PNC Bank 2006 Annual Report Download - page 15

significant publicly announced enforcement actions. There has
also been a heightened focus recently on the protection of
confidential customer information.
There are numerous rules governing the regulation of financial
services institutions and their holding companies.
Accordingly, the following discussion is general in nature and
does not purport to be complete or to describe all of the laws
and regulations that apply to us.
B ANK R EGULATION
As a bank holding company and a financial holding company,
we are subject to supervision and regular inspection by the
Federal Reserve. Our subsidiary banks and their subsidiaries
are subject to supervision and examination by applicable
federal and state banking agencies, principally the OCC with
respect to PNC Bank, N.A. and the Federal Reserve Bank of
Cleveland and the Office of the State Bank Commissioner of
Delaware with respect to PNC Bank, Delaware.
Notwithstanding PNC’s reduced ownership interest in
BlackRock and the deconsolidation resulting from the
BlackRock/MLIM transaction, BlackRock continues to be
subject to the supervision and regulation of the Federal
Reserve to the same extent as it was prior to the transaction.
Parent Company Liquidity and Dividends. The principal
source of our liquidity at the parent company level is
dividends from PNC Bank, N.A. Our subsidiary banks are
subject to various federal and state restrictions on their ability
to pay dividends to PNC Bancorp, Inc., the direct parent of the
subsidiary banks, which in turn may affect the ability of PNC
Bancorp, Inc. to pay dividends to PNC at the parent company
level. Our subsidiary banks are also subject to federal laws
limiting extensions of credit to their parent holding company
and non-bank affiliates as discussed in Note 4 Regulatory
Matters included in the Notes To Consolidated Financial
Statements in Item 8 of this Report, which is incorporated
herein by reference. Further information is also available in
the Liquidity Risk Management section of Item 7 of this
Report.
Under Federal Reserve policy, a bank holding company is
expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each
such bank. Consistent with the “source of strength” policy for
subsidiary banks, the Federal Reserve has stated that, as a
matter of prudent banking, a bank holding company generally
should not maintain a rate of cash dividends unless its net
income available to common shareholders has been sufficient
to fully fund the dividends and the prospective rate of earnings
retention appears to be consistent with the corporation’s
capital needs, asset quality and overall financial condition.
This policy does not currently have a negative impact on
PNC’s ability to pay dividends at our current level.
Additional Powers Under the GLB Act. The GLB Act permits
a qualifying bank holding company to become a “financial
holding company” and thereby to affiliate with financial
companies engaging in a broader range of activities than
would otherwise be permitted for a bank holding company.
Permitted affiliates include securities underwriters and
dealers, insurance companies and companies engaged in other
activities that are determined by the Federal Reserve, in
consultation with the Secretary of the Treasury, to be
“financial in nature or incidental thereto” or are determined by
the Federal Reserve unilaterally to be “complementary” to
financial activities. We became a financial holding company
as of March 13, 2000.
The Federal Reserve is the “umbrella” regulator of a financial
holding company, with its operating entities, such as its
subsidiary broker-dealers, investment managers, investment
companies, insurance companies and banks, also subject to the
jurisdiction of various federal and state “functional” regulators
with normal regulatory responsibility for companies in their
lines of business.
As subsidiaries of a financial holding company under the
GLB Act, our non-bank subsidiaries are allowed to conduct
new financial activities or acquire non-bank financial
companies with after-the-fact notice to the Federal Reserve. In
addition, our non-bank subsidiaries (and any financial
subsidiaries of subsidiary banks) are now permitted to engage
in certain activities that were not permitted for banks and bank
holding companies prior to enactment of the GLB Act, and to
engage on less restrictive terms in certain activities that were
previously permitted. Among other activities, we currently
rely on our status as a financial holding company to conduct
mutual fund distribution activities, merchant banking
activities, and underwriting and dealing activities.
To continue to qualify for financial holding company status,
our subsidiary banks must maintain “well capitalized” capital
ratios, examination ratings of “1” or “2” (on a scale of 1 to 5),
and certain other criteria that are incorporated into the
definition of “well managed” under the BHC Act and Federal
Reserve rules. If we were to no longer qualify for this status,
we could not continue to enjoy the after-the-fact notice
process for new non-banking activities and non-banking
acquisitions, and would be required promptly to enter into an
agreement with the Federal Reserve providing a plan for our
subsidiary banks to meet the “well capitalized” and “well
managed” criteria. The Federal Reserve would have broad
authority to limit our activities. Failure to satisfy the criteria
within a six-month period could result in a requirement that
we conform existing non-banking activities to activities that
were permissible prior to the enactment of the GLB Act. If a
subsidiary bank failed to maintain a “satisfactory” or better
rating under the Community Reinvestment Act of 1977, as
amended (“CRA”), we could not commence new activities or
make new investments in reliance on the GLB Act.
In addition, the GLB Act permits a national bank, such as
PNC Bank, N.A., to engage in expanded activities through the
5