SunTrust 2011 Annual Report Download - page 18
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to the financial system of the U.S.; (iv) limiting debit card interchange fees; (v) adopting certain changes to shareholder rights and
responsibilities, including a shareholder “say on pay” vote on executive compensation; (vi) strengthening the SEC's powers to
regulate securities markets; (vii) regulating OTC derivative markets; (viii) restricting variable-rate lending by requiring the ability
to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-
rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions;
and (ix) amending the Truth in Lending Act with respect to mortgage originations, including originator compensation, minimum
repayment standards, and prepayment considerations. These changes have profoundly impacted our policies and procedures and
will likely continue to do so as regulators adopt regulations going forward in accordance with the time table for enacting regulations
set forth in the Dodd-Frank Act.
Additionally, there have been a number of legislative and regulatory proposals that would have an impact on the operation of
financial holding companies and their bank and non-bank subsidiaries. We cannot predict whether or in what form these proposals
may be adopted in the future and, if adopted, what their effect will be on us.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries
by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository
institutions and to the FDIC insurance fund in the event the depository institution becomes in danger of default or is in default
and are generally not intended for the protection of shareholders or other investors. For example, under a policy of the Federal
Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might
not do so absent such policy. Additionally, the “cross-guarantee” provisions of federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The federal banking agencies have broad powers under current federal law to require us to take
prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether
the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized” as such terms are defined under regulations issued by each of the federal banking agencies. Under
the Dodd-Frank Act, the FDIC has the authority to liquidate certain financial holding companies that are determined to pose
significant risks to the financial stability of the U.S. (“covered financial companies”). Under this scenario, the FDIC would exercise
broad powers to take prompt corrective action to resolve problems with the covered financial company. Details of this process,
and the rights of shareholders and creditors of covered financial companies, are currently being formulated. The FDIC may make
risk-based assessments of all bank holding companies with total consolidated assets greater than $50 billion to recover losses
incurred by the FDIC in exercising its authority to liquidate covered financial companies.
The Federal Reserve and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S.
banking organizations. Additionally, these regulatory agencies may require that a banking organization maintain capital above the
minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve risk-based
guidelines define a tier-based capital framework. Tier 1 capital includes common shareholders' equity, trust preferred securities,
non-controlling interests and qualifying preferred stock, less goodwill (net of any qualifying DTL) and other adjustments. Beginning
in 2013, trust preferred securities will no longer be included in Tier 1 after a three-year phase-out. Tier 2 capital consists of preferred
stock not qualifying as Tier 1 capital, mandatorily convertible debt, limited amounts of subordinated debt, other qualifying term
debt, the allowance for credit losses up to a certain amount and a portion of the unrealized gain on equity securities. The sum of
Tier 1 and Tier 2 capital represents the Company's qualifying total capital. Risk-based capital ratios are calculated by dividing
Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of
risk-weights, based primarily on relative credit risk. Additionally, the Company, and any bank with significant trading activity,
must incorporate a measure for market risk in their regulatory capital calculations. The leverage ratio is determined by dividing
Tier 1 capital by adjusted average total assets. The Federal Reserve also requires the Company to calculate, report and maintain
certain levels of Tier 1 common equity. Tier 1 common equity is calculated by taking the Tier 1 capital result and subtracting
certain elements, including perpetual preferred stock and related surplus, non-controlling interests in subsidiaries, trust preferred
securities and mandatorily convertible preferred securities. Moreover, capital requirements for bank holding companies and banks
change frequently and these changes are often linked to decisions made by the BCBS of the Bank for International Settlements.
Capital requirements applicable to bank holding companies and banks may increase in the near-future as a result of the Dodd-
Frank Act and initiatives of the BCBS.
FDICIA, among other things, identifies five capital categories for insured depository institutions (“well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”) and requires the respective
federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not
meet minimum capital requirements within such categories. Depending on the category in which an institution is classified,
FDICIA imposes progressively more restrictive constraints on operations, management, and capital distributions. Failure to meet