Capital One 2003 Annual Report Download - page 32

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The third aspect of the proposal, market discipline, would require detailed disclosure of a bank’s capital
adequacy to enhance the role of market participants in encouraging banks to hold adequate capital. Each bank
would also be required to disclose how it evaluates its own capital adequacy.
It is not clear as of this date whether and in what manner the proposed new accord will be adopted by U.S. bank
regulators with respect to banking organizations that they supervise and regulate. Adoption of the proposed new
accord could require U.S. banking organizations, including the Company, to increase their regulatory capital.
FDICIA
Among other things, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires
federal bank regulatory authorities to take “prompt corrective action” (“PCA”) in respect of insured depository
institutions that do not meet minimum capital requirements. FDICIA establishes five capital ratio levels: well-
capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. As of December 31, 2003, each of the Bank and the Savings Bank met the requirements for a
“well-capitalized” institution. The “well-capitalized” classification is determined solely for the purposes of
applying FDICIA’s PCA provisions, as discussed below, and should not be viewed as describing the condition or
future prospects of a depository institution, including the Bank and the Savings Bank. Were the Bank and
Savings Bank to lose their status as “well-capitalized” they could be required to increase capital or lose access to
deposits.
The Bank and the Savings Bank may accept brokered deposits as part of their funding. Under FDICIA, only
“well-capitalized” and “adequately-capitalized” institutions may accept brokered deposits. Adequately-
capitalized institutions, however, must first obtain a waiver from the FDIC before accepting brokered deposits,
and such deposits may not pay rates that significantly exceed the rates paid on deposits of similar maturity from
the institution’s normal market area or the national rate on deposits of comparable maturity, as determined by the
FDIC, for deposits from outside the institution’s normal market area.
Liability for Commonly-Controlled Institutions
Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (“FIRREA”), insured depository institutions such as the Bank and the Savings Bank may be liable to the
FDIC in respect of any loss or reasonably anticipated loss incurred by the FDIC resulting from the default of, or
FDIC assistance to, any commonly controlled insured depository institution. The Bank and the Savings Bank are
commonly controlled within the meaning of the FIRREA cross-guarantee provision.
Investment Limitation and Qualified Thrift Lender Test
Federally-chartered savings banks such as the Savings Bank are subject to certain investment limitations. For
example, federal savings banks are not permitted to make consumer loans (i.e., certain open-end or closed-end
loans for personal, family or household purposes, excluding credit card loans) in excess of 35% of the savings
bank’s assets. Federal savings banks are also required to meet the QTL Test, which generally requires a savings
bank to maintain at least 65% “portfolio assets” (total assets less (i) specified liquid assets up to 20% of total
assets, (ii) intangibles, including goodwill and (iii) property used to conduct business) in certain “qualified thrift
investments” (residential mortgages and related investments, including certain mortgage backed and mortgage
related investments, small business related securities, certain state and federal housing investments, education
loans and credit card loans) on a monthly basis in nine out of every twelve months. Failure to qualify under the
QTL Test could subject the Savings Bank to substantial restrictions on its activities, including the activity
restrictions that apply generally to bank holding companies and their affiliates and potential loss of grandfathered
rights under the GLB Act. As of December 31, 2003, 83.24% of the Savings Bank’s portfolio assets were held in
qualified thrift investments, and the Savings Bank was in compliance with the QTL Test.
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