Fifth Third Bank 2013 Annual Report Download - page 180

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178 Fifth Third Bancorp
of the FRB general extension, the Bancorp will have until July 21,
2015 to fully conform its activities and investments to the Final
Rules. The FRB may extend the conformance period for two
additional one-year periods. Further, with respect to covered
funds that are “illiquid funds”, the FRB has the authority to grant
up to five more years for the Bancorp to conform to the final
Volcker Rule with respect to such illiquid funds. The Bancorp
does not know whether it will be granted any extension of time to
conform its activities to the final Volcker Rule.
Derivatives
Title VII of 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. Certain affiliates of the Bancorp that engage
in significant swaps activities may be required to register with the
Commodity Futures Trading Commission or the SEC as a swap
dealer, security0based swap dealer, major swap participant or
major security-based swap participant. 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
such entity 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, a state bank chartered in that state would be permitted
to establish a branch.
Systemically Significant Companies and Capital
Title I of the Dodd-Frank Act creates a new regulatory regime for
large bank holding companies. U.S. bank holding companies with
$50 billion or more in total consolidated assets, including Fifth
Third, are subject to enhanced prudential standards and early
remediation requirements under Title I. Title I of 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 requires the FRB to impose enhanced
capital and risk-management standards on these firms and
mandates the FRB 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.
In November 2013, the FRB provided instructions on the
2014 Comprehensive Capital Analysis and Review (“CCAR”).
The 2014 CCAR required bank holding companies with
consolidated assets of $50 billion or more to submit a capital plan
to the FRB by January 6, 2014. 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.
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 U.S. 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 December of 2010 and revised in June of 2011, the Basel
Committee on Banking Supervision (the “Basel Committee”)
issued Basel III, a global regulatory framework, to enhance
international capital standards. 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.
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. In July of
2013, U.S. banking regulators approved the final enhanced
regulatory capital rules (“Final Capital Rules”), which included
modifications to the proposed rules.
The Final Capital Rules, among other things, (i) introduce a
new capital measure “Common Equity Tier 1” (“CET1”), (ii)
specify that Tier 1 capital consists of CET1 and “Additional Tier
1 capital” instruments meeting specified requirements, (iii) define
CET1 narrowly by requiring that most adjustments to regulatory
capital measures be made to CET1 and not to the other
components of capital and (iv) expand the scope of the
adjustments as compared to existing regulations. CET1 capital
consists of common stock instruments that meet the eligibility
criteria in the final rules, retained earnings, accumulated other
comprehensive income and common equity Tier 1 minority
interest.
When fully phased-in on January 1, 2019, the Final Capital
Rules require banking organizations to maintain (i) a minimum
ratio of CET1 to risk-weighted assets of at least 4.5%, plus a
2.5% “capital conservation buffer” (which is added to the 4.5%
CET1 ratio as that buffer is phased-in, effectively resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7.0%
upon full implementation), (ii) a minimum ratio of Tier 1 capital
to risk-weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier 1 capital
ratio as that buffer is phased-in, effectively resulting in a
minimum Tier 1 capital ratio of 8.5% upon full implementation),