US Bank 2013 Annual Report Download - page 151

Compliance with new regulations and supervisory
initiatives will continue to increase the Company’s costs. In
addition, regulatory changes may reduce the Company’s
revenues, limit the types of financial services and products it
may offer, alter the investments it makes, affect the manner
in which it operates its businesses, increase its litigation and
regulatory costs should it fail to appropriately comply with
new laws and regulatory requirements, and increase the
ability of non-banks to offer competing financial services and
products. See “Supervision and Regulation” in the
Company’s Annual Report on Form 10-K for additional
information regarding the extensive regulatory framework
applicable to the Company.
The Company is subject to liquidity risk The
Company’s liquidity is essential for the operation of its
business. Market conditions, unforeseen outflows of cash or
other events could negatively affect the Company’s level or
cost of funding. Although the Company has implemented
strategies to maintain sufficient and diverse sources of
funding to accommodate planned, as well as unanticipated,
changes in assets and liabilities under both normal and
adverse conditions, any substantial, unexpected or
prolonged changes in the level or cost of liquidity could
adversely affect the Company’s business.
More stringent requirements related to on-balance
sheet liquidity have been proposed by U.S. banking
regulators that may require the Company to
purchase additional investment securities and
change its funding mix U.S. banking regulators have
proposed new liquidity-related standards applicable to
larger banking organizations including the Company. The
proposed new rules would require banks to hold sufficient
unencumbered liquid assets to meet certain regulatorily-
defined stress scenarios. The implementation of these
proposed rules could require the Company to increase its
investment security holdings or otherwise change aspects of
its liquidity measures, including in ways that may adversely
affect its results of operations or financial condition. See
“Supervision and Regulation” in the Company’s Annual
Report on Form 10-K for additional information regarding the
capital requirements under the Dodd-Frank Act and Basel III.
The Company’s credit ratings affect its liquidity The
Company’s credit ratings are important to its liquidity. A
reduction in one or more of the Company’s credit ratings
could adversely affect its liquidity and competitive position,
increase its funding costs or limit its access to the capital
markets. The Company’s credit ratings and credit rating
agencies’ outlooks are subject to ongoing review by the
rating agencies which consider a number of factors,
including the Company’s own financial strength,
performance, prospects and operations, as well as factors
not within the control of the Company, including conditions
affecting the financial services industry generally. There can
be no assurance that the Company will maintain its current
ratings and outlooks.
Loss of customer deposits could increase the
Company’s funding costs The Company relies on bank
deposits to be a low cost and stable source of funding. The
Company competes with banks and other financial services
companies for deposits. If the Company’s competitors raise
the rates they pay on deposits, the Company’s funding costs
may increase, either because the Company raises its rates
to avoid losing deposits or because the Company loses
deposits and must rely on more expensive sources of
funding. Higher funding costs reduce the Company’s net
interest margin and net interest income. Checking and
savings account balances and other forms of customer
deposits may decrease when customers perceive alternative
investments, such as the stock market, as providing a better
risk/return tradeoff. When customers move money out of
bank deposits and into other investments, the Company may
lose a relatively low cost source of funds, increasing the
Company’s funding costs and reducing the Company’s net
interest income.
The soundness of other financial institutions could
adversely affect the Company The Company’s ability to
engage in routine funding or settlement transactions could
be adversely affected by the actions and commercial
soundness of other domestic or foreign financial institutions.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty or other relationships. The
Company has exposure to many different counterparties,
and the Company routinely executes and settles transactions
with counterparties in the financial services industry,
including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even rumors
or questions about, one or more financial services
institutions, or the financial services industry generally, could
lead to losses or defaults by the Company or by other
institutions and impact the Company’s predominately United
States-based businesses or the less significant merchant
processing, corporate trust and fund administration services
businesses it operates in foreign countries. Many of these
transactions expose the Company to credit risk in the event
of a default by a counterparty or client. In addition, the
Company’s credit risk may be further increased when the
collateral held by the Company cannot be realized upon or is
liquidated at prices not sufficient to recover the full amount of
the financial instrument exposure due the Company. There is
no assurance that any such losses would not adversely
affect the Company’s results of operations.
U.S. BANCORP 149