Capital One 2013 Annual Report Download - page 33

comprehensiveness of the plan, the reasonableness of assumptions and analysis and methodologies used to assess
capital adequacy and the ability of the bank holding company to maintain capital above each minimum
regulatory capital ratio and above a Tier 1 common ratio of 5 percent on a pro forma basis under expected and
stressful conditions throughout a planning horizon of at least nine quarters. On September 24, 2013, the Federal
Reserve released an interim final rule that incorporated Basel III capital rules into CCAR. For the first time, the
2014 CCAR cycle will require us to meet Basel III Standardized capital requirements, with appropriate phase-in
provisions applicable to Basel III Advanced Approaches institutions during the CCAR planning horizon, under
the supervisory severely adverse stress scenario, in addition to the capital plan rule’s Tier 1 common ratio using
Basel I definitions.
Traditionally, dividends to us from our direct and indirect subsidiaries have represented a major source of funds
for us to pay dividends on our stock, make payments on corporate debt securities and meet our other obligations.
There are various federal law limitations on the extent to which the Banks can finance or otherwise supply funds
to us through dividends and loans. These limitations include minimum regulatory capital requirements, federal
banking law requirements concerning the payment of dividends out of net profits or surplus, Sections 23A and
23B of the Federal Reserve Act and Regulation W governing transactions between an insured depository
institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound
practices. In general, federal and applicable state banking laws prohibit, without first obtaining regulatory
approval, insured depository institutions, such as the Banks, from making dividend distributions if such
distributions are not paid out of available earnings or would cause the institution to fail to meet applicable capital
adequacy standards.
Deposit Insurance Assessments
Each of CONA and COBNA, as an insured depository institution, is a member of the DIF maintained by the
FDIC. Through the DIF, the FDIC insures the deposits of insured depository institutions up to prescribed limits
for each depositor. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the
Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the
“Reform Act”). The Reform Act permits the FDIC to set a Designated Reserve Ratio (“DRR”) for the DIF. To
maintain the DIF, member institutions may be assessed an insurance premium, and the FDIC may take action to
increase insurance premiums if the DRR falls below its required level.
Prior to passage of the Dodd-Frank Act, the FDIC had established a plan to restore the DIF in the face of recent
insurance losses and future loss projections, which resulted in several rules that generally increased deposit
insurance rates and purported to improve risk differentiation so that riskier institutions bear a greater share of
insurance premiums. The Dodd-Frank Act reformed the management of the DIF in several ways: raised the
minimum DRR to 1.35 percent (from the former minimum of 1.15 percent) and removed the upper limit on the
DRR; required that the reserve ratio reach 1.35 percent by September 30, 2020 (rather than 1.15 percent by the
end of 2016); required that in setting assessments, the FDIC must offset the effect of meeting the increased
reserve ratio on small insured depository institutions; and eliminated the requirement that the FDIC pay
dividends from the DIF when the reserve ratio reaches certain levels. The FDIC has set the DRR at 2 percent and,
in lieu of dividends, has established progressively lower assessment rate schedules as the reserve ratio meets
certain trigger levels. The Dodd-Frank Act also required the FDIC to change the deposit insurance assessment
base from deposits to average consolidated total assets minus average tangible equity. In February 2011, the
FDIC finalized rules to implement this change that significantly modified how deposit insurance assessment rates
are calculated for those banks with assets of $10 billion or greater.
Source of Strength and Liability for Commonly-Controlled Institutions
Under the regulations issued by the Federal Reserve, a bank holding company must serve as a source of financial
and managerial strength to its subsidiary banks (the so-called “source of strength doctrine”). The Dodd-Frank Act
codified the source of strength doctrine, directing the Federal Reserve to require bank holding companies to serve
as a source of financial strength to its subsidiary banks.
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