Fifth Third Bank 2013 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32 Fifth Third Bancorp
experienced weather events including hurricanes and other natural
disasters. The nature and level of these events and the impact of
global climate change upon their frequency and severity cannot be
predicted. If large scale events occur, they may significantly impact
its loan portfolios by damaging properties pledged as collateral as
well as impairing its borrowers’ ability to repay their loans.
RISKS RELATED TO THE LEGAL AND REGULATORY
ENVIRONMENT
As a regulated entity, the Bancorp is subject to certain capital
requirements that may limit its operations and potential
growth.
The Bancorp is a bank holding company and a financial holding
company. As such, it is subject to the comprehensive, consolidated
supervision and regulation of the FRB, including risk-based and
leverage capital requirements. The Bancorp must maintain certain
risk-based and leverage capital ratios as required by the FRB which
can change depending upon general economic conditions and the
Bancorp’s particular condition, risk profile and growth plans.
Compliance with the capital requirements, including leverage ratios,
may limit operations that require the intensive use of capital and
could adversely affect the Bancorp’s ability to expand or maintain
present business levels.
In June 2012, Federal banking agencies proposed
enhancements to the regulatory capital requirements for U.S.
banking organizations, which implemented 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 1 common equity ratio. In July
2013, the Federal banking agencies issued final rules for the
enhanced regulatory capital requirements, which included
modifications to the proposed rules. The final rules provide the
option for certain banking organizations, including the Bancorp, to
opt out of including AOCI in Tier 1 capital and retain the treatment
of residential mortgage exposures consistent with the current Basel I
capital rules. The new capital rules are effective for the Bancorp on
January 1, 2015, subject to phase-in periods for certain components
and other provisions. The need to maintain more and higher quality
capital as well as greater liquidity going forward could limit our
business activities, including lending, and our ability to expand,
either organically or through acquisitions. In addition, the new
liquidity standards could require us to increase our holdings of
highly liquid short-term investments, thereby reducing our ability to
invest in longer-term assets even if more desirable from a balance
sheet management perspective. Moreover, although these new
requirements are being phased in over time, U.S. Federal banking
agencies have been taking into account expectations regarding the
ability of banks to meet these new requirements, including under
stressed conditions, in approving actions that represent uses of
capital, such as dividend increases and share repurchases.
The Bancorp’s banking subsidiary must remain well-capitalized,
well-managed and maintain at least a “Satisfactory” CRA rating for
the Bancorp to retain its status as a financial holding company.
Failure to meet these requirements could result in the FRB placing
limitations or conditions on the Bancorp’s activities (and the
commencement of new activities) and could ultimately result in the
loss of financial holding company status. In addition, failure by the
Bancorp’s banking subsidiary to meet applicable capital guidelines
could subject the bank to a variety of enforcement remedies
available to the federal regulatory authorities. These include
limitations on the ability to pay dividends, the issuance by the
regulatory authority of a capital directive to increase capital, and the
termination of deposit insurance by the FDIC.
Fifth Third’s business, financial condition and results of
operations could be adversely affected by new or changed
regulations and by the manner in which such regulations are
applied by regulatory authorities.
Current economic conditions, particularly in the financial markets,
have resulted in government regulatory agencies placing increased
focus on and scrutiny of the financial services industry. The U.S.
government has intervened on an unprecedented scale, responding
to what has been commonly referred to as the financial crisis, by
introducing various actions and passing legislation such as the
Dodd-Frank Act. Such programs and legislation subject Fifth Third
and other financial institutions to restrictions, oversight and/or
costs that may have an impact on Fifth Third’s business, financial
condition, results of operations or the price of its common stock.
New proposals for legislation and regulations continue to be
introduced that could further substantially increase regulation of the
financial services industry. Fifth Third cannot predict whether any
pending or future legislation will be adopted or the substance and
impact of any such new legislation on Fifth Third. Additional
regulation could affect Fifth Third in a substantial way and could
have an adverse effect on its business, financial condition and
results of operations.
On November 21, 2013, the OCC and FDIC separately issued
guidance on deposit advance loans. The guidance establishes
numerous expectations for institutions that offer such products. It
covers matters such as consumer eligibility, capital adequacy, fees,
compliance, management oversight, and third-party relationships.
Fifth Third’s deposit advance product was designed to fully comply
with all applicable federal and state laws. However, given industry
developments, Fifth Third determined to cease enrolling customers
in its deposit advance product as of January 31, 2014 and will phase
out its service to existing deposit advance customers by December
31, 2014.
Fifth Third is subject to various regulatory requirements that
may limit its operations and potential growth.
Under federal and state laws and regulations pertaining to the safety
and soundness of insured depository institutions and their holding
companies, the FRB, the FDIC, the CFPB and the Ohio Division of
Financial Institutions have the authority to compel or restrict certain
actions by Fifth Third and its banking subsidiary. Fifth Third and its
banking subsidiary are subject to such supervisory authority and,
more generally, must, in certain instances, obtain prior regulatory
approval before engaging in certain activities or corporate decisions.
There can be no assurance that such approvals, if required, would
be forthcoming or that such approvals would be granted in a timely
manner. Failure to receive any such approval, if required, could limit
or impair Fifth Third’s operations, restrict its growth and/or affect
its dividend policy. Such actions and activities subject to prior
approval include, but are not limited to, increasing dividends paid by
Fifth Third or its banking subsidiary, entering into a merger or
acquisition transaction, acquiring or establishing new branches, and
entering into certain new businesses.
In addition, Fifth Third, as well as other financial institutions
more generally, have recently been subjected to increased scrutiny
from regulatory authorities stemming from broader systemic
regulatory concerns, including with respect to stress testing, capital
levels, asset quality, provisioning and other prudential matters,
arising as a result of the recent financial crisis and efforts to ensure
that financial institutions take steps to improve their risk
management and prevent future crises.
In some cases, regulatory agencies may take supervisory actions
that may not be publicly disclosed, which restrict or limit a financial
institution. Finally, as part of Fifth Third’s regular examination
process, Fifth Third’s and its banking subsidiary’s respective