Capital One 2015 Annual Report Download - page 29

10 Capital One Financial Corporation (COF)
The Federal Reserve issued a final rule on November 25, 2015 to further modify its capital planning and stress testing regulations
(“2015 Final Capital Plan and Stress Test Rule”). Among other changes, the 2015 Final Capital Plan and Stress Test Rule would
indefinitely delay incorporation of the Basel III Advanced Approaches; remove the tier 1 common ratio from the capital plan and
stress testing regulations, given the full phase-in of the common equity tier 1 capital requirement in the nine-quarter planning
horizon of the 2016 capital plan and stress testing cycles; and delay the incorporation of the supplementary leverage ratio until the
2017 capital plan and stress testing cycles. In addition, on December 18, 2015, the Federal Reserve also issued guidance that
summarizes and further details its supervisory expectations for the capital planning process, capital positions and modeling of
large and complex firms such as the Company in connection with their capital planning and stress testing activities.
The purpose of the Federal Reserve’s capital plan and stress test rules is to ensure that large BHCs have robust, forward-looking
capital planning processes that account for their unique risks and capital needs to continue operations through times of economic
and financial stress. As part of its evaluation of a capital plan, the Federal Reserve will consider the comprehensiveness of the
plan, the reasonableness of assumptions and analysis and methodologies used to assess capital adequacy and the ability of the
BHC to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions
throughout a planning horizon of at least nine quarters. The 2016 CCAR cycle will measure our capital levels under the Basel III
Standardized Approach, with appropriate phase-in provisions applicable to Capital One.
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 (“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% (from the former minimum of 1.15%); removed the
upper limit on the DRR; required that the reserve ratio reach 1.35% by September 30, 2020 (rather than 1.15% 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% 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 total consolidated 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. On November 18, 2014, the FDIC issued final rules to amend its deposit
insurance assessment regulation to conform to the Final Basel III Capital Rule and to the final rule revising the supplementary
leverage ratio.
On October 22, 2015, the FDIC proposed rules to implement the requirement that the FDIC offset the effect of meeting the increased
reserve ratio from 1.15% to 1.35% on insured depository institutions with total consolidated assets of less than $10 billion. The
FDIC’s proposed rulemaking would impose a new quarterly deposit insurance surcharge assessment, with a quarterly rate of 1.125
basis points, on all insured depository institutions with assets of $10 billion or more (including COBNA and CONA), in addition
to regular quarterly deposit insurance assessments applicable to each insured depository institution. The surcharge would begin
the quarter after the DIF reserve ratio first reaches or exceeds 1.15% (projected by the FDIC as likely to occur during the first