KeyBank 2013 Annual Report Download - page 25

U.S. implementation of the Basel III liquidity framework
In November 2013, the federal banking agencies published a joint NPR seeking comment on proposed rules that
would create a minimum liquidity coverage ratio (“LCR”) for certain internationally active bank and nonbank
financial companies (not including Key) and a modified version of the LCR (“Modified LCR”) for certain
depository institution holding companies that are not internationally active (including Key). The LCR and Modified
LCR created by the NPR are based on the Basel III liquidity framework and would be an enhanced prudential
liquidity standard consistent with the Dodd-Frank Act. Comments on the NPR were due by January 31, 2014.
Under the NPR, KeyCorp would be required to maintain high-quality liquid assets of at least 100% of its total net
cash outflow amount determined by prescribed assumptions in a hypothetical stress scenario over a 21-calendar
day period. Implementation of the LCR and Modified LCR would begin January 1, 2015, with minimum
requirements of 80% rising in equal annual steps of 10% to reach full implementation on January 1, 2017.
KeyBank will not be subject to the LCR or the Modified LCR under the NPR unless the OCC determines that
application to KeyBank is appropriate in light of its asset size, level of complexity, risk profile, scope of
operations, affiliation with foreign or domestic covered entities, or risk to the financial system. KeyCorp is
confident that it will be able to comply with the Modified LCR once the proposed rule is finalized and
implemented. Notwithstanding the foregoing, there are two components of the NPR that could present some
challenges for KeyCorp. If the NPR is implemented as proposed, KeyBank would likely limit the amount of
collateralized deposits it accepts from states and municipalities (i.e., “preferred deposits”), further reduce the
amount of interest it pays on those deposits, or eliminate the earnings credits it extends to states and
municipalities. Securities issued by U.S. government-sponsored enterprises (“GSEs”) are a primary tool for
liquidity management at Key and currently constitute a significant amount of our stock of high quality liquid
assets. The NPR would treat these securities as Level 2A liquid assets instead of Level 1 liquid assets while the
GSEs are under conservatorship, limiting our ability to rely on them as high quality liquid assets. Key continues
to manage in the direction to be Modified LCR compliant by the end of 2014 through changes to the composition
of our investment portfolio and by focusing on growing our client deposits that are not preferred deposits. The
impact of the January 2014 Basel III liquidity framework revisions on U.S. banking organizations, including Key
and KeyBank, will be determined by the extent to which they are implemented by the federal banking agencies.
Capital planning and stress testing
The Federal Reserve’s capital plan rule requires each U.S.-domiciled, top-tier BHC with total consolidated assets
of at least $50 billion (like KeyCorp) to develop and maintain a written capital plan supported by a robust
internal capital adequacy process. The capital plan must be submitted annually to the Federal Reserve for
supervisory review in connection with its annual CCAR. The supervisory review includes an assessment of many
factors, including Key’s ability to maintain capital above each minimum regulatory capital ratio and above a Tier
1 common ratio of 5% on a pro forma basis under expected and stressful conditions throughout the planning
horizon. KeyCorp is also subject to the Federal Reserve capital plan rule and supervisory guidance regarding the
declaration and payment of dividends and capital redemptions repurchases, including the supervisory expectation
in certain circumstances for prior notification to, and consultation with, Federal Reserve supervisory staff.
The Federal Reserve’s annual CCAR is an intensive assessment of the capital adequacy of large, complex U.S.
BHCs and of the policies and practices these BHCs use to assess their capital needs. Through CCAR, the Federal
Reserve assesses the capital plans of these BHCs to ensure that they have both sufficient capital to continue
operations throughout times of financial and economic stress and robust, forward-looking capital planning
processes that account for their unique risks. The Federal Reserve expects BHCs subject to CCAR to have
sufficient capital to withstand a severely adverse operating environment and to be able to continue operations,
maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit
intermediaries. In addition, the Federal Reserve evaluates the planned capital actions of these BHCs, including
planned capital distributions such as dividend payments or stock repurchases.
KeyCorp filed its 2014 CCAR capital plan on January 6, 2014. Under the Federal Reserve’s November 2013
CCAR instructions and guidance, KeyCorp’s 2014 capital plan was required to reflect the Regulatory Capital
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