Fifth Third Bank 2013 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33 Fifth Third Bancorp
regulators may advise it and its banking subsidiary to operate under
various restrictions as a prudential matter. Such supervisory actions
or restrictions, if and in whatever manner imposed, could have a
material adverse effect on Fifth Third’s business and results of
operations and may not be publicly disclosed.
Fifth Third and/or its affiliates are or may become involved
from time to time in information-gathering requests,
investigations and proceedings by various governmental
regulatory agencies and law enforcement authorities, as well
as self-regulatory agencies which may lead to adverse
consequences.
Fifth Third and/or its affiliates are or may become involved from
time to time in information-gathering requests, reviews,
investigations and proceedings (both formal and informal) by
governmental regulatory agencies and law enforcement authorities,
as well as self-regulatory agencies, including the SEC, regarding their
respective businesses. Such matters may result in material adverse
consequences, including without limitation, adverse judgments,
settlements, fines, penalties, injunctions or other actions,
amendments and/or restatements of Fifth Third’s SEC filings
and/or financial statements, as applicable, and/or determinations of
material weaknesses in its disclosure controls and procedures.
Deposit insurance premiums levied against Fifth Third Bank
may increase if the number of bank failures increase or the
cost of resolving failed banks increases.
The FDIC maintains a DIF to protect insured depositors in the
event of bank failures. The DIF is funded by fees assessed on
insured depository institutions including Fifth Third Bank. The
magnitude and cost of resolving an increased number of bank
failures have reduced the DIF. Future deposit premiums paid by
Fifth Third Bank depend on the level of the DIF and the magnitude
and cost of future bank failures. Fifth Third Bank also may be
required to pay significantly higher FDIC premiums because market
developments have significantly depleted the DIF of the FDIC and
reduced the ratio of reserves to insured deposits.
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact Fifth Third or the
businesses in which Fifth Third is engaged.
Fifth Third is subject to extensive state and federal regulation,
supervision and legislation that govern almost all aspects of its
operations and limit the businesses in which Fifth Third may
engage. These laws and regulations may change from time to time
and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds. The impact of any
changes to laws and regulations or other actions by regulatory
agencies may negatively impact Fifth Third or its ability to increase
the value of its business. Additionally, actions by regulatory agencies
or significant litigation against Fifth Third could cause it to devote
significant time and resources to defending itself and may lead to
penalties that materially affect Fifth Third and its shareholders.
Future changes in the laws, including tax laws, or regulations or
their interpretations or enforcement may also be materially adverse
to Fifth Third and its shareholders or may require Fifth Third to
expend significant time and resources to comply with such
requirements.
On July 21, 2010 the President of the United States signed into
law the Dodd-Frank Act. Many parts of the Dodd-Frank Act are
now in effect, while others are in an implementation stage likely to
continue for several years. A number of reform provisions are likely
to significantly impact the ways in which banks and bank holding
companies, including Fifth Third and its bank subsidiary, conduct
their business:
 The CFPB has been given authority to regulate
consumer financial products and services sold by
banks and non-bank companies and to supervise
banks with assets of more than $10 billion and their
affiliates for compliance with Federal consumer
protection laws. Any new regulatory requirements
promulgated by the CFPB could require changes to
our consumer businesses, result in increased
compliance costs and affect the streams of revenue of
such businesses. The FSOC has been charged with
identifying systemic risks, promoting stronger
financial regulation and identifying those non-bank
companies that are systemically important and thus
should be subject to regulation by the Federal
Reserve.
 The Dodd-Frank Act “Volcker Rule” provisions and
implementing final rule generally prohibit any
banking entity from (i) engaging in short-term
proprietary trading for its own account and (ii)
sponsoring or acquiring ownership interests in
private equity or hedge funds. The Volcker Rule,
however, contains a number of exceptions to these
prohibitions. For example, transactions on behalf of
customers or in connection with certain underwriting
and market making activities, as well as risk-
mitigating hedging activities and certain foreign
banking activities are permitted. The risk-mitigating
hedging exemption applies to hedging activities that
are designed to reduce or significantly mitigate
specific, identifiable risks of individual or aggregated
positions. Fifth Third is required to conduct an
analysis supporting its hedging strategy and the
effectiveness of hedges must be monitored and
recalibrated as necessary. Fifth Third will be required
to document, contemporaneously with the
transaction, the hedging rationale for certain
transactions that present heighted compliance risks.
Under the market-making exemption, a trading desk
is required to routinely stand ready to purchase and
sell one or more types of financial instruments. The
trading desk’s inventory in these types of financial
instruments has to be designed not to exceed, on an
ongoing basis, the reasonably expected near-term
demands of customers.
 The Volcker Rule and the rulemakings promulgated
thereunder restrict banks and their affiliated entities
from investing in or sponsoring certain private equity
and hedge funds. Fifth Third does not sponsor any
private equity or hedge funds that it is prohibited
from sponsoring. As of December 31, 2013, the
Bancorp had approximately $181 million in interests
and approximately $80 million in binding
commitments to invest in private equity funds likely
to be affected by the Volcker rule. It is expected that
over time the Bancorp may need to eliminate these
investments although it is likely that these
investments will be reduced over time in the ordinary
course before compliance is required. Fifth Third
expects to be able to hold these investments until July
2015 with no restriction, and be eligible to obtain up
to two one-year extension periods, subject to
regulatory approvals. A forced sale of some of these