BB&T 2014 Annual Report Download - page 15

Table of Contents
U.S. Implementation of Basel III
During 2013, the FRB published final rules establishing a new comprehensive capital framework for U.S. banking organizations known as Basel III. The rules
substantially revise the risk-based capital requirements applicable to BHCs and depository institutions, including BB&T and Branch Bank, compared to the
current U.S. risk-based capital rules. The rules define the components of capital and address other issues affecting banking institutions' regulatory capital
ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing
risk-weighting approach, which was derived from Basel I capital accords of the BCBS, with a more risk-sensitive approach based, in part, on the standardized
approach in the BCBS's 2004 “Basel II” capital accords. The Basel III rules also implement the requirements of Section 939A of the Dodd-Frank Act to
remove references to credit ratings from the federal banking agencies' rules. BB&T qualifies as a standardized approach banking organization and must
comply with the new requirements beginning on January 1, 2015. Institutions with greater than $250 billion in assets or $10 billion in foreign assets are
considered advanced approach banking organizations, which requires a more conservative calculation of risk-weighted assets.
The Basel III rules, among other things, (1) introduce a new capital measure referred to as common equity Tier 1; (2) specify that Tier 1 capital consist of Tier
1 common equity and additional Tier 1 capital instruments meeting specified requirements; (3) define Tier 1 common equity narrowly by requiring that most
deductions/adjustments to regulatory capital measures be made to Tier 1 common equity and not to the other components of capital; and (4) expand the
scope of the deductions/adjustments from capital as compared to existing regulations.
The Basel III rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived
categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging
from 0% for U.S. government and agency securities, to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset categories. In
addition, the rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central
counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
The Basel III rules revise the “prompt corrective action” directives by establishing more conservative ratio levels for well-capitalized status. In addition to the
minimum risk-based capital requirements, all banks must hold additional capital, the capital conservation buffer (which is in the form of common equity), to
avoid being subject to limits on capital distributions, such as dividend payments, discretionary payments on Tier 1 instruments, share buybacks, and certain
discretionary bonus payments to executive officers, including heads of major business lines and similar employees. The required amount of the capital
conservation buffer will be phased-in annually through January 1, 2019.
During September 2014, the FDIC, FRB and OCC issued a final rule on the U.S. implementation of the Basel III LCR rule. Under the final rule, BB&T will be
considered a “modified LCR” holding company. BB&T would be subject to full LCR requirements if its operations were to fall under the “internationally
active” rules, which would generally be triggered if BB&T’s assets were to increase above $250 billion. BB&T implemented balance sheet changes to
support its compliance with the rule and to optimize its balance sheet based on the final rule. These actions included changing the mix of the investment
portfolio to include more GNMA and U.S. Treasury securities, which qualify as Level 1 under the rule, and changing its deposit mix to increase retail and
commercial deposits. Based on management’s interpretation of the final rule, BB&T’s LCR was approximately 130% at December 31, 2014, compared to the
regulatory minimum of 90% that will be effective January 1, 2016, which puts BB&T in full compliance with the rule. The regulatory minimum will increase
to 100% on January 1, 2017. The final rule requires each financial institution to have a method for determining “operational deposits” as defined by the rule.
The number above includes an estimate of operational deposits; however, BB&T continues to evaluate its method to identify and measure operational
deposits.
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Source: BB&T CORP, 10-K, February 25, 2015 Powered by Morningstar® Document Research℠
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