Charles Schwab 2013 Annual Report Download - page 32

THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
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The Final Regulatory Capital Rules, among other things:
 subject savings and loan holding companies to consolidated capital requirements;
 revise the required minimum risk-based and leverage capital requirements by (1) establishing a new minimum
Common Equity Tier 1 Risk-Based Capital Ratio (common equity Tier 1 capital to total risk-weighted assets) of
4.5%; (2) raising the minimum Tier 1 Risk-Based Capital Ratio from 4.0% to 6.0%; (3) maintaining the minimum
Total Risk-Based Capital Ratio of 8.0%; and (4) maintaining a minimum Tier 1 Leverage Ratio (Tier 1 capital to
adjusted average consolidated assets) of 4.0%;
 add a requirement to maintain a minimum capital conservation buffer, composed of common equity Tier 1 capital,
of 2.5% of risk-weighted assets, which means that banking organizations, on a fully phased-in basis no later than
January 1, 2019, must maintain a Common Equity Tier 1 Risk-Based Capital Ratio greater than 7.0%; a Tier 1 Risk-
Based Capital Ratio greater than 8.5% and a Total Risk-Based Capital Ratio greater than 10.5%; and
 change the definition of capital categories for insured depository: to be considered “well-capitalized”, Schwab Bank
must have a Common Equity Tier 1 Risk-Based Capital Ratio of at least 6.5%, a Tier 1 Risk-Based Capital Ratio of
at least 8%, a Total Risk-Based Capital Ratio of at least 10% and a Tier 1 Leverage Ratio of at least 5%.
The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets are effective beginning
January 1, 2015. The required minimum capital conservation buffer will be phased in incrementally, starting at 0.625% on
January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
The Final Regulatory Capital Rules provide that the failure to maintain the minimum capital conservation buffer will result in
restrictions on capital distributions and discretionary cash bonus payments to executive officers. The Company does not
expect the Final Regulatory Capital Rules to have a material impact on the Company’s business, financial condition, and
results of operations.
On October 24, 2013, the Federal Reserve, in collaboration with the OCC and the Federal Deposit Insurance Corporation,
issued a joint notice of proposed rulemaking that would implement a quantitative liquidity requirement generally consistent
with the LCR standard established by Basel III. The LCR would apply to all internationally active banking organizations. The
Federal Reserve also proposed a modified LCR standard, which would apply to the Company. Under the modified LCR, a
depository institution holding company would be required to maintain high-quality liquid assets in an amount related to its
total net cash outflows over a prospective period. The proposed transition period for the rule would begin on January 1, 2015,
and institutions would be required to be fully compliant by January 1, 2017. The Company is currently evaluating the impact
of the proposed rule, which may be subject to further modification.
In April 2013, the SEC published notice of a National Securities Clearing Corporation (NSCC) proposed rule change that
would impose a supplemental liquidity funding obligation on certain NSCC participants. The NSCC is a subsidiary of DTCC.
The stated purpose was to provide the NSCC with sufficient liquidity and financial resources to withstand a default by one of
its members. The rule change, as proposed, could have required the Company to provide a supplemental liquidity deposit
relating to options activity (Special SLD) and a supplemental liquidity deposit relating to equities activity (Regular SLD).
The proposed rule change with regard to the Special SLD was approved and went into effect on February 1, 2014, and the
Company does not expect the rule change to have a material impact on the Company’s business, financial condition, and
results of operations. However, the proposed rule change with regard to the Regular SLD was withdrawn and alternative
proposals are currently being discussed.
The Company is pursuing lawsuits in state court in San Francisco for rescission and damages against issuers, underwriters,
and dealers of individual non-agency residential mortgage-backed securities on which the Company has experienced realized
and unrealized losses. The lawsuits allege that offering documents for the securities contained material untrue and misleading
statements about the securities and the underwriting standards and credit quality of the underlying loans. On January 27,
2012, and July 24, 2012, the court denied defendants’ motions to dismiss the claims with respect to all but 3 of the 51
securities, and discovery is proceeding.