Wells Fargo 2013 Annual Report Download - page 121

may decrease when customers perceive alternative investments,
such as the stock market, as providing a better risk/return
tradeoff. When customers move money out of bank deposits and
into other investments, we may lose a relatively low cost source
of funds, increasing our funding costs and negatively affecting
our liquidity.
If we are unable to continue to fund our assets through
customer bank deposits or access capital markets on favorable
terms or if we suffer an increase in our borrowing costs or
otherwise fail to manage our liquidity effectively, our liquidity,
net interest margin, financial results and condition may be
materially adversely affected. As we did during the financial
crisis, we may also need, or be required by our regulators, to
raise additional capital through the issuance of common stock,
which could dilute the ownership of existing stockholders, or
reduce or even eliminate our common stock dividend to preserve
capital or in order to raise additional capital.
For more information, refer to the “Risk Management –
Asset/Liability Management” section in this Report.
Adverse changes in our credit ratings could have a
material adverse effect on our liquidity, cash flows,
financial results and condition. Our borrowing costs and
ability to obtain funding are influenced by our credit ratings.
Reductions in one or more of our credit ratings could adversely
affect our ability to borrow funds and raise the costs of our
borrowings substantially and could cause creditors and business
counterparties to raise collateral requirements or take other
actions that could adversely affect our ability to raise funding.
Credit ratings and credit ratings agencies’ outlooks are based on
the ratings agencies’ analysis of many quantitative and
qualitative factors, such as our capital adequacy, liquidity, asset
quality, business mix, the level and quality of our earnings, rating
agency assumptions regarding the probability and extent of
federal financial assistance or support, and other rating agency
specific criteria. In addition to credit ratings, our borrowing costs
are affected by various other external factors, including market
volatility and concerns or perceptions about the financial
services industry generally.
On October 8, 2013, Fitch Ratings affirmed all the ratings of
the Parent and its rated subsidiaries. On October 25, 2013,
Standard & Poor’s Ratings Services (S&P) affirmed all the ratings
of the Parent and its rated subsidiaries, and on
November 14, 2013, Moody’s Investors Service (Moody’s)
confirmed all of the ratings of the Parent and its rated
subsidiaries. This ratings confirmation by Moody’s followed
completion of their review regarding whether to continue
incorporating the possibility of federal support in ratings
applicable to certain bank holding companies in light of recent
regulatory developments related to the Title II Orderly
Liquidation Authority of the Dodd-Frank Act. Moody’s decided
to eliminate any assumption of federal support for the impacted
holding companies, including the Parent. However, Moody’s also
concluded that the same regulatory developments were likely to
reduce the severity of losses for bank holding company creditors
in the event of default, reflecting the potential benefits of a more
orderly resolution of bank holding companies and their related
banks. The net result of these offsetting conclusions was the
confirmation of our ratings. S&P is likewise reviewing their
support assumptions for certain bank holding companies in light
of the same regulatory developments. That review is ongoing and
S&P has not specified a timeframe for completion of their review.
There can be no assurance that we will maintain our credit
ratings and outlooks and that credit ratings downgrades in the
future would not materially affect our ability to borrow funds and
borrowing costs.
Downgrades in our credit ratings also may trigger additional
collateral or funding obligations which could negatively affect
our liquidity, including as a result of credit-related contingent
features in certain of our derivative contracts. Although a one or
two notch downgrade in our current credit ratings would not be
expected to trigger a material increase in our collateral or
funding obligations, a more severe credit rating downgrade of
our long-term and short-term credit ratings could increase our
collateral or funding obligations and the effect on our liquidity
could be material. For information regarding additional
collateral and funding obligations required of certain derivative
instruments in the event our credit ratings were to fall below
investment grade, see Note 16 (Derivatives) to Financial
Statements in this Report.
We rely on dividends from our subsidiaries for
liquidity, and federal and state law can limit those
dividends. Wells Fargo & Company, the parent holding
company, is a separate and distinct legal entity from its
subsidiaries. It receives a significant portion of its funding and
liquidity from dividends and other distributions from its
subsidiaries. We generally use these dividends and distributions,
among other things, to pay dividends on our common and
preferred stock and interest and principal on our debt. Federal
and state laws limit the amount of dividends and distributions
that our bank and some of our nonbank subsidiaries, including
our broker-dealer subsidiaries, may pay to our parent holding
company. Also, our right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is subject to the
prior claims of the subsidiary’s creditors.
For more information, refer to the “Regulation and
Supervision – Dividend Restrictions” and “– Holding Company
Structure” sections in our 2013 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 26 (Regulatory and
Agency Capital Requirements) to Financial Statements in this
Report.
RISKS RELATED TO FINANCIAL REGULATORY
REFORM AND OTHER LEGISLATION AND
REGULATIONS
Enacted legislation and regulation, including the Dodd-
Frank Act, as well as future legislation and/or
regulation, could require us to change certain of our
business practices, reduce our revenue and earnings,
impose additional costs on us or otherwise adversely
affect our business operations and/or competitive
position. Our parent company, our subsidiary banks and many
of our nonbank subsidiaries such as those related to our
brokerage and mutual fund businesses, are subject to significant
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