SunTrust 2011 Annual Report Download - page 19
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the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must
develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability
of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became
“undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parent's general unsecured creditors. Additionally, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations
and management, asset quality, and executive compensation and permits regulatory action against a financial institution that does
not meet such standards.
The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by
FDICIA, using the total risk-based capital, Tier 1 risk-based capital, and leverage capital ratios as the relevant capital measures.
Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized.
Under the regulations, a “well capitalized” institution must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based
capital ratio of at least 10%, and a leverage ratio of at least 5%, among other things.
Regulators also must take into consideration: (i) concentrations of credit risk; (ii) interest rate risk (when the interest rate sensitivity
of an institution's assets does not match the sensitivity of its liabilities or its off-balance sheet position); and (iii) risks from non-
traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's
capital. Regulators make this evaluation as a part of their examination of the institution's regular safety and soundness. Additionally,
regulators may choose to examine other factors in order to evaluate the safety and soundness of financial institutions. The Federal
Reserve recently announced that its approval of certain capital actions, such as dividend increases and stock repurchase, will be
tied to the level of Tier 1 common equity, and that bank holding companies must consult with the Federal Reserve's staff before
taking any actions, such as stock repurchases, capital redemptions, or dividend increases, which might result in a diminished
capital base.
Capital Framework and Basel III
In December 2009, the BCBS issued two consultative documents proposing reforms to bank capital and liquidity regulation. The
BCBS's capital proposals would significantly revise the definitions of Tier 1 capital and Tier 2 capital, which is sometimes referred
to as “Basel III.” The Basel III capital framework, among other things:
• introduces as a new capital measure Tier 1 common equity, specifies that Tier 1 capital consists of Tier 1 common equity
and “Additional Tier 1 capital” instruments meeting specified requirements, defines Tier 1 common equity narrowly by
requiring that most deductions or adjustments to regulatory capital measures be made to Tier 1 common equity and not
to the other components of capital, and expands the scope of the deductions or adjustments as compared to existing
regulations;
• when fully phased-in on January 1, 2019, requires banks to maintain:
as a newly adopted international standard, a minimum ratio of Tier 1 common equity to RWA of at least 4.5%,
plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Tier 1 common equity ratio as that buffer
is phased in, effectively resulting in a minimum ratio of Tier 1 common equity to RWA of at least 7% upon full
implementation);
a minimum ratio of Tier 1 capital to RWA of at least 6.0%, plus the capital conservation buffer (which is added
to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio
of 8.5% upon full implementation);
a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to RWA of at least 8.0%, plus the capital conservation
buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum
total capital ratio of 10.5% upon full implementation); and
as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1
capital to balance sheet exposures plus certain off-balance sheet exposures (as the average for each quarter of
the month-end ratios for the quarter); and
• provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess
aggregate credit growth becomes associated with a buildup of systemic risk, that would be a Tier 1 common equity add-
on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total
buffers of between 2.5% and 5%).