. As it relates to orderly liquidation authority while minimum debt requirements are not yet proposed. We believe that we are conservatively positioned with bailing capital at their capacity at the holding company of roughly 36% of Basel III risk related assets under the advanced approach.

In conclusion, as Harvey began this discussion, we feel extremely well-positioned from a credit perspective. We have taken conscious steps reduced the risk on our balance sheet. We have grown our capital base materially. We operate with robust liquidity and we continue to enhance the term and diversity of our funding. Moreover, the significant regulations around capital, liquidity, and stress testing are meaningful and durable credit enhancements for the industry.

With that, Harvey and I are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of (indiscernible) with Credit Suisse. Please go ahead.

Unidentified Analyst

Yes, the question primarily for Harvey, but what do you think caused the SLR under the new U.S. methodology, either proposed new methodology to decline to 4.2% from approximately 5% in the previous quarter?

Harvey Schwartz

I just want to make sure I heard your question correctly and thanks for joining us today. I think you were asking what is the difference between the finalized role versus the proposed role, which is really the adjustment from the denominator, is that what you are asking?

Unidentified Analyst

Actually what’s the main driver that’s – that caused the purported a lot declined to 4.2% from the previous estimate of 5%.

Harvey Schwartz

Right, okay, okay I understand now. So the new proposal obviously had a significantly different denominator under the Basel III denominator and significant component of the driver is the treatment of credit derivatives.

Unidentified Analyst

Okay, thank you. And the second question is what steps can Goldman take in order to reduce the gap between the both internal estimate for this pro forma CBS versus capital ratios versus what the Federal Reserves estimate?

Harvey Schwartz

So, I just want to make sure again I apologize, I am not sure I understand your question, you are talking about that what can we do to get from the 4.2 to the proposed 5, is that the question?

Unidentified Analyst

No, in terms of the Fed’s stress test?

Harvey Schwartz

Sorry, okay.

Unidentified Analyst

They are coming out versus where the Bank’s internal estimates are coming out, what can you do to reduce the gap?

Harvey Schwartz

Okay. So, that’s a great question. So, a couple of things on that obviously as I talked about in my remarks, we are huge supporters of stress testing as a methodology for managing risk and actually the method for managing tail risk is particularly powerful and so we’ve been using stress testing as I described for the 90s and we continue to evolve our processes. We obviously submitted our results and we thought our test was quite severe and our regular in the Federal Reserve runs our own models. In their public discussion, the Federal Reserve has really encouraged people to continue to develop their own scenarios and not really we look to replicate the Federal Reserve scenario is now. Having said that, we will obviously communicate with the Federal Reserve over the next several months, but in the end as you know, as they communicated by design that Federal Reserve doesn’t provide significant transparency around their testing processes, but we will as always continue to focus on our processes.

Unidentified Analyst

And the last comment that I want to make is the color that you provided around the secured funding piece is very useful, especially considering that U.S. regulators may impose additional guidelines around it?

Harvey Schwartz

Right. As you know and Liz described, we manage it very conservatively. And so we appreciate the feedback.

Unidentified Analyst

Thank you.

Operator

Your next question comes from line of David MacGown with Morgan Stanley. Please go ahead.

David MacGown - Morgan Stanley

Good morning.

Harvey Schwartz

Hey, David. How are you?

David MacGown - Morgan Stanley

Well, thank you. Couple of questions, I think the first one is probably for Liz and it’s around liquidity. This might be a nomenclature question, but I interpret from your Slide 9 that your Global Core Excess is funded with long-term debt deposits and equity, but on your Slide 12 you make reference to the non-GCE funding book. Want to make sure we understand precisely to how the GCE is funded and I think that’s particularly important as we gear up for something perhaps this year on capital charges for secured financing transactions from the Fed? And related to that, do you have any early comments on how some of the things that Liz you have just talked about on funding and liquidity management might change in light of what we expect to come out of the Fed on SFT? For example, might it imply a higher mix of long-term debt as part of the funding mix and liquidity management?

Liz Robinson

Okay. So, on the first of those questions, I would say, the majority of our GCE is funded with equity and with long-term debt. There are some categories of the GCE that are in some ways you could argue self-funding. So, we raise deposits, but when we reserve to the risk of those deposits potentially going out the door as a result of client actions in a stress scenario, we essentially just don’t use those deposits. We put those in cash. So, there is self-funding in that sense. So, for certain categories, there is self-funding, the rest would be equity and long-term debt.

In terms of your second question around regulation, look I think the main liquidity regulations are still very much in play. We are still waiting for clarity on both the LCR and the NSFR. And so we are little bit too tuned to say how those will create evolution internally, obviously nothing about the way we run our business is static. We continue to dynamically change and manage as the world develops. And so as the rules evolves, our incentives and our actions internally will evolve accordingly, but I think it’s safe to say the incentives that are being set in both the LCR and NSFR in many ways really relate to longer dated funding. And as I spent a lot of time talking about in my prepared remarks, that is something we have internally been very focused on for a very long time. So, there is some consistency there.

David MacGown - Morgan Stanley

Thanks, Liz. And Harvey, we are hearing more reports about competitor attrition that you guys have referenced the tougher SLR, maybe it’s early days still or maybe middle innings at best, I wonder if you could comment at all on any success you might be having in being able to start the pass-through wider spreads in some businesses whether it be prime brokerage or other areas to clients?

Harvey Schwartz

No, I would say, it really feels a little bit more early days to me than middle innings. And the reason I would say that is because one of the things that the regulators have done, which I think is quite thoughtful obviously and we have talked about it a lot. These extended glide paths really give the industry and by extension obviously the impact on capital markets and lending and activities, they are giving the industry I think adequate time to make adjustments. So, with a lot of these rules having multiple years to finalization and adoption, I think in some respect that also extends out the adjustment factor a bit. I would say at the margin, we have seen some things and certainly in some businesses, where people have made announcements, you might see it more explicitly. We thought we saw maybe a little bit of it in the first quarter in commodities. Obviously, that’s been an area, where there has been a lot of announcements, but I think it’s early and also it’s hard to see some of this in a lower activity environment like we had.

David MacGown - Morgan Stanley

Thank you.

Harvey Schwartz

Thanks.

Operator

Your next question comes from the line of Robert Smalley with UBS. Please go ahead.

Robert Smalley - UBS

Hi, thanks very much. Thanks for doing the call. Couple of questions. First one might be a little long, so sorry about this, but Harvey in the past you have talked about redeploying capital into the franchise businesses. And when I look at CCAR, I see the result of that being trapped capital, you talk about redeploying capital from other investments. At the same time, the market is the market and can only take so much at any certain time. So, it seems that the choices are either sitting on what you have or redeploying into businesses that may not generate the type of returns that you would like them to have. So – and the reason why I am asking is in terms of return on your equity, while it’s not a credit question, the ability to generate and retain earnings is a very important differentiator for Goldman? And how do you see this going forward in a market, where there may not be as much opportunity and you have more and more capital to redeploy?

Harvey Schwartz

So, it’s a really great question. In terms of capital management, I think that the first thing obviously is we want to ensure that we have more than adequate capital from safety and soundness perspective and obviously sort of the regulators in all of our constituents. I think that the issue around excess capital is an important factor and obviously there is from a risk perspective first and foremost you want to have more than adequate capital, but there is also risk to having excess capital. And I think the best way to mitigate the risk of having excess capital is to not sacrifice any discipline around deploying it. And that has always been our philosophy. It will remain our philosophy. It may mean an environment, where regulators allow firms to return capital more slowly that it requires more discipline, but it certainly I don’t think it would be a good shift to let that pressure encourage people to deploy that capital into risky activities that don’t fit the capital objectives. So, I think it’s just about discipline at this stage. Now, we are in an environment and we have been for a while, where as you have seen across the industry, client demand has kind of come and fit some storage. And so our bias obviously will be to see a big pickup in client demand and we are well-positioned for that, but in the meantime we will stay disciplined.

Robert Smalley - UBS

Do you have any specific return targets for on a business line or division basis that you want to share or that you feel free talking about just so we can get an idea of what those hurdles are?

Harvey Schwartz

So, we run it dynamically in terms of the hurdles. We haven’t talked about any specific hurdles, but I think there is couple of takeaways. One would be that and we talk about this a lot that we run the firm as a collective. And so over the last two years, we have had a collective ROE of 10.7 and then 11 and then you saw our returns for the first quarter and well on an absolute basis we’d like to do better. On a relative basis, they were industry leading and the relative return we think is quite significant.

Robert Smalley - UBS

Just shifting gears, there is a story out a few days ago about CFTC looking at banks that over the past couple of months in their overseas operations are moving business to non-guaranteed affiliates. Could you address that in terms of Goldman’s derivatives business, particularly it’s non-U.S. business, is that something that you are looking at how much of the business is in non-guaranteed affiliates and ultimately where do you see the risk, where do you see the risks are in that, and does it all come back to you anyways?

Harvey Schwartz

I didn’t see the story. So, I can’t comment on specifically. In terms of our strategy and how we use various legal entities and how we deploy our resources quite frankly in aggregate across the globe is obviously we are running a global business. We are going to evolve as our clients evolve. And you have seen us do this in the past and I would throw all of this in the category of market structure. As market structures change and clients demand different resources whether it’s things that have at times seem more complicated, but now seem quite simple in the past like a transition from trading, foreign exchange by voice to electronic or the shift now to clearing. All these things are going to be as the market evolves, but the key takeaway is its all client activity driven and I think that’s how you’ll see the world evolve.

Robert Smalley - UBS

Okay. I’ll send the story over. Thanks very much.

Harvey Schwartz

Thank you.

Operator

Your next question comes from the line of Larry Vitale with Moore Capital. Please go ahead.

Larry Vitale - Moore Capital

Thanks. Good morning, Harvey, good morning, Liz, afternoon, good afternoon, Harvey, good afternoon, Liz, how are you?

Liz Robinson

Hello Larry.

Harvey Schwartz

Hi, Larry, how are you?

Larry Vitale - Moore Capital

Good. Thanks. You covered a lot of ground here and I think I just wanted to pickup on something that Rob was talking about. There was some interesting language in some of your filings about additional capital requirements at GS Bank USA. And on the CRD IV capital requirements and also the liquidity requirements at Goldman Sachs International. And I hear you Harvey on running a global business and evolving as your clients evolve, but the local regulators do I think anyway loom larger and how you manage these businesses? And I’m just wondering if you can help us understand what you see is as the challenges for managing capital and liquidity at each of the units and how you expect to respond to what appears to be maybe strict to requirements than what you’ve had to meet in the past? And then I had a follow-up on something that Liz said.

Harvey Schwartz

That’s okay. So in terms of the liquidity requirements or capital requirements and broadly I would say it applies to all the regulatory reform is evolved, well obviously adapt as we need to know we’ve always run conservatively the capital of our subsidiaries and obviously the liquidity profile. And the liquidity management strategy that Liz outlined applies across subsidiary. And so there is nothing specific I would share with you as it relates to anything about those entities that I would call strategic at this stage. But I do think it falls into the broader bucket of the evolution of regulatory reform. And again this will be driven both by regulators and ultimately by client activity. And so where the client activity is, we’ll respond accordingly. It’s a little bit akin to the prior question also.

Larry Vitale - Moore Capital

Okay. And specifically can I guess you to comment on the Tier 1 capital ratio, I’m not sure it’s CET1, but you disclosed it I think 8.7% for Goldman Sachs International and I’m just wondering how that fits in with whatever they’re going to be required to do which is at this point is unclear to me?

Harvey Schwartz

Yes, so it’s unclear to us, but we can take it offline and if you could follow-up and we’ll have more conversation with you if you want.

Larry Vitale - Moore Capital

That’s fine. I appreciate that. And then finally for Liz, this is my last one. You said something really interesting about moving away from the traditional U.S. money market lenders and to directly to global corporate. So the global corporate is the way I understand it works global corporate give cash to money market funds and they go find paper to invest in and it seems like you’re and in fact by passing the Middleman. Do I have this correct and can you just maybe elaborate on your all motivations for this because it seems very interesting?

Liz Robinson

Larry thanks for that. I think our general strategy has been to look everywhere around the globe for every type of institutions that has excess cash and try to develop structures, collateralized structures that would enable them to give us that cash. And so it’s not the strategy of disintermediating the money market funds per se, it’s really looking for resources and top to cash around the world and trying to tap them as effectively as we can to increase that diversity I talked about which is still important to us.

Larry Vitale - Moore Capital

Okay, alright, great. Thank you both very much.

Harvey Schwartz

Thanks, Larry.

Operator

Your next question is from the line of Brian Monteleone with Barclays. Please go ahead.

Brian Monteleone - Barclays

Hi, thanks.

Harvey Schwartz

Hi, Brian.

Brian Monteleone - Barclays

And thanks for the commentary on Slide 13 regarding issuance being likely to track maturities move with the caveat that Goldman is going to revisit the targets frequently depending on the size and composition of the balance sheet. Just looking into the balance sheet size over the last four, five years has been plus, minus $900 billion to $950 billion. Can you maybe give us some context in terms of what factors might drive that to grow at some point or do you think it’s really largely ranged down?

Liz Robinson

Look I think the size of our balance sheet is driven principally by clients activity and serving our clients. I think, there is also the factors of continued regulatory evolution and so as we learn more about regulations, we will try to balance and serve our clients in the most effective way.

Brian Monteleone - Barclays

Okay. So maybe giving the regulatory path $20 billion of maturities in issuance a year is a pretty reasonable base case?

Liz Robinson

Again our base case is to replace the maturities as they come due and as you can see on the slide it is roughly $20 billion a year we do try to spread those maturities out and avoid concentration. Again it’s both the size and the composition of the balance sheet that are relevant and if either of those things changes, our issuance could go up or down accordingly.

Brian Monteleone - Barclays

Sure, understood. Then maybe switching gears a little bit on the SLR you laid out the path to get the SLR from 4.2% to 4.9% and I think if we get standardized approach to counterparty credit which gets you guys above 5%, could you maybe talk then a little bit about how you think about scaling a management buffer to the SLR versus how you have talked about 100 basis point buffer for risk based capital requirements?

Harvey Schwartz

So we haven’t really spent any time on thinking for the buffer. And the other thing I would say is I think given the rules that are still being developed, I think you can make an assumption that the (indiscernible) is accretive, but at this stage I think we all need to see how the rules evolve and how we ultimately finalize, but given the runway that the regulators have provided, we feel pretty comfortable, but we haven’t determined at this stage what buffer we will run with.

Brian Monteleone - Barclays

Okay. Have you given any thought maybe to which of the two frameworks is ultimately going to be more binding on your business model more restrictive, it seems like the SLR is likely to become part of the CCAR process?

Harvey Shwartz

I think actually you could expand your question, the general one of sort of managing binding constraints.

Brian Monteleone - Barclays

Yes.

Harvey Shwartz

And so all firms us included will manage to their binding constraint. I think if you are talking many years out of this stage from rules that are finalized like Basel 3, you can see kind of 11.3 we are running with significant excess capacity at this stage versus our target, but we will evolve, but at this stage there is not a binding constraint necessarily that we are particularly focused on, but again rules are evolving. We will have to see.

Brian Monteleone - Barclays

Okay, great. Thanks Harvey.

Harvey Shwartz

Thanks, Brian.

Operator

And at this time, there are no further questions. Please continue with any closing remarks.

Harvey Schwartz - Chief Financial Officer

So, on behalf of Liz and myself and the team, we just wanted to thank everybody for dialing in. We also appreciate feedback post these calls. If there is other things you want to hear us talk about certainly we get that feedback back to the team, but again, we appreciate you taking the time, and Liz and I look forward to talking to you all over the next couple of months. Take care.

Operator

Ladies and gentlemen, this does conclude the Goldman Sachs fixed income and investor conference call. You may now disconnect.

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