Fifth Third Bank 2006 Annual Report Download - page 89

ANNUAL REPORT ON FORM 10-K
Fifth Third Bancorp 87
GLBA if any of the subsidiary banks receives a CRA rating of
less than “Satisfactory.”
The FRB has established capital guidelines for financial
holding companies. The FRB and the OCC have also issued
regulations establishing capital requirements for banks. Failure
to meet capital requirements could subject the Bancorp and its
subsidiary banks to a variety of restrictions and enforcement
actions. In addition, as discussed above, each of the Bancorp’s
subsidiary banks must remain well capitalized for the Bancorp
to retain its status as a financial holding company.
The minimum risk-based capital requirements adopted by
the federal banking agencies follow the Capital Accord of the
Basel Committee on Banking Supervision. In 2004, the Basel
Committee published its new capital guidelines (“Basel II”)
governing the capital adequacy of large, internationally active
banking organizations. Studies of the impact of Basel II on the
large banks that will operate under the new rules indicated that
such banks could benefit from a material reduction in minimum
risk based capital requirements. In response to the potential
inequities between the Basel II banks and other banks, in
December 2006, the federal banking agencies issued a notice of
proposed changes to the risk based capital rules for banks in the
U.S. which will not be subject to Basel II, known as Basel IA.
In Basel IA, the banking agencies are proposing to expand the
number of risk-weight categories, allow the use of external
ratings to risk-weight certain exposures, expand the range of
recognized collateral and eligible guarantors, use loan-to-value
ratios to risk-weight residential mortgages, increase the credit
conversion factor for certain commitments with an original
maturity of one year or less, assess a charge for early
amortizations in securitizations of revolving exposures, and
remove the 50 percent limit on the risk weight for certain
derivative transactions. Until such time as final rules are
adopted, the Bancorp is unable to predict whether and when it
will be subject to new capital requirements.
The FRB, FDIC and other bank regulatory agencies have
adopted final guidelines (the “Guidelines”) for safeguarding
confidential, personal customer information. The Guidelines
require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate
committee thereof, to create, implement and maintain a
comprehensive written information security program designed
to ensure the security and confidentiality of customer
information, protect against any anticipated threats or hazards to
the security or integrity of such information and protect against
unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer.
The Bancorp has adopted a customer information security
program that has been approved by the Bancorp’s Board of
Directors (the “Board”).
The GLBA requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic
personal information about consumers to non-affiliated third
parties. In general, the statute requires explanations to
consumers on policies and procedures regarding the disclosure
of such nonpublic personal information, and, except as
otherwise required by law, prohibits disclosing such
information except as provided in the subsidiary banks policies
and procedures. The subsidiary banks have implemented a
privacy policy effective since the GLBA became law, pursuant
to which all of its existing and new customers are notified of the
privacy policies.
The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the “Patriot Act”), designed to deny terrorists and
others the ability to obtain access to the United States financial
system, has significant implications for depository institutions,
brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act, as implemented by various federal
regulatory agencies, requires financial institutions, including the
Bancorp and its subsidiaries, to implement new policies and
procedures or amend existing policies and procedures with
respect to, among other matters, anti-money laundering,
compliance, suspicious activity and currency transaction
reporting and due diligence on customers. The Patriot Act and
its underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement
agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the FRB
(and other federal banking agencies) to evaluate the
effectiveness of an applicant in combating money laundering
activities when considering applications filed under Section 3 of
the BHCA or the Bank Merger Act. The Bancorp’s Board has
approved policies and procedures that are believed to be
compliant with the Patriot Act.
Certain mutual fund and unit investment trust custody and
administrative clients are regulated as “investment companies”
as that term is defined under the Investment Company Act of
1940, as amended (the “ICA”), and are subject to various
examination and reporting requirements. The provisions of the
ICA and the regulations promulgated thereunder prescribe the
type of institution that may act as a custodian of investment
company assets, as well as the manner in which a custodian
administers the assets in its custody. As a custodian for a
number of investment company clients, these regulations
require, among other things, that certain minimum aggregate
capital, surplus and undivided profit levels are maintained by
the subsidiary banks. Additionally, arrangements with clearing
agencies or other securities depositories must meet ICA
requirements for segregation of assets, identification of assets
and client approval. Future legislative and regulatory changes in
the existing laws and regulations governing custody of
investment company assets, particularly with respect to
custodian qualifications, may have a material and adverse
impact on the Bancorp. Currently, management believes the
Bancorp is in compliance with all minimum capital and
securities depository requirements. Further, the Bancorp is not
aware of any proposed or pending regulatory developments,
which, if approved, would adversely affect its ability to act as
custodian to an investment company.
Investment companies are also subject to extensive record
keeping and reporting requirements. These requirements dictate
the type, volume and duration of the record keeping the
Bancorp undertakes, either in the role as custodian for an
investment company or as a provider of administrative services
to an investment company. Further, specific ICA guidelines
must be followed when calculating the net asset value of a
client mutual fund. Consequently, changes in the statutes or
regulations governing recordkeeping and reporting or valuation
calculations will affect the manner in which operations are
conducted.
New legislation or regulatory requirements could have a
significant impact on the information reporting requirements
applicable to the Bancorp and may in the short term adversely
affect the Bancorp’s ability to service clients at a reasonable
cost. Any failure to provide such support could cause the loss of
customers and have a material adverse effect on financial
results. Additionally, legislation or regulations may be proposed
or enacted to regulate the Bancorp in a manner that may
adversely affect financial results. Furthermore, the mutual fund