Fifth Third Bank 2010 Annual Report Download - page 134

132 Fifth Third Bancorp
Prior to the passage of the Dodd-Frank Act, a large IDI’s
DIF premiums principally were based on the size of an IDI’s
domestic deposit base. Section 331(b) of Dodd-Frank changed
the assessment base from an IDI’s domestic deposit base to its
total assets. In addition to potentially greatly increasing the size
of a large IDI’s assessment base, the expansion of the
assessment base affords the FDIC much greater flexibility to
vary its assessment system based upon the different asset
classes that large IDIs normally hold on their balance sheets.
To implement this provision, the FDIC created an
assessment scheme vastly different from the deposit-based
system. Under the new system, large IDIs will be assessed
under a complex “scorecard” methodology that seeks to capture
both the probability that an individual large IDI will fail and the
magnitude of the impact on the DIF if such a failure occurs.
Sections 23A and 23B of the Federal Reserve Act, restrict
transactions between a bank and an affiliated company,
including a parent bank holding company. The Bancorp’s
subsidiary bank is 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. Generally, the
Bancorp’s subsidiary bank is limited in its extension 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 acquiring other
financial institutions. 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 received a
“Satisfactory” CRA rating in its most recent CRA examination.
The FRB has established capital guidelines for bank
holding companies and FHCs. The FRB, the Division and the
FDIC 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 and well managed for the Bancorp to retain its status
as a FHC. In addition, as of the Dodd-Frank Act “transfer date”
(currently anticipated to be July 21, 2011), the Bancorp also
must be well capitalized and well managed to retain its financial
holding company status.
Historically, the minimum risk-based capital requirements
adopted by the federal banking agencies typically followed the
Capital Accord of the Basel Committee on Banking
Supervision. On December 16, 2010, the Basel Committee on
Banking Supervision (the “Basel Committee”) issued the final
text of a comprehensive update of the 2004 Basel II Accord
(“Basel III”). On January 13, 2011, the Basel Committee issued
an Annex to Basel III containing the final elements of reform to
the definition of regulatory capital. Basel III aims to reform the
international financial system by instituting significantly higher
global capital requirements and new liquidity and leverage
standards. Basel III is not itself binding, but rather must be
adopted into United States law or regulation before affecting
banks supervised in the United States. Moreover, if adopted in
the United States Basil III likely would not become effective
until 2013, and its provision would be subject to a multi-year
transition period.
Basel III significantly revises the definitions of regulatory
capital, establishing separate capital requirements for common
equity Tier 1 Capital (a new regulatory metric), Tier 1 Capital,
consisting of the sum of Tier 1 Common Equity and Additional
Tier 1 Capital, and Total Capital, consisting of the sum of Tier
1 Common Equity, Additional Tier 1 and Tier 2 Capital. Basel
III, if implemented, ultimately would require banks to maintain
a minimum Tier 1 Common Equity Capital ratio of 4.5%, a
minimum Tier 1 Capital ratio of 6%, and a minimum Total
Capital ratio of 8%. Among other significant reforms to the
definition of regulatory capital, Basel III disqualifies certain
structured capital instruments, such as trust preferred securities,
from Tier 1 capital status. (Dodd-Frank also disqualifies trust-
preferred and similar instruments over a three year period
beginning in 2013.) In addition to higher minimum capital
standards, Basel III also institutes new capital conservation and
countercyclical buffers that could, if fully implemented, create
significant incentive for banks to maintain up to an additional
5% above the minimum capital requirements.
Basel III also introduces two measures of liquidity based
on risk exposure, one based on a 30-day time horizon under an
acute liquidity stress scenario and one designed to promote
more medium and long-term funding of the assets and activities
of banks over a one-year time horizon.
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 bank’s policies
and procedures. The Bancorp’s subsidiary bank has