American Express 2010 Annual Report Download - page 41

$50 billion in assets. In addition, certain derivative transactions
will be required to be centrally cleared, which may create or
increase collateral posting requirements for the Company.
Many provisions of the Dodd-Frank Reform Act require the
adoption of rules for implementation. In addition, the Dodd-
Frank Reform Act mandates multiple studies, which could result
in additional legislative or regulatory action. These new rules
and studies will be implemented and undertaken over a period of
several years. Accordingly, the ultimate consequences of the
Dodd-Frank Reform Act and its implementing regulations on
the Company’s business, results of operations and financial
condition are uncertain at this time.
Other Legislative and Regulatory Initiatives
The credit and charge card sector also faces continuing scrutiny
in connection with the fees merchants pay to accept cards.
Although investigations into the way bankcard network
members collectively set the “interchange” (that is, the fee
paid by the bankcard merchant acquirer to the card issuing
bank in “four party” payment networks, like Visa and
MasterCard) had largely been a subject of regulators outside
the United States, legislation was previously introduced in
Congress designed to give merchants antitrust immunity to
negotiate interchange collectively with card networks and to
regulate certain card network practices. Although, unlike the
Visa and MasterCard networks, the American Express network
does not collectively set fees, antitrust actions and government
regulation relating to merchant pricing could ultimately affect
all networks.
In addition to the provisions of the Dodd-Frank Reform Act
regarding merchants’ ability to offer discounts or incentives to
encourage customers’ use of a particular form of payment, a
number of U.S. states are also considering legislation that would
prohibit card networks from imposing conditions, restrictions or
penalties on a merchant if the merchant, among other things,
(i) provides a discount to a customer for using one form of
payment versus another or one type of credit or charge card
versus another, (ii) imposes a minimum dollar requirement on
customers with respect to the use of credit or charge cards or
(iii) chooses to accept credit and charge cards at some of its
locations but not at others. Such legislation has recently been
enacted in Vermont, and similar legislation has been introduced
in other states.
Also, other countries in which the Company operates have
been considering and in some cases adopting similar legislation
and rules that would impose changes on certain practices of card
issuers and bankcard networks.
Any or all of the above changes to the legal and regulatory
environment in which the Company operates could have a
material adverse effect on the Company’s results of operations.
Refer to “Consolidated Capital Resources and Liquidity” for a
discussion of the series of international capital and liquidity
standards published by the Basel Committee on
Banking Supervision.
CONSOLIDATED CAPITAL RESOURCES
AND LIQUIDITY
The Company’s balance sheet management objectives are
to maintain:
•A solid and flexible equity capital profile;
•A broad, deep and diverse set of funding sources to finance its
assets and meet operating requirements; and
•Liquidity programs that enable the Company to continuously
meet expected future financing obligations and business
requirements, even in the event it is unable to raise new
funds under its regular funding programs.
CAPITAL STRATEGY
The Company’s objective is to retain sufficient levels of capital
generated through earnings and other sources to maintain a
solid equity capital base and to provide flexibility to satisfy
future business growth. The Company believes capital
allocated to growing businesses with a return on risk-adjusted
equity in excess of its costs will generate shareholder value.
The level and composition of the Company’s consolidated
capital position are determined through the Company’s internal
capital adequacy assessment process (ICAAP), which reflects its
business activities, as well as marketplace conditions and credit
rating agency requirements. They are also influenced by
subsidiary capital requirements. The Company, as a bank
holding company, is also subject to regulatory requirements
administered by the U.S. federal banking agencies. The
Federal Reserve has established specific capital adequacy
guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items.
The Company currently calculates and reports its capital
ratios under the measurement standards commonly referred
to as Basel I. In June 2004, the Basel Committee published new
international guidelines for determining regulatory capital
(Basel II). In December 2007, the U.S. bank regulatory
agencies jointly adopted a final rule based on Basel II.
The Dodd-Frank Reform Act and a series of international
capital and liquidity standards known as Basel III published by
the Basel Committee on Banking Supervision (commonly
referred to as Basel) will in the future change these current
quantitative measures. In general, these changes will involve, for
the U.S. banking industry as a whole, a reduction in the types of
instruments deemed to be capital along with an increase in the
amount of capital that assets, liabilities and certain off-balance
sheet items require. These changes will generally serve to reduce
reported capital ratios compared to current capital guidelines.
The specific U.S. guidelines supporting the new standards and
the proposed Basel III capital standards have not been finalized,
but are generally expected to be issued within the next
12 months. In addition to these measurement changes,
international and United States banking regulators could
increase the ratio levels at which banks would be deemed to
be “well capitalized”.
39
AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW