PNC Bank 2015 Annual Report Download - page 67

The Basel II framework, which was adopted by the Basel
Committee on Banking Supervision in 2004, seeks to provide
more risk-sensitive regulatory capital calculations and
promote enhanced risk management practices among large,
internationally active banking organizations. The U.S. banking
agencies initially adopted rules to implement the Basel II
capital framework in 2004. In July 2013, the U.S. banking
agencies adopted final rules (referred to as the advanced
approaches) that modified the Basel II framework effective
January 1, 2014. See the Supervision and Regulation section
in Item 1 Business and Item 1A Risk Factors of this Report for
additional information. Prior to fully implementing the
advanced approaches to calculate risk-weighted assets, PNC
and PNC Bank must successfully complete a “parallel run”
qualification phase. Both PNC and PNC Bank entered this
parallel run 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. advanced
approaches banks that have all had multi-year parallel run
periods. After PNC exits parallel run, its regulatory risk-based
capital ratio for each measure (e.g., Common equity Tier 1
capital ratio) will be the lower of the ratios as calculated under
the standardized approach and the advanced approaches.
As a result of the staggered effective dates of the final U.S.
Basel III regulatory capital rules (Basel III rules), as well as
the fact that PNC remains in the parallel run qualification
phase for the advanced approaches, PNC’s regulatory risk-
based ratios in 2015 were calculated using the standardized
approach, effective January 1, 2015, for determining risk-
weighted assets, and the definitions of, and deductions from,
regulatory capital under the Basel III rules (as such definitions
and deductions are phased-in for 2015). We refer to the capital
ratios calculated using the phased-in Basel III provisions in
effect for 2015 and, for the risk-based ratios, standardized
approach risk-weighted assets as the 2015 Transitional Basel
III ratios. Under the standardized approach for determining
credit risk-weighted assets, exposures are generally assigned a
pre-defined risk weight. Exposures to high volatility
commercial real estate, past due exposures, equity exposures
and securitization exposures are generally subject to higher
risk weights than other types of exposures.
Under the Basel III rules adopted by the U.S. banking
agencies, significant common stock investments in
unconsolidated financial institutions, mortgage servicing
rights and deferred tax assets must be deducted from capital
(subject to a phase-in schedule) to the extent they individually
exceed 10%, or in the aggregate exceed 15%, of the
institution’s adjusted common equity Tier 1 capital. Also,
Basel III regulatory capital includes (subject to a phase-in
schedule) accumulated other comprehensive income related to
securities currently and previously held as available for sale,
as well as pension and other postretirement plans.
Federal banking regulators have stated that they expect the
largest U.S. bank holding companies, including PNC, to have
a level of regulatory capital well in excess of the regulatory
minimum and have required the largest U.S. bank holding
companies, including PNC, to have a capital buffer sufficient
to withstand losses and allow them to meet the credit needs of
their customers through estimated stress scenarios. We seek to
manage our capital consistent with these regulatory principles,
and believe that our December 31, 2015 capital levels were
aligned with them.
At December 31, 2015, PNC and PNC Bank, our sole bank
subsidiary, were both considered “well capitalized,” based on
applicable U.S. regulatory capital ratio requirements.
Beginning in 2015, to qualify as “well capitalized”, PNC must
have Transitional Basel III capital ratios of at least 6% for
Tier 1 risk-based capital and 10% for Total risk-based capital,
and PNC Bank must have Transitional Basel III capital ratios
of at least 6.5% for Common equity Tier 1 risk-based capital,
8% for Tier 1 risk-based capital, 10% for Total risk-based
capital, and a Leverage ratio of at least 5%. To qualify as
“well capitalized” in 2014, regulators required insured
depository institutions, such as PNC Bank, to maintain
Transitional Basel III capital ratios of at least 6% for Tier 1
risk-based, 10% for Total risk-based and 5% for Leverage,
and required bank holding companies, such as PNC, to
maintain Transitional Basel III regulatory capital ratios of at
least 6% Tier 1 risk-based and 10% for Total risk-based.
The access to and cost of funding for new business initiatives,
the ability to undertake new business initiatives including
acquisitions, the ability to engage in expanded business
activities, the ability to pay dividends or repurchase shares or
other capital instruments, the level of deposit insurance costs,
and the level and nature of regulatory oversight depend, in
large part, on a financial institution’s capital strength.
We provide additional information regarding regulatory
capital requirements and some of their potential impacts on
PNC in the Supervision and Regulation section of Item 1
Business, Item 1A Risk Factors and Note 19 Regulatory
Matters in the Notes To Consolidated Financial Statements in
Item 8 of this Report.
The PNC Financial Services Group, Inc. – Form 10-K 49