Fifth Third Bank 2014 Annual Report Download - page 20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18 Fifth Third Bancorp
The BHCs that participated in the 2014 CCAR, including the
Bancorp, were required to conduct mid-cycle company-run stress
tests using data as of March 31, 2014. The stress tests must be based
on three BHC defined economic scenarios – baseline, adverse and
severely adverse. As required, the Bancorp reported the mid-cycle
stress test results to the FRB on July 7, 2014. In addition, the
Bancorp published a Form 8-K providing a summary of the results
under the severely adverse scenario on September 18, 2014, which is
available on Fifth Third’s website at https://www.53.com. These
results represented estimates of the Bancorp’s results from the
second quarter of 2014 through the second quarter of 2016 under
the severely adverse scenario, which is considered highly unlikely to
occur.
Fifth Third offers qualified deposit customers a deposit
advance product if they choose to avail themselves of this product
to meet short-term, small-dollar financial needs. In April of 2013,
the CFPB issued a “White Paper” which studied financial services
industry offerings and customer use of deposit advance products as
well as payday loans and is considering whether rules governing
these products are warranted. At the same time, the OCC and FDIC
each issued proposed supervisory guidance for public comment to
institutions they supervise which supplements existing OCC and
FDIC guidance, detailing the principles they expect financial
institutions to follow in connection with deposit advance products
and supervisory expectations for the use of deposit advance
products. The Federal Reserve also issued a statement in April of
2013 to state member banks like Fifth Third for whom the Federal
Reserve is the primary regulator. This statement encouraged state
member banks to respond to customers’ small-dollar credit needs in
a responsible manner; emphasized that they should take into
consideration the risks associated with deposit advance products,
including potential consumer harm and potential elevated
compliance risk; and reminded them that these product offerings
must comply with applicable laws and regulations.
Fifth Third’s deposit advance product is designed to fully
comply with the applicable federal and state laws and use of this
product is subject to strict eligibility requirements and advance
restriction guidelines to limit dependency on this product as a
borrowing source. The Bancorp’s deposit advance balances are
included in other consumer loans and leases in the Bancorp’s
Consolidated Balance Sheets and represent substantially all of the
revenue reported in interest and fees on other consumer loans and
leases in the Bancorp’s Consolidated Statements of Income and in
Table 8 in the Statements of Income Analysis section of MD&A.
On January 17, 2014, given developments in industry practice, Fifth
Third announced that it would no longer enroll new customers in its
deposit advance product and expected to phase out the service to
existing customers by the end of 2014. To avoid a disruption to its
existing customers during the extension period while the banking
industry awaits further regulatory guidance on the deposit advance
product, on November 3, 2014, Fifth Third announced changes to
its current deposit advance product for existing customers
beginning January 1, 2015, including a lower transaction fee, an
extended repayment period and a reduced maximum advance
period. The Bancorp currently expects to continue to offer the
service to existing deposit advance customers until further
regulatory guidance is provided. The Bancorp currently expects
these changes to the deposit advance product to negatively impact
net interest income by approximately $100 million in 2015.
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 the final enhanced
regulatory capital rules (Basel III Final Rule), which included
modifications to the proposed rules. The Bancorp continues to
evaluate the Basel III Final Rule and its potential impact. For more
information on the impact of the regulatory capital enhancements,
refer to the Capital Management section of MD&A. Refer to the
Non-GAAP section of MD&A for an estimate of the Basel III Tier
I common equity ratio.
On December 10, 2013, the banking agencies finalized section
619 of the DFA, known as the Volcker Rule, which became
effective April 1, 2014. Though the final rule was effective April 1,
2014, the FRB granted the industry an extension of time until July
21, 2015 to conform certain of its activities related to proprietary
trading to comply with the Volcker Rule. In addition, the FRB has
granted the industry an extension of time until July 21, 2016, and
announced its intention to grant a one year extension of the
conformance period until July 21, 2017, to conform certain
ownership interests in, sponsorship activities of and relationships
with private equity or hedge funds as well as holding certain
collateralized loan obligations that were in place as of December 31,
2013. It is possible that additional conformance period extensions
could be granted either to the entire industry, or, upon request, to
requesting banking organizations on a case-by-case basis. The final
rule prohibits banks and bank holding companies from engaging in
short-term proprietary trading of certain securities, derivatives,
commodity futures and options on these instruments for their own
account. The Volcker Rule also restricts banks and their affiliated
entities from owning, sponsoring or having certain relationships
with private equity and hedge funds, as well as holding certain
collateralized loan obligations that are deemed to contain ownership
interests. Exemptions are provided for certain activities such as
underwriting, market making, hedging, trading in certain
government obligations and organizing and offering a hedge fund or
private equity fund. Fifth Third does not sponsor any private equity
or hedge funds that, under the final rule, it is prohibited from
sponsoring. As of December 31, 2014, the Bancorp held no
collateralized loan obligations. As of December 31, 2014, the
Bancorp had approximately $165 million in interests and
approximately $60 million in binding commitments to invest in
private equity funds that are affected by the Volcker Rule. It is
expected that over time the Bancorp may need to sell or redeem
these investments, however no formal plan to sell has been
approved as of December 31, 2014. As a result of the announced
conformance period extension, the Bancorp believes it is likely that
these investments will be reduced over time in the ordinary course
of events before compliance is required.
On October 10, 2014, the U.S. Banking Agencies published
final rules implementing a quantitative liquidity requirement
consistent with the LCR standard established by the BCBS for large
internationally active banking organizations, generally those with
$250 billion or more in total consolidated assets or $10 billion or
more in on-balance sheet foreign exposure. In addition, a modified
LCR requirement was implemented for BHCs with $50 billion or
more in total consolidated assets but that are not internationally
active, such as Fifth Third. The modified LCR is effective January 1,
2016 and requires BHCs to calculate its LCR on a monthly basis.
Refer to the Liquidity Risk Management section of MD&A for
further discussion on these ratios.
On July 31, 2013, the U.S. District Court for the District of
Columbia issued an order granting summary judgment to the
plaintiffs in a case challenging certain provisions of the FRB’s rule
concerning electronic debit card transaction fees and network