Fifth Third Bank 2011 Annual Report Download - page 160

158 Fifth Third Bancorp
contains additional requirements applicable to any private equity
or hedge fund that is sponsored by the banking entity or for which
it serves as investment manager or investment advisor. The
Bancorp will be required to demonstrate that it has a satisfactory
compliance programs specifically to monitor compliance with the
Volcker rule.
Derivatives
The Dodd-Frank Act includes measures to broaden the scope of
derivative instruments subject to regulation by requiring clearing
and exchange trading of certain derivatives, imposing new capital
and margin requirements for certain market participants and
imposing position limits on certain over-the-counter derivatives.
To the extent that the Bancorp acts in certain capacities in trading
derivatives or trades a certain amount of certain derivatives
instruments, then certain affiliates of the Bancorp may be
required to register with the Commodity Futures Trading
Commission or the SEC. As with the Volcker Rule, the Bancorp
will be required to demonstrate that it has a satisfactory
compliance program to monitor the activities of any swap dealer
or major swap participant registered under the new regulations.
The ultimate impact of these derivatives regulations, and the time
it will take to comply, continues to remain uncertain. The final
regulations will impose additional operational and compliance
costs on us and may require us to restructure certain businesses
and negatively impact our revenues and results of operations.
Interstate Bank Branching
The Dodd-Frank Act includes provisions permitting national and
insured state banks to engage in de novo interstate branching if,
under the laws of the state where the new branch is to be
established, as state bank chartered in that state would be
permitted to establish a branch.
Systemically Significant Companies and Capital
The Dodd-Frank Act creates a new regulatory regime for entities
that are deemed to be “systemically significant financial
companies.” The Dodd-Frank Act sets a $50 billion consolidated
asset floor for a bank holding company to be subject to the
heightened oversight and regulation, although the FRB can adjust
those amounts upward for some of the heightened standards under
certain circumstances. Dodd-Frank establishes a broad framework
for identifying, applying heightened supervision and regulation
to, and (as necessary) limiting the size and activities of
systemically significant financial companies.
The Dodd-Frank Act instructs the FRB to impose enhanced
capital and risk-management standards on large financial firms
and mandates the Federal Reserve to conduct annual stress tests
on all bank holding companies with $50 billion or more in assets
to determine whether they have the capital needed to absorb
losses in baseline, adverse, and severely adverse economic
conditions. In November 2011, the FRB adopted final rules
requiring bank holding companies with $50 billion or more in
consolidated assets to submit capital plans to the FRB on an
annual basis. Under the final rules, the FRB annually will
evaluate an institutions capital adequacy, internal capital
adequacy, assessment processes and plans to make capital
distributions such as dividend payments and stock repurchases.
Also in November 2011, the FRB launched the 2012
Comprehensive Capital Analysis and Review (“CCAR”), which
required certain large organizations, such as the Bancorp, to
submit capital plans by January 9, 2012. As part of the CCAR,
the FRB will also carry out a supervisory stress test. An
organization’ s capital adequacy and its plans to make capital
distributions will be assessed against a number of criteria,
including projected performance under stress scenarios.
In December 2011, the FRB issued proposed rules to
strengthen regulation and supervision of large bank holding
companies and systemically important nonbank financial firms.
The proposed rules would generally apply to all US bank holding
companies with consolidated assets of $50 billion or more, such
as the Bancorp, and any nonbank financial firms that may be
designated by the FSOC as systemically important companies.
The proposal, which is mandated by the Dodd-Frank Act,
includes a wide range of measures addressing such issues as
capital, liquidity, credit exposure, stress testing, risk management
and early remediation requirements. In particular, the proposal
includes proposed risk-based capital and leverage requirements
that would be implemented in two phases, the first phase would
be subject to the FRB’ s capital plan rule issued in November
2011. The second phase would involve the FRB issuing a
proposal to implement a risk-based capital surcharge based on the
framework and methodology developed by the Basel Committee
on Banking Supervision (the “Basel Committee”), the current
version referred to as “Basel III.”
Basel III is designed to materially improve the quality of
regulatory capital and introduces a new minimum common equity
requirement. Basel III also raises the numerical minimum capital
requirements and introduces capital conservation and
countercyclical buffers to induce banking organizations to hold
capital in excess of regulatory minimums. In addition, Basel III
establishes an international leverage standard for internationally
active banks. The FRB is working with other U.S. banking
regulators to implement the Basel III capital reforms in the United
States. It is not anticipated that such implementing rules would
be issued until 2013 or 2014 and there would most likely be a
phase-in period.