Fifth Third Bank 2014 Annual Report Download - page 179

177 Fifth Third Bancorp
rule contains additional requirements applicable to any private
equity or hedge fund that is sponsored by the banking entity or for
which it serves as investment manager or investment advisor.
The Bancorp is required under the Final Rules to demonstrate that
it has a Volcker Rule compliance program. In connection with the
issuance of the Final Rules, the Federal Reserve extended the
conformance period generally until July 21, 2015. The Final
Rules became effective April 2014 and in December 2014, the
FRB extended the compliance period through July 2016 for
investments in and relationships with such covered funds that
were in place prior to December 31, 2013, and indicated that it
intends to further extend the compliance period for such
investments through July 2017. 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.
Derivatives
Title VII of the DFA 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.
In 2014, Fifth Third Bank registered as a swap dealer with the
CFTC and became subject to new substantive requirements,
including real time trade reporting and robust record keeping
requirements, business conduct requirements (including daily
valuations, disclosure of material risks associated with swaps and
disclosure of material incentives and conflicts of interest), and
mandatory clearing and exchange trading of all standardized
swaps designated by the relevant regulatory agencies as required
to be cleared. As with the Volcker Rule, Fifth Third Bank is
required to demonstrate that it has a satisfactory compliance
program to monitor the activities of the swap dealer and comply
with the applicable regulations. Although the ultimate impact of
the regulatory changes will depend on the promulgation of all
final regulations, Fifth Third Bank’ s derivatives business will
likely be further subject to additional substantive requirements
including margin requirements in excess of current market
practice and certain capital requirements. These requirements
may 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 DFA 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 DFA creates a new regulatory regime for large
BHCs. U.S. BHCs 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 the DFA 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 DFA 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 BHCs with $50 billion or
more in assets to determine whether they have adequate capital
available to absorb losses in baseline, adverse, or severely adverse
economic conditions. In November 2011, the FRB adopted final
rules requiring BHCs 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
institution’ s capital adequacy, internal capital adequacy,
assessment processes and capital distribution plans such as
dividend payments and stock repurchases. Banks are also required
to report certain data to the FRB on a quarterly basis to allow the
FRB to monitor progress against the approved capital plans.
The CCAR process is intended to help ensure that BHCs
have robust, forward-looking capital planning processes that
account for each company’ s unique risks and that permit
continued operations during times of economic and financial
stress. The 2015 CCAR required BHCs with consolidated assets
of $50 billion or more to submit a capital plan to the FRB by
January 5, 2015. The mandatory elements of the capital plan are
an assessment of the expected uses and sources of capital over a
nine-quarter 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 tests
require increased involvement by boards of directors in stress
testing and public disclosure of the results of both the FRB’ s
annual stress tests and a BHC’ s annual supervisory stress tests,
and semi-annual internal stress tests. The Bancorp submitted its
capital plan, along with all supporting materials, to the FRB on
January 5, 2015. The FRB will release the results of the
supervisory stress tests on March 5, 2015 and the related results
from the 2015 CCAR on March 11, 2015.
The FRB recently amended its capital planning and stress
testing rules to, among other things, generally limit a BHC’ s
ability to make quarterly capital distributions – that is, dividends
and share repurchases – commencing April 1, 2015 if the amount
of the bank’ s actual cumulative quarterly capital issuances of
instruments that qualify as regulatory capital are less than the
bank had indicated in its submitted capital plan as to which it
received a non-objection from the FRB. For example, if the BHC
issued a smaller amount of additional common stock than it had
stated in its capital plan, it would be required to reduce common
dividends and/or the amount of common stock repurchases so that
the dollar amount of capital distributions, net of the dollar amount
of additional common stock issued (“net distributions”), is no
greater than the dollar amount of net distributions relating to its
common stock included in its capital plan, as measured on an
aggregate basis beginning in the third quarter of the nine-quarter
planning horizon through the end of the then current quarter.
However, not raising sufficient amounts of common stock as
planned would not affect distributions related to Additional Tier I
Capital instruments and/ or Tier II Capital. These limitations also
contain several important qualifications and exceptions, including
that scheduled dividend payments on (as opposed to repurchases
of) a BHC’ s Additional Tier I Capital and Tier II Capital
instruments are not restricted if the BHC fails to issue a sufficient
amount of such instruments as planned, as well as provisions for
certain de minimis excess distributions.
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
minimum capital requirements and introduces capital