Charles Schwab 2015 Annual Report Download - page 31

THE CHARLES SCHWAB CORPORATION
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rules regarding standards of conduct for broker-dealers providing investment advice to retail clients. The Company has
incurred and will continue to incur significant additional costs and expend a significant amount of time as it develops and
integrates appropriate systems and procedures, and then monitors, supports and refines those systems and procedures.
While U.S. banking regulators have finalized many regulations to implement various provisions of Dodd-Frank and Basel III,
implementation of the legislation is ongoing and significant rule-making and interpretations remain to be completed. For
example, rules relating to a minimum net stable funding ratio, which will require financial institutions to have a stable
funding structure over a one-year horizon, have not yet been proposed.
Future regulatory changes or revised guidance and interpretations may impact the profitability of the Company’s business
activities, require changes to certain of its business practices, impose upon the Company more stringent capital, liquidity and
leverage ratio requirements or otherwise adversely affect the Company’s ability to pursue its business strategies. These
changes may also require the Company to invest significant management attention and resources to evaluate and make
necessary changes to its compliance, risk management and operations functions.
Failure to meet capital adequacy and liquidity guidelines could affect the Company’s financial condition.
CSC, together with Schwab Bank and its broker-dealer subsidiaries, must meet certain capital and liquidity standards, subject
to qualitative judgments by regulators about components, risk weightings and other factors. The Uniform Net Capital Rule
limits Schwab’s ability to transfer capital to CSC and other affiliates. New regulatory capital, liquidity, and stress testing
requirements may limit or otherwise restrict how the Company utilizes its capital, including paying dividends and stock
repurchases, and may require the Company to increase its capital and/or liquidity or to limit its growth. Any requirement that
the Company increase its regulatory capital, replace certain capital instruments which presently qualify as Tier 1 capital, or
increase regulatory capital ratios or liquidity, could require the Company to liquidate assets, deleverage or otherwise change
its business and/or investment plans, which may adversely affect its financial results. Issuing additional common stock would
dilute the ownership of existing stockholders.
If the Company’s consolidated total assets equal or exceed $250 billion, the Company would become subject to the advanced
approaches framework of the Basel III capital and liquidity requirements, including being subject to a supplementary
leverage ratio, the inclusion of AOCI in regulatory capital, and the unmodified LCR and enhanced Basel III disclosures. In
addition, federal banking agencies have broad discretion and could require CSC or Schwab Bank to hold higher levels of
capital or increase liquidity above the applicable regulatory requirements.
In July 2013, the Federal Reserve and OCC issued Final Regulatory Capital Rules, which established more restrictive capital
definitions, higher risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers. Failure by
either CSC or Schwab Bank to meet its minimum capital requirements could result in certain mandatory, and additional
discretionary, actions by regulators that, if undertaken, could have a negative impact on the Company. In addition, failure by
CSC or Schwab Bank to maintain a sufficient amount of capital to satisfy its capital conservation buffer requirements (as
phased in) would result in restrictions on the Company’s ability to make capital distributions and discretionary cash bonus
payments to executive officers. Further, in September 2014, the Federal Reserve issued a modified LCR that requires CSC to
maintain a sufficient amount of HQLA in relation to total projected net cash outflows over a 30-day stress period.
For a discussion of the Company’s Liquidity and Capital Management, 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 the Consolidated Financial Statements – 23. Regulatory Requirements.”
Technology and operational failures or errors could subject the Company to losses, litigation, and regulatory actions.
The Company faces operational risk, which is the potential for loss due to inadequate or failed internal processes, systems,
and firms or exchanges handling client orders, or from external events and relationships impacting the Company and/or any
of its key business partners and vendors. This risk also includes the risk of human error, execution errors, errors in models
such as those used for asset management, capital planning and management, risk management, stress testing and compliance,
employee misconduct, unauthorized trading, external fraud, computer viruses, distributed denial of service attacks, terrorist
attacks, natural disaster, power outage, capacity constraints, software flaws and similar events. For example, the Company
and other financial institutions have been the target of various denial of service attacks that have, in certain circumstances,