Wells Fargo 2014 Annual Report Download - page 121

Federal regulatory agencies have finalized rules to implement
this credit risk retention requirement, which have only included
limited exemptions. We continue to evaluate the final rules and
assess their impact on our ability to issue certain ABS or
otherwise participate in various securitization transactions.
In order to address the perceived risks that money market
mutual funds may pose to the financial stability of the United
States, the SEC adopted rules in July 2014 that, among other
things, require significant structural changes to these funds,
including requiring institutional prime money market funds to
maintain a variable net asset value and providing for the
imposition of liquidity fees and redemption gates for all non-
governmental money market funds during periods in which they
experience liquidity impairments of a certain magnitude. The
SEC has provided a period of two years following the effective
date of the rule for funds to comply with these structural
changes. Certain of our money market mutual funds may see a
decline in assets under management in response to
implementation of these structural changes.
Federal banking regulators also continue to implement the
provisions of the Dodd-Frank Act addressing the risks to the
financial system posed by the failure of a systemically important
financial institution. Pursuant to rules adopted by the FRB and
the FDIC, Wells Fargo has prepared and filed a resolution plan, a
so-called “living will,” that is designed to facilitate our resolution
in the event of material distress or failure. There can be no
assurance that the FRB or FDIC will respond favorably to the
Company’s resolution plans. If the FRB and FDIC determine that
our resolution plan is deficient, the Dodd-Frank Act authorizes
the FRB and FDIC to impose more stringent capital, leverage or
liquidity requirements on us or restrict our growth or activities
until we submit a plan remedying the deficiencies. If the FRB
and FDIC ultimately determine that we have been unable to
remedy the deficiencies, they could order us to divest assets or
operations in order to facilitate our orderly resolution in the
event of our material distress or failure. Our national bank
subsidiary, Wells Fargo Bank, N.A., is also required to prepare
and submit a resolution plan to the FDIC under separate
regulatory authority.
The Dodd-Frank Act also establishes an orderly liquidation
process which allows for the appointment of the FDIC as a
receiver of a systemically important financial institution that is
in default or in danger of default. The FDIC has issued rules to
implement its orderly liquidation authority and released a notice
and request for comment regarding a proposed resolution
strategy, known as “single point of entry,” designed to resolve a
large financial institution in a manner that would, among other
things, impose losses on shareholders and creditors in
accordance with statutory priorities, without imposing a cost on
U.S. taxpayers. Implementation of the strategy would require
that institutions maintain a sufficient amount of available equity
and unsecured debt to absorb losses and recapitalize operating
subsidiaries. The FDIC has not issued any final statements on
the single point of entry resolution strategy.
Other future regulatory initiatives that could significantly
affect our business include proposals to reform the housing
finance market in the United States. These proposals, among
other things, consider winding down the GSEs and reducing or
eliminating over time the role of the GSEs in guaranteeing
mortgages and providing funding for mortgage loans, as well as
the implementation of reforms relating to borrowers, lenders,
and investors in the mortgage market, including reducing the
maximum size of a loan that the GSEs can guarantee, phasing in
a minimum down payment requirement for borrowers,
improving underwriting standards, and increasing
accountability and transparency in the securitization process.
Congress also may consider the adoption of legislation to reform
the mortgage financing market in an effort to assist borrowers
experiencing difficulty in making mortgage payments or
refinancing their mortgages. The extent and timing of any
regulatory reform or the adoption of any legislation regarding
the GSEs and/or the home mortgage market, as well as any
effect on the Company’s business and financial results, are
uncertain.
Any other future legislation and/or regulation, if adopted,
also could significantly change our regulatory environment and
increase our cost of doing business, limit the activities we may
pursue or affect the competitive balance among banks, savings
associations, credit unions, and other financial services
companies, and have a material adverse effect on our financial
results and condition.
For more information, refer to the “Regulatory Reform”
section in this Report and the “Regulation and Supervision”
section in our 2014 Form 10-K.
Bank regulations, including Basel capital and liquidity
standards and FRB guidelines and rules, may require
higher capital and liquidity levels, limiting our ability to
pay common stock dividends, repurchase our common
stock, invest in our business, or provide loans or other
products and services to our customers. Federal banking
regulators continually monitor the capital position of banks and
bank holding companies. In December 2010, the Basel
Committee on Banking Supervision (BCBS) finalized a set of
international guidelines for determining regulatory capital
known as Basel III. These guidelines are designed to address
many of the weaknesses identified in the previous Basel
standards and in the banking sector as contributing to the
financial crisis of 2008 and 2009 by, among other things,
increasing minimum capital requirements, increasing the quality
of capital, increasing the risk coverage of the capital framework,
increasing liquidity buffers, and increasing standards for the
supervisory review process and public disclosure. When fully
phased in, the Basel III guidelines require bank holding
companies to maintain a minimum ratio of Common Equity
Tier 1 (CET1) to risk-weighted assets of at least 7.0%.
U.S. regulatory authorities have been considering the BCBS
capital guidelines and related proposals, and in July 2013, U.S.
banking regulators approved final and interim final rules to
implement the Basel III capital guidelines for U.S. banks. These
final capital rules, among other things:
• implement in the United States the Basel III regulatory
capital reforms including those that revise the definition of
capital, increase minimum capital ratios, and introduce a
minimum CET1 ratio of 4.5% and a capital conservation
buffer of 2.5% (for a total minimum CET1 ratio of 7.0%) and
a potential countercyclical buffer of up to 2.5%, which would
be imposed by regulators at their discretion if it is
determined that a period of excessive credit growth is
contributing to an increase in systemic risk;
• require a Tier 1 capital to average total consolidated assets
ratio of 4% and introduce, for large and internationally
active bank holding companies (BHCs), a Tier 1
supplementary leverage ratio of 3% that incorporates off-
balance sheet exposures;
• revise “Basel I” rules for calculating risk-weighted assets to
enhance risk sensitivity under a standardized approach;
• modify the existing Basel II advanced approaches rules for
calculating risk-weighted assets to implement Basel III;
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