Fifth Third Bank 2012 Annual Report Download - page 20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18 Fifth Third Bancorp
Legislative Developments
On July 21, 2010, the Dodd-Frank Act was signed into federal law.
This act implements changes to the financial services industry and
affects the lending, deposit, investment, trading and operating
activities of financial institutions and their holding companies. The
legislation establishes a CFPB responsible for implementing and
enforcing compliance with consumer financial laws, changes the
methodology for determining deposit insurance assessments, gives
the FRB the ability to regulate and limit interchange rates charged to
merchants for the use of debit cards, enacts new limitations on
proprietary trading, broadens the scope of derivative instruments
subject to regulation, requires on-going stress tests and the
submission of annual capital plans for certain organizations and
requires changes to regulatory capital ratios. This act also calls for
federal regulatory agencies to conduct multiple studies over the next
several years in order to implement its provisions.
The Bancorp was impacted by a number of the components of
the Dodd-Frank Act which were implemented during 2011. The
CFPB began operations on July 21, 2011. The CFPB holds primary
responsibility for regulating consumer protection by enforcing
existing consumer laws, writing new consumer legislation,
conducting bank examinations, monitoring and reporting on
markets, as well as collecting and tracking consumer complaints.
The FRB final rule implementing the Dodd-Frank Act’s “Durbin
Amendment”, which limits debit card interchange fees, was issued
on July 21, 2011 for transactions occurring after September 30,
2011. The final rule establishes a cap on the fees banks with more
than $10 billion in assets can charge merchants for debit card
transactions. The fee was set at $.21 per transaction plus an
additional 5 bps of the transaction amount and $.01 to cover fraud
losses. The FRB repealed Regulation Q as mandated by the Dodd-
Frank Act on July 21, 2011. Regulation Q was implemented as part
of the Glass-Steagall Act in the 1930’s and provided a prohibition
against the payment of interest on commercial demand deposits.
While the total impact of the fully-implemented Dodd-Frank Act on
Fifth Third is not currently known, the impact is expected to be
substantial and may have an adverse impact on Fifth Third’s
financial performance and growth opportunities.
In December of 2010 and revised in June of 2011, the Basel
Committee on Banking Supervision issued Basel III, a global
regulatory framework, to enhance international capital standards. In
June of 2012, U.S. banking regulators proposed enhancements to
the regulatory capital requirements for U.S. banks, which implement
aspects of Basel III, such as re-defining the regulatory capital
elements and minimum capital ratios, introducing regulatory capital
buffers above those minimums, revising the agencies’ rules for
calculating risk-weighted assets and introducing a new Tier I
common equity ratio. The Bancorp continues to evaluate these
proposals and their potential impact. For more information on the
impact of the proposed regulatory capital enhancements, refer to
the Capital Management section of the MD&A.
On October 9, 2012, the FRB published final stress testing
rules that implement section 165(i)(1) and (i)(2) of the Dodd-Frank
Act. The 19 bank holding companies that participated in the 2009
SCAP and subsequent CCAR, which includes Fifth Third, are
subject to the final stress testing rules. The rules require both
supervisory and company-run stress tests, which provide forward-
looking information to supervisors to help assess whether
institutions have sufficient capital to absorb losses and support
operations during adverse economic conditions.
The FRB launched the 2013 stress testing program and CCAR
on November 9, 2012. The CCAR requires bank holding companies
to submit a capital plan in addition to their stress testing results. The
mandatory elements of the capital plan are an assessment of the
expected use and sources of capital over the planning horizon, a
description of all planned capital actions over the planning horizon,
a discussion of any expected changes to the Bancorp’s business plan
that are likely to have a material impact on its capital adequacy or
liquidity, a detailed description of the Bancorp’s process for
assessing capital adequacy and the Bancorp’s capital policy. The
stress testing results and capital plan were submitted by the Bancorp
to the FRB on January 7, 2013.
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
assumptions and the analysis underlying the capital plan.
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier 1 common ratio of 5 percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB will also assess the Bancorp’s strategies for
addressing proposed revisions to the regulatory capital framework
agreed upon by the Basel Committee on Banking Supervision and
requirements arising from the Dodd-Frank Act.
The FRB has indicated that it expects to disclose on March 7,
2013 its estimates of participating institutions results under the FRB
supervisory stress scenario, including capital results, which assume
that all banks take certain consistently applied future capital actions.
The FRB has indicated that it expects to disclose on March 14, 2013
its estimates of participating institutions results under the FRB
supervisory severe stress scenarios including capital results based on
each company’s own base scenario capital actions. The FRB will
also issue an objection or non-objection to each participating
institution’s capital plan submitted under CCAR. Additionally, as a
CCAR institution, Fifth Third is required to disclose our own
estimates of results under the supervisory severely adverse scenario
using the same consistently applied capital actions noted above, and
to provide information related to risks included in its stress testing;
a summary description of the methodologies used; estimates of
aggregate pre-provision net revenue, losses, provisions, and pro
forma capital ratios at the end of the forward-looking planning
horizon of at least nine quarters; and an explanation of the most
significant causes of changes in regulatory capital ratios. These
disclosures are required by March 31, 2013 and are to be sent to the
FRB and publicly disclosed.
In January of 2013, the CFPB issued several final regulations
and changes to certain consumer protections under existing laws.
These regulations are intended to strengthen consumer protections
for high-cost mortgages, amend escrow requirements under the
Truth in Lending Act, require mortgage lenders to consider the
consumers’ ability to repay home loans before extending them
credit, implement mortgage servicing rules, amend the Equal Credit
Opportunity Act regarding appraisals and other written valuations
for first lien residential mortgage loans and revises the Truth in
Lending Act to strengthen loan originator qualification requirements
and regulate industry compensation practices. These regulations take
effect in 2014 except for the escrow requirements and certain
provisions of the compensation rules under the Truth in Lending
Act which takes effect on June 1, 2013. The Bancorp is currently
assessing the impact these new regulations will have on its
Consolidated Financial Statements.