Charles Schwab 2015 Annual Report Download - page 26

THE CHARLES SCHWAB CORPORATION
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the Consumer Financial Protection Bureau (CFPB), and the Federal Deposit Insurance Corporation (FDIC). CSC and
Schwab Bank are also subject to regulation and various requirements and restrictions under state and other federal laws.
This regulatory structure establishes a comprehensive framework designed to protect depositors and consumers, the safety
and soundness of depository institutions and their holding companies, and the stability of the banking system as a whole.
This framework affects the activities and investments of CSC, Schwab Bank and CSC’s non-bank subsidiaries and gives the
regulatory authorities broad discretion in connection with their supervisory, examination and enforcement activities and
policies.
Financial Regulatory Reform
As a result of the enactment of Dodd-Frank, the adoption by the federal banking agencies of implementing regulations and
other regulatory reforms, the financial services industry is currently experiencing a period of unprecedented change in
financial regulation. The changes that have been enacted under Dodd-Frank and other regulatory reforms that are significant
for CSC and Schwab Bank are highlighted below.
Basel III Capital and Liquidity Framework
In July 2013, the U.S. Federal banking agencies finalized a rule to implement strengthened regulatory capital requirements
for U.S. banking organizations consistent with Basel III (Final Regulatory Capital Rules). The Final Regulatory Capital Rules
established Common Equity Tier 1 (CET1) Capital as a new capital standard, increased minimum required risk-based capital
ratios, narrowed the eligibility criteria for regulatory capital instruments, provided for new regulatory capital deductions and
adjustments, and modified methods for calculating risk-weighted assets (the denominator of risk-based capital ratios). See
“Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” and
“Capital Management,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 23. Regulatory Requirements” for the new capital ratio requirements.
The Final Regulatory Capital Rules provided for a one-time election which CSC and Schwab Bank made to exclude
accumulated other comprehensive income (AOCI) from the calculation of CET1 Capital. The Final Regulatory Capital Rules
also introduced a capital conservation buffer that limits a banking organization’s ability to make capital distributions and
discretionary bonus payments to executive officers if a banking organization fails to maintain a capital conservation buffer of
more than 2.5%, on a fully phased-in basis, in excess of all of its minimum risk-based capital ratio requirements.
The Final Regulatory Capital Rules provide for a “standardized approach” framework for the calculation of a banking
organization’s regulatory capital and risk-weighted assets. Depository institutions and their holding companies with
consolidated total assets of $250 billion or more, or total on-balance-sheet foreign exposures of $10 billion or more, are also
required to calculate their regulatory capital requirements using an “advanced approaches” framework to determine their risk-
weighted assets. Such companies must also maintain a minimum supplementary leverage ratio of at least 3.0% and are
subject to certain other enhanced provisions. CSC and Schwab Bank are currently only subject to the “standardized
approach” framework.
The new capital requirements under the Final Regulatory Capital Rules became effective on January 1, 2015, for CSC, which
had not previously been subject to any consolidated capital requirements, and Schwab Bank. The required minimum capital
conservation buffer is being phased in incrementally; it started at .625% on January 1, 2016 and will increase to 1.25% on
January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
In September 2014, U.S. Federal banking agencies issued an inter-agency final rule that imposes a quantitative liquidity
coverage ratio (LCR) requirement on large banking organizations. The purpose of the LCR is to require banking
organizations to hold minimum amounts of high-quality liquid assets (HQLA) based on a percentage of their projected net
cash outflows over a 30-day period. Banking organizations with $250 billion or more in total consolidated assets or foreign
exposures of $10 billion or more must hold HQLA in an amount equal to at least 100% of their projected net cash outflows
over a 30-day period. Other bank and savings and loan holding companies with total consolidated assets of $50 billion or
more, such as CSC, are subject to a modified LCR rule requiring them to hold HQLA in an amount equal to at least 70% of
their projected net cash outflows over a 30-day period. The modified LCR rule went into effect on January 1, 2016, with
holding companies subject to the rule required to hold at least 90% of the necessary amount of HQLA in 2016 and at least
100% starting on January 1, 2017.