Fifth Third Bank 2009 Annual Report Download - page 119

ANNUAL REPORT ON FORM 10-K
Fifth Third Bancorp 117
quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. The FDIC also adopted a
uniform three-basis point increase in assessment rates effective
on January 1, 2011.
Federal law, Sections 23A and 23B of the Federal Reserve
Act, restricts transactions between a bank and an affiliated
company, including a parent bank holding company. The
subsidiary banks are subject to certain restrictions on loans to
affiliated companies, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or
letter of credit on their behalf. Among other things, these
restrictions limit the amount of such transactions, require
collateral in prescribed amounts for extensions of credit,
prohibit the purchase of low quality assets and require that the
terms of such transactions be substantially equivalent to terms
of similar transactions with non-affiliates. One result of these
restrictions is a limitation on the subsidiary banks to fund the
Bancorp. Generally, each subsidiary bank is limited in its
extensions of credit to any affiliate to 10% of the subsidiary
bank’s capital and its extension of credit to all affiliates to 20%
of the subsidiary bank’s capital.
The CRA generally requires insured depository institutions
to identify the communities they serve and to make loans and
investments and provide services that meet the credit needs of
these communities. Furthermore, the CRA requires the FRB to
evaluate the performance of each of the subsidiary banks in
helping to meet the credit needs of their communities. As a part
of the CRA program, the subsidiary banks are subject to
periodic examinations by the FRB, and must maintain
comprehensive records of their CRA activities for this purpose.
During these examinations, the FRB rates such institutions’
compliance with CRA as “Outstanding,” “Satisfactory,” “Needs
to Improve" or "Substantial Noncompliance.” Failure of an
institution to receive at least a “Satisfactory” rating could
inhibit such institution or its holding company from undertaking
certain activities, including engaging in activities permitted as a
financial holding company under the GLBA and acquisitions of
other financial institutions, or, as discussed above, require
divestitures. The FRB must take into account the record of
performance of banks in meeting the credit needs of the entire
community served, including low- and moderate-income
neighborhoods. Fifth Third Bank, Fifth Third Bank (Michigan)
and Fifth Third Bank, N.A. all received a “Satisfactory” CRA
rating. Because the Bancorp is an FHC, with limited exceptions,
the Bancorp may not commence any new financial activities or
acquire control of any companies engaged in financial activities
in reliance on the 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 bank to a variety of restrictions and enforcement
actions. In addition, as discussed previously, the Bancorp’s
subsidiary bank 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 (core” banking organizations with at
least $250 billion in total assets or at least $10 billion in foreign
exposure). The final rule to implement the advanced approaches
of Basel II for core banking organizations became effective on
April 1, 2008. Under Basel II, after a transition period, core
banking organizations are required to enhance the measurement
and management of their risks, including credit risk and
operational risk, through the use of advanced approaches for
calculating risk-based capital requirements. Other U.S. banking
organizations may elect to adopt the requirements of this rule (if
they meet applicable qualification requirements), but they are
not required to apply them.
In July 2008, the federal banking agencies issued a
proposed rule that would give all non-core banking
organizations, which are not required to adopt Basel II’s
advance approaches, such as Bancorp, with the option to adopt
a new risk-based framework. This framework would adopt the
standardized approach of Basel II for credit risk, the basic
indicator approach of Basel II for operational risk, and related
disclosure requirements. The proposed rule, if adopted, will
replace the earlier proposal to adopt the so-called Basel IA
option. Until such time as the new rules for non-core banking
organizations are adopted, Bancorp is unable to predict whether
it will adopt a standardized approach under Basel II.
On September 3, 2009, the United States Treasury
Department (“Treasury”) issued a policy statement (the
“Treasury Policy Statement”) entitled “Principles for
Reforming the U.S. and International Regulatory Capital
Framework for Banking Firms.” The Treasury Policy Statement
was developed in consultation with the U.S. bank regulatory
agencies and contemplates changes to the existing regulatory
capital regime that would involve substantial revisions to, if not
replacement of, major parts of the Basel I and Basel II capital
frameworks and affect all regulated banking organizations and
other systemically important institutions. The Treasury Policy
Statement calls for, among other things, stronger and higher
capital requirements for all banking firms. The Treasury Policy
Statement suggested that changes to the regulatory capital
framework be phased in over a period of several years. Treasury
seeks to reach a comprehensive international agreement on the
framework by December 31, 2010, with the implementation of
reforms by December 31, 2012. However, it remains possible
that U.S. bank regulatory agencies could officially adopt, or
informally implement, new capital standards at an earlier date.
On December 17, 2009, the Basel Committee issued a set
of proposals (the “Capital Proposals”) that would significantly
revise the definitions of Tier 1 capital and Tier 2 capital, with
the most significant changes being to Tier 1 capital. Most
notably, the Capital Proposals would disqualify certain
structured capital instruments, such as trust preferred securities,
from Tier 1 capital status. The Capital Proposals would also re-
emphasize that common equity is the predominant component
of Tier 1 capital by adding a minimum common equity to risk-
weighted assets ratio and requiring that goodwill, general
intangibles and certain other items that currently must be
deducted from Tier 1 capital instead be deducted from common
equity as a component of Tier 1 capital. The Capital Proposals
also leave open the possibility that the Basel Committee will
recommend changes to the minimum Tier 1 capital and total
capital ratios of 4.0% and 8.0%, respectively.
Concurrently with the release of the Capital Proposals, the
Basel Committee also released a set of proposals related to
liquidity risk exposure (the “Liquidity Proposals,” and together
with the Capital Proposals, the “2009 Basel Committee
Proposals”). The Liquidity Proposals include two measures of
liquidity based on risk exposure, one based on a 30-day time
horizon under an acute liquidity stress scenario and one