Capital One 2013 Annual Report Download - page 29

Basel III and U.S. Capital Rules
In December 2009, the Basel Committee on Banking Supervision (the “Basel Committee”) released proposals for
additional capital and liquidity requirements, which subsequently have been clarified and amended (“Basel III”). In
September 2010, the Basel Committee announced a package of reforms that included detailed capital ratios and
capital conservation buffers, subject to transition periods through 2018. In December 2010, the Basel Committee
published a final framework on capital and liquidity, consistent in large part with the prior proposals. In November
2011, the Basel Committee adopted a framework that would require additional Tier 1 common capital for
systemically important institutions. This surcharge would vary based on the firm’s systemic importance as
determined using five criteria (size, interconnectedness, lack of substitutability, cross-jurisdictional activity and
complexity). As noted below, Federal Banking Agencies have stated that they intend to implement this surcharge,
although the extent to which it would apply to us is unclear. In January 2014, the Basel Committee made changes to
the leverage ratio rules to account for differences in national accounting frameworks.
The Federal Banking Agencies issued a rule in July 2013 implementing the Basel III capital framework
developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions (“Final Rule”).
The Final Rule increases the minimum capital that we and other institutions are required to hold.
Prior to being revised in the Final Rule, the minimum risk-based capital requirements adopted by the Federal
Banking Agencies followed Basel I and the Advanced Approaches for applicable banks and bank holding
companies. See “Advanced Approaches Rules,” above. The Final Rule modified both Basel I and the Advanced
Approaches (as modified, referred to respectively as “Basel III Standardized” and the “Basel III Advanced
Approaches”).
The Final Rule increases the general risk-based and leverage capital requirements; significantly revises the
definition of regulatory capital, including by eliminating certain items that constituted regulatory capital;
establishes a minimum Tier 1 common equity requirement; introduces a new capital conservation buffer
requirement; and (as noted below) updates the prompt corrective action framework to reflect the new regulatory
capital minimums. For Basel III Advanced Approaches institutions like the Company and Banks, the Final Rule
also implements a supplementary leverage ratio that incorporates a broader set of exposures and a new
countercyclical capital buffer requirement.
Specifically, the Final Rule establishes for bank holding companies and banks a new minimum common equity
Tier 1 capital ratio of 4.5 percent, adopts a leverage ratio of 4 percent (and removes the current 3 percent limited
exception), and implements a capital conservation buffer of 2.5 percent. It also contains a supplementary
leverage ratio of 3 percent and a countercyclical capital buffer of up to 2.5 percent (initially set to zero percent).
Compliance with certain aspects of the Final Rule went into effect as of January 1, 2014 and other provisions will
go into effect according to different start dates and phase-in periods.
Under the Final Rule, beginning on January 1, 2014, as a Basel III Advanced Approaches banking organization
that has yet to enter or exit parallel run, we must use Basel III Standardized for calculating our regulatory capital,
including as used in our capital ratios, subject to transition periods. In 2014, however, we will continue to use
Basel I for calculating our risk-weighted assets in our regulatory capital ratios. Beginning on January 1, 2015, we
must use Basel III Standardized for calculating our risk-weighted assets in our regulatory capital ratios.
For information regarding our expectations of how the Final Rule impacts us, see “MD&A—Capital
Management.” It remains unclear whether and how the Federal Banking Agencies will account for changes in the
leverage ratio recently published by the Basel Committee.
The Basel Committee also published a liquidity framework in December 2010, which was subsequently amended
in January 2013 and January 2014. The liquidity framework includes two standards for liquidity risk supervision,
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