PNC Bank 2014 Annual Report Download - page 23

things, require that covered BHCs conduct liquidity stress
tests at least monthly, maintain a contingency funding plan
and sufficient highly liquid assets to meet net stress cash-flow
needs (as projected under the company’s liquidity stress tests)
for 30 days, and establish certain oversight and governance
responsibilities for the chief risk officer, the board of directors
and the risk committee of the board of directors of a covered
company. In addition, the rules implement the provisions of
Dodd-Frank that require the Federal Reserve to impose a
maximum 15-to-1 debt to equity ratio on a BHC if the FSOC
determines that the company poses a grave threat to the
financial stability of the United States and that the imposition
of such a debt-to-equity requirement would mitigate such risk.
The rules issued in February 2014 did not finalize the other
enhanced prudential standards that the Federal Reserve
proposed in December 2011, including counterparty credit
exposure limits and early remediation requirements, although
the Federal Reserve has indicated that these matters remain
under development. See the Recent Market and Industry
Developments portion of Item 7 MD&A and Item 1A Risk
Factors for additional information.
Regulatory Capital Requirements, Stress Testing and Capital
Planning. PNC and PNC Bank are subject to the regulatory
capital requirements established by the Federal Reserve and
the OCC, respectively. These requirements have changed, and
will continue to change significantly, as a result of the rules
adopted by the U.S. banking agencies in July 2013 to
implement the new international guidelines for determining
regulatory capital established by the Basel Committee on
Banking Supervision (Basel Committee) known as “Basel III,”
as well as to implement certain provisions of Dodd-Frank. The
rules adopted in July 2013 generally have three fundamental
parts.
The first part, referred to as the Basel III capital rule, among
other things, narrows the definition of regulatory capital,
requires banking organizations with $15 billion or more in
assets (including PNC) to phase-out trust preferred securities
from Tier 1 regulatory capital, establishes a new common
equity Tier 1 capital regulatory requirement for banking
organizations, and revises the capital levels at which PNC and
PNC Bank would be subject to prompt corrective action.
These rules also require that significant common stock
investments in unconsolidated financial institutions (as
defined in the rule), as well as mortgage servicing rights and
deferred tax assets, be deducted from Tier 1 common
regulatory capital to the extent such items individually exceed
10%, or in the aggregate exceed 15%, of the organization’s
adjusted Basel III common equity Tier 1 regulatory capital.
We previously referred to Basel III common equity Tier 1
capital as Basel III Tier 1 common capital. The Basel III
capital rule also significantly limits the extent to which
minority interests in consolidated subsidiaries (including
minority interests in the form of REIT preferred securities)
may be included in regulatory capital. In addition, for banking
organizations, like PNC, which are subject to the advanced
approaches (described below), the rule includes other
comprehensive income related to both available for sale
securities and pension and other post-retirement plans as a
component of common equity Tier 1 capital. The Basel III
capital rule became effective on January 1, 2014 for PNC and
PNC Bank, although many provisions are phased-in over a
period of years, with the rules generally fully phased-in as of
January 1, 2019.
The second part of the rules adopted in July 2013 is referred to
as the advanced approaches and materially revises the
framework for the risk-weighting of assets under Basel II. The
Basel II framework, which was adopted by the Basel
Committee in 2004, seeks to provide more risk-sensitive
regulatory capital calculations and promote enhanced risk
management practices among large, internationally active
banking organizations. The advanced approaches
modifications adopted by the U.S. banking agencies became
effective on January 1, 2014, and generally apply to banking
organizations that have $250 billion or more in total
consolidated assets or that have $10 billion or more in on-
balance sheet foreign exposure. Prior to fully implementing
the advanced approaches to calculate risk-weighted assets,
PNC and PNC Bank must successfully complete a “parallel
run” qualification phase. PNC and PNC Bank entered this
parallel run qualification phase on January 1, 2013. Although
the minimum parallel run qualification period is four quarters,
the parallel run period for PNC and PNC Bank, now in its
third year, is consistent with the experience of other U.S.
banks that have all had multi-year parallel run periods.
The third major part of the rules adopted in July 2013 is
referred to as the standardized approach and materially revises
the framework for the risk-weighting of assets under Basel I.
The standardized approach, for example, establishes a new
framework for the risk-weighting of securitization and non-
U.S. sovereign exposures, and increases the risk-weights on
certain types of assets including high-volatility commercial
real estate and past due corporate and retail exposures. The
standardized approach took effect on January 1, 2015.
The risk-based capital and leverage rules that the federal
banking regulators have adopted require the capital-to-assets
ratios of banking organizations, including PNC and PNC Bank,
to meet certain minimum standards. The Basel III rule generally
divides regulatory capital into three components: common
equity Tier 1 capital, additional Tier 1 capital (which, together
with common equity Tier 1 capital, comprises Tier 1 capital)
and Tier 2 capital. Common equity Tier 1 capital is generally
common stock, retained earnings, qualifying minority interest
and, for advanced approaches banking organizations,
accumulated other comprehensive income, less the deductions
required to be made from common equity Tier 1 capital.
Additional Tier 1 generally includes, among other things,
perpetual preferred stock and qualifying minority interests, less
the deductions required to be made from additional Tier 1. Tier
2 capital generally comprises qualifying subordinated debt.
The PNC Financial Services Group, Inc. – Form 10-K 5