Regions Bank 2011 Annual Report Download - page 34

Capital Requirements
Regions and Regions Bank are required to comply with the applicable capital adequacy standards
established by the Federal Reserve. There are two basic measures of capital adequacy for bank holding
companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure.
Risk-based Capital Standards. The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in credit and market risk profiles among banks and financial holding
companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets.
Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
Currently the minimum guideline for the ratio of total capital (“Total capital”) to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit) is 8.0 percent. The regulatory capital
rules state that voting common stockholders’ equity should be the predominant element within Tier 1 capital and
that banking organizations should avoid over-reliance on non-common equity elements. At least half of the Total
capital must be “Tier 1 capital,” which currently consists of qualifying common equity, qualifying noncumulative
perpetual preferred stock (including related surplus), senior perpetual preferred stock issued to the U.S. Treasury
as part of the Troubled Asset Relief Program Capital Purchase Program (the “CPP”), minority interests relating
to qualifying common or noncumulative perpetual preferred stock issued by a consolidated U.S. depository
institution or foreign bank subsidiary, and certain “restricted core capital elements,” as discussed below, less
goodwill and certain other intangible assets. Currently, “Tier 2 capital” may consist of, among other things,
qualifying subordinated debt, mandatorily convertible debt securities, preferred stock and trust preferred
securities not included in the definition of Tier 1 capital, and a limited amount of the allowance for loan losses.
Non-cumulative perpetual preferred stock, trust preferred securities and other so-called “restricted core capital
elements” are currently limited to 25 percent of Tier 1 capital. Pursuant to the Dodd-Frank Act, trust preferred
securities will be phased-out of the definition of Tier 1 capital of bank holding companies having consolidated
assets exceeding $500 million, such as Regions, over a three-year period beginning in January 2013.
Currently the minimum guideline to be considered well-capitalized for Tier 1 capital and Total capital is 6.0
percent and 10.0 percent, respectively. As of December 31, 2011, Regions’ consolidated Tier 1 capital to risk-
adjusted assets and Total capital to risk-adjusted assets ratios were 13.28 percent and 16.99 percent, respectively.
The elements currently comprising Tier 1 capital and Tier 2 capital and the minimum Tier 1 capital and Total
capital ratios may be subject to change in the future, as discussed in greater detail below. The risk-based capital
rules state that the capital requirements are minimum standards based primarily on broad credit-risk
considerations and do not take into account the other types of risk a banking organization may be exposed to
(e.g., interest rate, market, liquidity and operational risks).
Basel I and II Standards. Regions currently calculates its risk-based capital ratios under guidelines
adopted by the Federal Reserve based on the 1988 Capital Accord (“Basel I”) of the Basel Committee on
Banking Supervision (the “Basel Committee”). In 2004, the Basel Committee published a new set of risk-based
capital standards (“Basel II”) to revise Basel I. Basel II provides two approaches for setting capital standards for
credit risk—an internal ratings-based approach tailored to individual institutions’ circumstances and a
standardized approach that bases risk-weighting on external credit assessments to a much greater extent than
permitted in the existing risk-based capital guidelines. Basel II also sets capital requirements for operational risk
and refines the existing capital requirements for market risk exposures.
A definitive final rule for implementing the advanced approaches of Basel II in the United States, which
applies only to internationally active banking organizations, or “core banks” (defined as those with consolidated
total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more)
became effective on April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this
rule (if they meet applicable qualification requirements), but are not required to comply. The rule also allows a
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