Fifth Third Bank 2013 Annual Report Download - page 82

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
80 Fifth Third Bancorp
sheet foreign exposures of $10 billion were required to adopt the
advanced approach effective April 1, 2008. The Bancorp does not
meet these thresholds and, therefore, is not subject to the
requirements of Basel II.
The Dodd-Frank Act requires more stringent prudential
standards, including capital and liquidity requirements, for larger
institutions. It addresses the quality of capital components by
limiting the degree to which certain hybrid instruments can be
included. The Dodd-Frank Act will phase out the inclusion of
certain TruPS as a component of Tier I risk-based capital when the
Bancorp implements the revised regulatory capital rules known as
Basel III.
In December of 2010 and revised in June of 2011, the BCBS
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. In July of
2013, U.S. banking regulators approved final enhanced regulatory
capital requirements (Basel III Final Rule), which included
modifications to the proposed rules. The Basel III Final Rule
provides for certain banks, 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 Basel III Final Rule will phase out the inclusion of
certain TruPS as a component of Tier I capital. Under these
provisions, these TruPS would qualify as a component of Tier II
capital. At December 31, 2013 the Bancorp’s Tier I capital included
$60 million of TruPS representing approximately 5 bps of risk
weighted assets. The Basel III Final Rule is effective for the
Bancorp on January 1, 2015, subject to phase-in periods for certain
of its components and other provisions. The Bancorp is in the
process of evaluating the Basel III Final Rule and its potential
impact. The Bancorp’s current estimate of the pro-forma fully
phased in Tier I common equity ratio at December 31, 2013 under
the Basel III Final Rule is approximately 8.99% compared with
9.39% as calculated under the existing Basel I capital framework.
The primary drivers of the change from the existing Basel I capital
framework to the Basel III Final Rule are an increase in Tier I
common equity of approximately 75 bps (primarily from the
elimination of the current 10% deduction of mortgage servicing
rights from capital), which would be more than offset by the impact
of increases in risk-weighted assets (primarily from the treatment of
securitizations, mortgage servicing rights and commitments with an
original maturity of one year or less). If the Bancorp elects to
include AOCI components in capital, the December 31, 2013 pro
forma Basel III Final Rule Tier 1 common ratio would be increased
by approximately 7 bps. The pro-forma Tier I common equity ratio
exceeds the proposed minimum Tier I common equity ratio of 7%
comprised of a minimum of 4.5% plus a capital conservation buffer
of 2.5%. The pro-forma Tier I common equity ratio does not
include the effect of any mitigating actions the Bancorp may
undertake to offset the impact of the proposed capital
enhancements. Additionally, pursuant to the Basel III Final Rule,
the minimum capital ratios as of January 1, 2015 will be 6% for the
Tier I capital ratio, 8% for the total risk-based capital ratio and 4%
for the Tier I capital to average consolidated assets (leverage ratio).
For further discussion on the Basel I and Basel III Tier I common
equity ratios, see the Non-GAAP Financial Measures section of
MD&A.
Market Risk Rule
On June 7, 2012, banking agencies approved a final rule effective
January 1, 2013, titled as “Risk-Based Capital Guidelines: Market
Risk,” to implement enhancements to the market risk framework
adopted by the BCBS. The final rule, to which the Bancorp is
subject, requires banking organizations with significant trading
activities to adjust their capital requirements to better account for
the market risks of those activities. The rule introduces new
measures of market risk, establishes a charge related to stressed VaR
for covered trading positions and replaces references to credit
ratings in the market risk rules with alternative methodologies for
assessing risk. The intention of the rule is to better capture positions
for which the market risk capital rule is appropriate, reduce
procyclicality in market risk capital requirements, enhance sensitivity
to risks that are not adequately captured by the current regulatory
methodologies and increase transparency through enhanced
disclosures. Upon the adoption of the market risk final rule in the
first quarter of 2013, the Bancorp’s Tier I and total risk-based
capital ratios decreased 1 bp and adoption had an immaterial impact
to the Tier I common equity ratio.
TABLE 60: CAPITAL RATIOS
As of December 31 ($ in millions) 2013 2012 2011 2010 2009
Average equity as a percent of average assets 11.56 % 11.65 11.41 12.22 11.36
Tangible equity as a percent of tangible assets(a) 9.44 9.17 9.03 10.42 9.71
Tangible common equity as a percent of tangible assets(a) 8.63 8.83 8.68 7.04 6.45
Tier I capital $ 12,094 11,685 12,503 13,965 13,428
Total risk-based capital 16,440 15,816 16,885 18,178 17,648
Risk-weighted assets(b) 116,736 109,699 104,945 100,561 100,933
Regulatory capital ratios:
Tier I risk-based capital 10.36 % 10.65 11.91 13.89 13.30
Total risk-based capital 14.08 14.42 16.09 18.08 17.48
Tier I leverage 9.64 10.05 11.10 12.79 12.34
Tier I common equity(a) 9.39 9.51 9.35 7.48 6.99
(a) For further information on these ratios, see the Non-GAAP Financial Measures section of MD&A.
(b) Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar
amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp’s total risk-weighted assets.