PNC Bank 2014 Annual Report Download - page 38

opportunities to securitize loans would likely be a
reduction in the willingness of banks, including PNC,
to make loans due to balance sheet management
requirements. Any of these potential impacts of the
Dodd-Frank risk retention rules could affect the way
in which PNC conducts its business, including its
product offerings.
Even after new rules are finalized and become effective, it still
may take a period of time before the manner in which the
rules will be interpreted and administered by the relevant
agencies becomes clarified and known. A failure to comply, or
to have adequate policies and procedures designed to comply,
with these and other regulatory requirements could expose us
to damages, fines and regulatory penalties and other
regulatory actions, which could be significant, and could also
injure our reputation with customers and others with whom we
do business.
New capital and liquidity standards will result in banks
and bank holding companies needing to maintain more
and higher quality capital and greater liquidity than has
historically been the case.
We are subject to regulatory capital and liquidity requirements
established by the Federal Reserve and the OCC, and discuss
these requirements and standards in the Supervision and
Regulation section included in Item 1 of this Report.
The regulatory capital requirements applicable to banks and
BHCs have undergone, and continue to undergo, significant
changes. For example, the final 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 known as “Basel III”, as
well as to implement certain provisions of Dodd-Frank,
fundamentally altered the U.S. regulatory capital requirements
for U.S. BHCs and banks. Significant parts of these rules
became effective for PNC on January 1, 2014 and on
January 1, 2015, although as a result of the staggered effective
dates of the rules many provisions are phased-in over a period
of years, with the rules generally fully phased-in as of
January 1, 2019. The Basel Committee, moreover, continues
to consider additional, significant changes to the international
capital framework for banking organizations, including
modifications that would significantly alter the international
frameworks governing the market risk capital requirements for
trading positions and the standardized risk weighting approach
for credit risk, establish a capital floor for banking
organizations subject to the advanced approaches for the risk
weighting of assets, modify the treatment of securitization
positions, and seek to enhance the transparency and
consistency of capital requirements amongst banks and
jurisdictions. It is unclear how these or other initiatives by the
Basel Committee may be finalized and implemented in the
United States and, thus, we are unable to estimate what
potential impact such initiatives may have on PNC.
The U.S. banking agencies also recently have implemented
rules that significantly strengthen and alter the framework for
liquidity regulation in the United States. In September 2014,
the U.S. banking agencies adopted final rules to implement the
LCR, a new, short-term quantitative liquidity requirement.
These rules require PNC and PNC Bank to maintain an
amount of qualifying high-quality liquid assets sufficient to
cover the entity’s projected net cash outflows over a 30-day
stress period using inflow, outflow and maturity assumptions
included in the rule. The LCR rules became effective for PNC
and PNC Bank on January 1, 2015, and the minimum required
LCR and the requirement to calculate the LCR on a daily basis
will be phased-in over a period of years, with the standard
being fully implemented on January 1, 2017. In anticipation of
the final rules, PNC undertook several actions to prepare for
implementation of the LCR. The Federal Reserve’s new
liquidity risk management requirements for bank holding
companies with $50 billion or more in consolidated total
assets (like PNC) also became effective on January 1, 2015.
The new rules require covered BHCs to, among other things,
conduct internal liquidity stress tests over a range of time
horizons, maintain a buffer of highly liquid assets sufficient to
meet projected net outflows under the BHC’s 30-day liquidity
stress test, and maintain a contingency funding plan that meets
detailed requirements.
Additional liquidity standards also are expected to be
implemented in the coming years. For example, the Basel
Committee, in October 2014, released the final framework for
the NSFR standard, which is designed to ensure that banking
organizations maintain a stable, long-term funding profile in
relation to their asset composition and off-balance sheet
activities. Under that framework, the NSFR would take effect
as a minimum regulatory standard on January 1, 2018,
although the U.S. banking agencies have not yet proposed
rules to implement the NSFR.
The need to maintain more and higher quality capital, as well
as greater liquidity, going forward than historically has been
required could limit PNC’s business activities, including
lending, and its ability to expand, either organically or through
acquisitions. It could also result in PNC taking steps to
increase its capital that may be dilutive to shareholders or
being limited in its ability to pay dividends or otherwise return
capital to shareholders, or selling or refraining from acquiring
assets, the capital requirements for which are inconsistent with
the assets’ underlying risks. In addition, the new liquidity
standards require PNC to maintain holdings of highly liquid
short-term investments, thereby reducing PNC’s ability to
invest in longer-term or less liquid assets even if more
desirable from a balance sheet or interest rate risk
management perspective. Moreover, although these new
requirements are being phased in over time, U.S. federal
20 The PNC Financial Services Group, Inc. – Form 10-K