American Express 2012 Annual Report Download - page 31

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
CONSOLIDATED CAPITAL RESOURCES
AND LIQUIDITY
The Company’s balance sheet management objectives are to
maintain:
폷A solid and flexible equity capital profile;
폷A broad, deep and diverse set of funding sources to finance its
assets and meet operating requirements; and
폷Liquidity programs that enable the Company to continuously
meet expected future financing obligations and business
requirements for at least a 12-month period, even in the event
it is unable to continue to raise new funds under its traditional
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 support 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, which reflects its business
activities, as well as marketplace conditions and credit rating
agency requirements. The Company’s consolidated capital
position is 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 standards commonly referred to as Basel I. In June
2004, the Basel Committee on Banking Supervision (commonly
referred to as Basel) 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 Company has adopted Basel II in certain non-
U.S. jurisdictions and is currently taking steps toward Basel II
implementation in the United States.
Dodd-Frank and a series of international capital and liquidity
standards known as Basel III published by Basel on December 16,
2010 will in the future change the 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. On June 7,
2012, the Federal Reserve, the Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation issued
three joint notices of proposed rulemaking, collectively referred
to as Basel III, which presents details of the proposed new U.S.
regulatory capital standards. The proposed U.S. rules are
generally in line with the aforementioned capital standards
published by Basel in 2010.
The following table presents the regulatory risk-based capital
ratios and leverage ratio for the Company and its significant
bank subsidiaries, as well as additional ratios widely utilized in
the marketplace, as of December 31, 2012.
Well-
Capitalized
Ratios(a)
Ratios as of
December 31,
2012
Risk-Based Capital
Tier 1 6%
American Express Company 11.9%
American Express Centurion Bank 17.6%
American Express Bank, FSB 16.5%
Total 10%
American Express Company 13.8%
American Express Centurion Bank 18.9%
American Express Bank, FSB 18.7%
Tier 1 Leverage 5%
American Express Company 10.2%
American Express Centurion Bank 17.0%
American Express Bank, FSB 17.5%
Common Equity to Risk-Weighted Assets
American Express Company 15.0%
Tier 1 Common Risk-Based(b)
American Express Company 11.9%
Tangible Common Equity to Risk-Weighted
Assets(b)
American Express Company 11.7%
(a) As defined by the Federal Reserve.
(b) Refer to page 30 for a reconciliation of Tier 1 common equity and tangible
common equity, both non-GAAP measures.
The following provides definitions for the Company’s regulatory
risk-based capital ratios and leverage ratio, which are calculated
as per standard regulatory guidance, if applicable:
Risk-Weighted Assets — Assets are weighted for risk according to
a formula used by the Federal Reserve to conform to capital
adequacy guidelines. On- and off-balance sheet items are
weighted for risk, with off-balance sheet items converted to
balance sheet equivalents, using risk conversion factors, before
being allocated a risk-adjusted weight. The off-balance sheet
items comprise a minimal part of the overall calculation. Risk-
weighted assets as of December 31, 2012 were $125.7 billion.
Tier 1 Risk-Based Capital Ratio — The Tier 1 capital ratio is
calculated as Tier 1 capital divided by risk-weighted assets. Tier 1
capital is the sum of common shareholders’ equity, certain
perpetual preferred stock (not applicable to the Company), and
noncontrolling interests in consolidated subsidiaries, adjusted
for ineligible goodwill and intangible assets, as well as certain
other comprehensive income items as follows: net unrealized
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