Fifth Third Bank 2014 Annual Report Download - page 79

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
77 Fifth Third Bancorp
Liquidity Coverage Ratio and Net Stable Funding Ratio
A key reform within the Basel III framework to strengthen
international liquidity standards was the introduction of the LCR
and NSFR. On January 7, 2013, the BCBS issued a final standard
for the LCR applicable to large internationally active banking
organizations. The BCBS plans on implementing the NSFR in 2018.
Section 165 of the DFA requires the FRB to establish
enhanced liquidity standards in the U.S. for BHCs with total assets
of $50 billion or greater. 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 finalized for BHCs with
$50 billion or more in total consolidated assets that are not
internationally active, such as Fifth Third. The Modified LCR
requires BHCs to maintain HQLA equal to its calculated net cash
outflows over a 30 calendar-day stress period multiplied by a factor
of 0.7. The modified LCR is effective January 1, 2016 and requires
BHCs to calculate its LCR on a monthly basis. The final rule
includes a transition period for the modified LCR in which BHCs
must maintain HQLA of 90% of its calculated net cash outflows for
2016 and then 100% beginning in 2017. The Bancorp estimates its
modified LCR was 112% at December 31, 2014 calculated under
the modified LCR final rule. For more information on LCR, refer to
the Non-GAAP Financial Measures section of MD&A.
Credit Ratings
The cost and availability of financing to the Bancorp are impacted
by its credit ratings. A downgrade to the Bancorp’s credit ratings
could affect its ability to access the credit markets and increase its
borrowing costs, thereby adversely impacting the Bancorp’s
financial condition and liquidity. Key factors in maintaining high
credit ratings include a stable and diverse earnings stream, strong
credit quality, strong capital ratios and diverse funding sources, in
addition to disciplined liquidity monitoring procedures.
The Bancorp’s credit ratings are summarized in Table 60. The
ratings reflect the ratings agencies view on the Bancorp’s capacity to
meet financial commitments. *
* As an investor, you should be aware that a security rating is not a
recommendation to buy, sell or hold securities, that it may be subject to revision
or withdrawal at any time by the assigning rating organization and that each
rating should be evaluated independently of any other rating. Additional
information on the credit rating ranking within the overall classification system is
located on the website of each credit rating agency.
TABLE 60: AGENCY RATINGS
A
s of February 25, 2015 Moody's Standard and Poor's Fitch DBRS
Fifth Third Bancorp:
Short-term No rating A-2 F1 R-1L
Senior debt Baa1 BBB+ A AL
Subordinated debt Baa2 BBB A- BBBH
Fifth Third Bank:
Short-term P-2 A-2 F1 R-1L
Long-term deposit A3 No rating A+ A
Senior debt A3 A- A A
Subordinated debt Baa1 BBB+ A- AL
OPERATIONAL RISK MANAGEMENT
The Bancorp faces ongoing and emerging risks and regulations
related to the activities that surround the delivery of banking and
financial products. The Bancorp believes that effective management
of operational risk plays a major role in both the level and the
stability of profitability. Operational risk is the risk of loss from
inadequate or failed internal processes, people or systems or from
external events. This includes, but is not limited to, the following
types of risk: business continuity risk, information management
risk, fraud risk, model risk, third party service provider risk, human
resources risk, and process risk.
The Bancorp’s risk management framework consists of five
integrated components, including identifying, assessing, managing,
monitoring, and reporting risks. The Operational Risk Management
function is responsible for developing and overseeing the
implementation of the Bancorp’s approach to managing operational
risk. This includes providing training, tools, guidance and oversight
to support implementation of key risk programs and systems as they
relate to operational risk management, such as risk and control self-
assessments, new product/initiative risk reviews, key risk indicators,
and operational losses. The function is also responsible for
developing reports that support the proactive management of
operational risk across the enterprise. The lines of business and
corporate functions are responsible for managing the operational
risks associated with their areas in accordance with the risk
management framework. The framework is intended to enable the
Bancorp to function with a sound and well-controlled operational
environment. These processes support the Bancorp’s goals to
minimize future operational losses and strengthen the Bancorp’s
performance by maintaining sufficient capital to absorb operational
losses that are incurred.
CAPITAL MANAGEMENT
Management regularly reviews the Bancorp’s capital levels to help
ensure it is appropriately positioned under various operating
environments. The Bancorp has established a Capital Committee
which is responsible for making capital plan recommendations to
management. These recommendations are reviewed by the ERM
Committee and the capital plan is approved by the Board of
Directors. The Capital Committee is responsible for execution
oversight of the capital actions of the capital plan.
Capital Ratios
The U.S banking agencies established quantitative measures that
assign risk weightings to assets and off-balance sheet items and also
define and set minimum regulatory capital requirements. The U.S.
banking agencies define “well-capitalized” ratios for Tier I and Total
risk-based capital as 6% and 10%, respectively. The Bancorp
exceeded these “well-capitalized” ratios for all periods presented.
The Basel II advanced approach framework was finalized by
U.S. banking agencies in 2007. Core banks, defined as those with
consolidated total assets in excess of $250 billion or on balance