Fifth Third Bank 2014 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
35 Fifth Third Bancorp
adopted a final rule to implement an assessment
provision under the DFA equal to the expense the
FRB estimates are necessary or appropriate to
supervise and regulate bank holding companies with
$50 billion or more in assets.
xOn 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 exclusivity arrangements (the “Current
Rule”) that were adopted to implement Section 1075
of the DFA, known as the Durbin Amendment. The
Court held that, in adopting the Current Rule, the
FRB violated the Durbin Amendment’s provisions
concerning which costs are allowed to be taken into
account for purposes of setting fees that are
reasonable and proportional to the costs incurred by
the issuer and therefore the Current Rule’s maximum
permissible fees were too high. In addition, the Court
held that the Current Rule’s network non-exclusivity
provisions concerning unaffiliated payment networks
for debit cards also violated the Durbin Amendment.
The Court vacated the Current Rule, but stayed its
ruling to provide the FRB an opportunity to replace
the invalidated portions. The FRB appealed this
decision and on March 21, 2014, the D.C. Circuit
Court of Appeals reversed the District Court’s grant
of summary judgment and remanded the case for
further proceedings in accordance with its opinion.
The merchants have filed a petition for writ of
certiorari to the U.S. Supreme Court. However, on
January 20, 2015, the U.S. Supreme Court declined to
hear an appeal of the Circuit Court reversal, thereby
largely upholding the Current Rule and substantially
reducing uncertainty surrounding debit card
interchange fees the Bancorp is permitted to charge.
Refer to the Noninterest Income subsection of the
Statements of Income Analysis section of MD&A for
further information regarding the Bancorp’s debit
card interchange revenue.
It is clear that the reforms, both under the DFA and otherwise, are
having a significant effect on the entire financial industry. Fifth
Third believes compliance with the DFA and implementing its
regulations and other initiatives will likely continue to negatively
impact revenue and increase the cost of doing business, both in
terms of transition expenses and on an ongoing basis, and may also
limit Fifth Third’s ability to pursue certain desirable business
opportunities. Any new regulatory requirements or changes to
existing requirements could require changes to Fifth Third’s
businesses, result in increased compliance costs and affect the
profitability of such businesses. Additionally, reform could affect
the behaviors of third parties that we deal with in the course of our
business, such as rating agencies, insurance companies and
investors. The extent to which Fifth Third can adjust its strategies to
offset such adverse impacts also is not known at this time.
Fifth Third and/or its affiliates are or may become the subject
of litigation which could result in legal liability and damage to
Fifth Third’s reputation.
Fifth Third and certain of its directors and officers have been
named from time to time as defendants in various class actions and
other litigation relating to Fifth Third’s business and activities. Past,
present and future litigation have included or could include claims
for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The SEC has announced a
policy of seeking admissions of liability in certain settled cases,
which could adversely impact the defense of private litigation. These
matters could result in material adverse judgments, settlements,
fines, penalties, injunctions or other relief, 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. Like other
large financial institutions and companies, Fifth Third is also subject
to risk from potential employee misconduct, including non-
compliance with policies and improper use or disclosure of
confidential information. Substantial legal liability or significant
regulatory action against Fifth Third could materially adversely
affect its business, financial condition or results of operations
and/or cause significant reputational harm to its business.
Fifth Third’s ability to pay or increase dividends on its
common stock or to repurchase its capital stock is restricted.
Fifth Third’s ability to pay dividends or repurchase stock is subject
to regulatory requirements and the need to meet regulatory
expectations. Fifth Third is subject to an annual assessment by the
FRB as part of CCAR. The mandatory elements of the capital plan
are an assessment of the expected use and sources of capital over
the 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 capital plan must reflect the revised capital
framework that the FRB adopted in connection with the
implementation of the Basel III accord, including the framework’s
minimum regulatory capital ratios and transition arrangements. Fifth
Third’s stress testing results and 2015 capital plan were submitted to
the FRB on January 5, 2015.
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
assumptions and the analysis underlying the capital plan.
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier I common ratio of 5 percent under baseline and
stressful conditions throughout a nine-quarter planning horizon.