Charles Schwab 2014 Annual Report Download - page 41

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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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.
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 were 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.
In September 2014, the Federal Reserve, in collaboration with the OCC and the FDIC, issued a rule implementing a
quantitative liquidity requirement generally consistent with the LCR standard established by Basel III. The LCR applies to all
internationally active banking organizations. The Federal Reserve also issued a modified LCR that applies to the Company.
Under the modified LCR, a depository institution holding company is required to maintain high-quality liquid assets in an
amount related to its total estimated net cash outflows over a prospective period. The modified LCR will be phased in
beginning on January 1, 2016, with a minimum requirement of 90%, increasing to 100% at January 1, 2017. The Company is
currently evaluating the impact of the final rule but does not expect a material impact to the Company’s business, financial
condition, and results of operations.
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 and discovery is proceeding. To date, the
Company has realized $28 million in net settlement proceeds on such claims, and an initial trial date relating to certain of the
defendants who remain in the case is set for August 2015.