Credit Risk: General Disclosures.................................................................................................................................
Appendix A - Disclosure Matrix…………………………………………………………………………………….A1
Basel III regulatory capital rules for large and internationally active banks established the definition of regulatory capital elements and minimum capital ratios, regulatory capital buffers above those minimums, a common equity tier 1 ratio, a supplementary leverage ratio and the rules for calculating risk-weighted assets. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk- sensitive advanced approaches. With the passing of the "Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations" rule, effective December 31, 2019, the Company is classified as a Category III banking organization. Therefore, the regulatory capital requirements effective for U.S. Bancorp (the "Company") follow the general standardized approach.
U.S. Bancorp (the "Company") based in Minneapolis, is the parent company of one of the largest commercial banks in the United States and provides a comprehensive line of banking, investment, mortgage, trust and payment services products to consumers, businesses, and institutions.
This document, and certain of the Company's public filings, present the Pillar 3 Disclosures in compliance with Basel III as described in Subsections 61-63 of the: Capital Adequacy-Basel III Final Rule (the "Rule"). The Company's 2020 Annual Report on Form 10-K ("Annual Report") and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 ("Form 10-Q") filed with the Securities and Exchange Commission contains management's discussion of the overall corporate risk profile of the Company and related management strategies. These Pillar 3 Disclosures should be read in conjunction with the Annual Report and Form 10-Q, the Consolidated Financial Statements for Bank Holding Companies - FR Y-9C. The Company's Pillar 3 Disclosures Matrix (see Appendix A) specifies where all disclosures required by the Rule are located. The Pillar 3 Disclosures have not been audited by the Company's external auditors.
The Rule applies only to the consolidated Company, with the exception that every depository subsidiary must disclose capital ratios.
Managing risks is an essential part of successfully operating a financial services company. The Company's Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, through its Risk Management and Capital Planning Committees, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.
The Executive Risk Committee ("ERC"), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputational risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.
The Company's most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputational risk. Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale, mortgage servicing rights ("MSRs") and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business Compliance risk is the risk that the Company may suffer legal or regulatory sanctions,
financial losses and reputational damage if the Company fails to adhere to compliance requirements and the Company's compliance policies. Strategic risk is the risk to current or projected financial condition and resilience arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputation risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company's competitiveness by affecting its ability to establish new relationships or services or continue servicing existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to "Risk Factors" in the Annual Report and Form 10-Q for a detailed discussion of these factors.
The Company's Board of Directors and management-level governance committees are supported by a "three lines of defense" model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which is primarily aligned to the Chief Risk Officer's organization but also includes policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company's governance, risk management, and control processes.
INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
The Company's ICAAP is a component of its Basel Program. The Company manages its capital to multiple minimum thresholds and measures that are consistent with the Company's strategic objectives, business model and capital plan. Expectations of internal and external stakeholders are integral, and the capital goals and targets are calibrated considering internally developed models that ensure adequate coverage for all material quantitative and qualitative risks, minimum regulatory requirements, supervisory stress testing expectations and rating agency and counterparty perspectives.
The Company is committed to managing capital to maintain strong protection for depositors and creditors, and for maximum shareholder benefit in order to achieve the Company's broader goals, which are as follows:
Ensure the Company's safety and soundness;
Maintain access to the debt and capital markets so the Company may continue to provide exceptional service to its customers and fulfill, without interruption, its obligations as a credit intermediary;
Serve as a source of managerial and financial strength to its subsidiaries; and
Ensure that the Company continues to be in a position to conduct its business in an environment of economic or financial stress.
The Company's ICAAP, the identification of material risks and how those material risks inform capital adequacy, is conducted via the Company's stress testing program. Through this process the Company's material risks, informed by the risk identification process, are critical to the scenario design process and the development of the Company's internal stress scenario. The results of these forward-looking scenarios inform the Company's regulatory and internally defined capital adequacy relative to the Company's risk profile and risk appetite.
REGULATORY CAPITAL ADEQUACY RATIOS
The Company also manages its capital to exceed regulatory capital requirements for well-capitalized financial institutions. The Company's applicable capital requirement for regulatory and supervisory purposes is based upon the ratios determined under the standardized approach.
Banking regulators define capital requirements for banks and financial services holding companies expressed in the form of a common equity tier 1 capital ratio, a tier 1 capital ratio, a total risk-based capital ratio, a leverage ratio and for advanced approaches banks and category III banks, a supplementary leverage ratio. The current minimum required levels, for these ratios are 4.5 percent, 6 percent, 8 percent, 4.0 percent and 3.0 percent, respectively, while the requirements for an insured depository institution to be considered "well-capitalized" are 6.5 percent, 8.0
percent, 10.0 percent, 5.0 percent and 3.0 percent, respectively. Using the standardized approach rule the common equity tier 1 ratio was 9.9 percent at March 31, 2021 - above the Company's targeted ratio of 8.5 percent.
A summary of the capital ratios under the standardized is shown in Table 1.
The Company's total shareholders' equity was $51.7 billion at March 31, 2021, compared with $53.1 billion at December 31, 2020. The following items of note have had an impact on equity during the year, net income and an increase other comprehensive income resulted in an increase in equity which were offset dividends paid and common share repurchases during the year. In compliance with the Rule, the Company reviewed the aggregate amount of surplus capital of insurance subsidiaries included in the regulatory capital of the consolidated group and has determined that it was not material. Refer to "Management's Discussion and Analysis-Capital Management" in the Annual Report and Form 10-Q for further discussion on capital management.
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy. These measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company's capital position relative to other financial services companies. These measures differ from the currently effective capital ratios defined by current banking regulations principally in that the numerator excludes trust preferred securities and preferred stock, the nature and extent of which varies among different financial services companies. These measures are not defined in generally accepted accounting principles ("GAAP") or are not currently effective or defined in federal banking regulations. As a result, these measures disclosed by the Company may be considered non-GAAP financial measures.
Stress Capital Buffer
Effective October 1, 2020 the Federal Reserve Board (FRB) introduced a new Stress Capital Buffer (SCB) that will replace the capital conservation buffer. The SCB is calculated based on the decrease in the Company's Common Equity Tier 1 Capital under the severely adverse scenario in the FRB's annual supervisory stress test and related Comprehensive Capital Analysis and Review (CCAR), plus four quarters of planned common stock dividends as a percentage of risk-weighted assets subject to a floor of 2.5%. A company's SCB is added to the minimum capital requirement from above for the risk-based ratios and is the level of capital where restrictions on distributions and discretionary bonuses begin. The FRB announced that the Company's stress capital buffer is 2.50% effective October 1, 2020.
The FRB, OCC and FDIC also adopted a final rule that revises the definition of "eligible retained income" for purposes of the SCB and other capital buffer requirements. This revision reduces the likelihood that a banking organization is suddenly subject to abrupt and restrictive distribution limitations in a scenario where the Company's ratios fall within its applicable minimum-plus-buffer requirements. The change to the definition of eligible retained income allow banking organizations to more freely use their capital and leverage buffers and supports banking organizations' lending activity and other financial intermediation activities to avoid compounding negative impacts in the financial markets. Under the final rule, eligible retained income is the greater of (i) the banking organization's net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) the average of the banking organization's net income over the preceding four quarters. The Company's eligible retained income at March 31, 2021 was $1.5 billion.