Bank of America 2007 Annual Report Download - page 154

Note 15 – Regulatory Requirements and
Restrictions
The Board of Governors of the Federal Reserve System (FRB) requires the
Corporation’s banking subsidiaries to maintain reserve balances based on
a percentage of certain deposits. Average daily reserve balances required
by the FRB were $5.7 billion and $5.6 billion for 2007 and 2006. Currency
and coin residing in branches and cash vaults (vault cash) are used to
partially satisfy the reserve requirement. The average daily reserve balan-
ces, in excess of vault cash, held with the FRB amounted to $49 million
and $27 million for 2007 and 2006.
The primary source of funds for cash distributions by the Corporation
to its shareholders are dividends received from its banking subsidiaries
Bank of America, N.A., FIA Card Services, N.A., and LaSalle Bank, N.A. In
2007, Bank of America Corporation received $15.4 billion in dividends
from its banking subsidiaries. In 2008, Bank of America, N.A., FIA Card
Services, N.A., and LaSalle Bank, N.A. can declare and pay dividends to
Bank of America Corporation of $4.6 billion, $1.6 billion, and $155 million
plus an additional amount equal to their net profits for 2008, as defined
by statute, up to the date of any such dividend declaration. The other
subsidiary national banks can initiate aggregate dividend payments in
2008 of $338 million plus an additional amount equal to their net profits
for 2008, as defined by statute, up to the date of any such dividend decla-
ration. The amount of dividends that each subsidiary bank may declare in
a calendar year without approval by the Office of the Comptroller of the
Currency (OCC) is the subsidiary bank’s net profits for that year combined
with its net retained profits, as defined, for the preceding two years.
The FRB, the OCC and the Federal Deposit Insurance Corporation
(collectively, the Agencies) have issued regulatory capital guidelines for
U.S. banking organizations. Failure to meet the capital requirements can
initiate certain mandatory and discretionary actions by regulators that
could have a material effect on the Corporation’s financial statements. At
December 31, 2007, the Corporation, Bank of America, N.A., FIA Card
Services, N.A., and LaSalle Bank, N.A. were classified as “well-capitalized”
under this regulatory framework. At December 31, 2006, the Corporation,
Bank of America N.A., and FIA Card Services, N.A. were also classified as
“well-capitalized.” There have been no conditions or events since
December 31, 2007 that management believes have changed the Corpo-
ration’s, Bank of America, N.A.’s, FIA Card Services, N.A.’s, and LaSalle
Bank, N.A.’s capital classifications.
The regulatory capital guidelines measure capital in relation to the
credit and market risks of both off- and on-balance sheet items using vari-
ous risk weights. Under the regulatory capital guidelines, Total Capital
consists of three tiers of capital. Tier 1 Capital includes common share-
holders’ equity, Trust Securities, minority interests and qualifying preferred
stock, less goodwill and other adjustments. Tier 2 Capital consists of
preferred stock not qualifying as Tier 1 Capital, mandatory convertible
debt, limited amounts of subordinated debt, other qualifying term debt, the
allowance for credit losses up to 1.25 percent of risk-weighted assets and
other adjustments. Tier 3 Capital includes subordinated debt that is
unsecured, fully paid, has an original maturity of at least two years, is not
redeemable before maturity without prior approval by the FRB and includes
a lock-in clause precluding payment of either interest or principal if the
payment would cause the issuing bank’s risk-based capital ratio to fall or
remain below the required minimum. Tier 3 Capital can only be used to
satisfy the Corporation’s market risk capital requirement and may not be
used to support its credit risk requirement. At December 31, 2007 and
2006, the Corporation had no subordinated debt that qualified as Tier 3
Capital.
Certain corporate sponsored trust companies which issue Trust
Securities are not consolidated under FIN 46R. As a result, the Trust
Securities are not included on the Corporation’s Consolidated Balance
Sheet. On March 1, 2005, the FRB issued Risk-Based Capital Standards:
Trust Preferred Securities and the Definition of Capital (the Final Rule)
which allows Trust Securities to continue to qualify as Tier 1 Capital with
revised quantitative limits that would be effective after a five-year tran-
sition period. As a result, Trust Securities are included in Tier 1 Capital.
The FRB’s Final Rule limits restricted core capital elements to 15
percent for internationally active bank holding companies. Internationally
active bank holding companies are those with consolidated assets greater
than $250 billion or on-balance sheet exposure greater than $10 billion. In
addition, the FRB revised the qualitative standards for capital instruments
included in regulatory capital. At December 31, 2007, the Corporation’s
restricted core capital elements comprised 20.3 percent of total core capi-
tal elements. The Corporation expects to be fully compliant with the
revised limits prior to the implementation date of March 31, 2009.
To meet minimum, adequately-capitalized regulatory requirements, an
institution must maintain a Tier 1 Capital ratio of four percent and a Total
Capital ratio of eight percent. A well-capitalized institution must generally
maintain capital ratios 200 bps higher than the minimum guidelines. The
risk-based capital rules have been further supplemented by a leverage
ratio, defined as Tier 1 Capital divided by adjusted quarterly average total
assets, after certain adjustments. “Well-capitalized” bank holding compa-
nies must have a minimum Tier 1 Leverage ratio of three percent and are
not subject to a FRB directive to maintain higher capital levels. National
banks must maintain a Tier 1 Leverage ratio of at least five percent to be
classified as “well-capitalized.”
Net unrealized gains (losses) on AFS debt securities, net unrealized
gains on AFS marketable equity securities, net unrealized gains (losses)
on derivatives, and employee benefit plan adjustments in shareholders’
equity at December 31, 2007 and 2006, are excluded from the calcu-
lations of Tier 1 Capital and Leverage ratios. The Total Capital ratio
excludes all of the above with the exception of up to 45 percent of net
unrealized pre-tax gains on AFS marketable equity securities.
Regulatory Capital Developments
In June 2004, Basel II was published with the intent of more closely align-
ing regulatory capital requirements with underlying risks. Similar to eco-
nomic capital measures, Basel II seeks to address credit risk, market risk,
and operational risk. On December 7, 2007, U.S. regulatory agencies pub-
lished the final Basel II rules (Basel II Rules) providing detailed capital
requirements for credit and operational risk under Pillar 1, supervisory
requirements under Pillar 2 and disclosure requirements under Pillar 3.
The Corporation is still awaiting final rules for market risk requirements
under Basel II.
The Basel II Rules’ effective date is April 1, 2008, which allows U.S.
financial institutions to begin parallel reporting as early as 2008. The
Corporation continues execution efforts to ensure preparedness with all
Basel II requirements. The goal is to achieve full compliance by the end of
the three-year implementation period in 2011. Further, internationally
Basel II was implemented in several countries during the second half of
2007, while others will begin implementation in 2008 and 2009.
152 Bank of America 2007