NOTE 18 — REGULATORY REQUIREMENTS AND MATTERS

Capital Adequacy — The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The Bank is a member bank of the Federal Reserve System and the Federal Reserve Bank is the Bank’s primary regulator. In July 2013, the Federal Reserve Bank published Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision. The Basel III Capital Rules apply to all depository institutions and top-tier bank holding companies with assets of $500.0 million or more, and accordingly are effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain of their components). The Basel III Capital Rules: (i) introduced a new capital measure called Common Equity Tier I Risk-based Capital (“CET1”) and a related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specified that Tier I capital consists of CET1 and “Additional Tier I capital” instruments, which are instruments treated as Tier I instruments under the prior capital rules that meet certain revised requirements; (iii) mandated that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expanded the scope of the deductions from and adjustments to capital, compared to existing regulations. The Basel III Capital Rules also prescribed a new standardized approach for risk weightings that expanded the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories.

The Federal Deposit Insurance Corporation Improvement Act of 1991 requires that the federal regulatory agencies adopt regulations defining capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Basel III Capital Rule requires that banking organizations maintain a minimum CET1 ratio of 4.5%, a Tier I capital ratio of 6.0%, and a total capital ratio of 8.0% to be considered adequately capitalized. Failure to meet minimum capital requirements can result in certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements.

As of December 31, 2016 and 2015, the Company and the Bank were both categorized as well capitalized based on applicable U.S. regulatory capital ratio requirements in accordance with Basel III standardized approaches, as set forth in the table below. The Company believes that no changes in conditions or events have occurred since December 31, 2016, which would result in changes that would cause the Company or the Bank to fall below the well capitalized level. The following tables present the regulatory capital information of the Company and the Bank as of December 31, 2016 and 2015:




	Basel III
	December 31, 2016								December 31, 2015
($ in thousands)	Actual				Minimum Requirement		Well Capitalized Requirement		Actual				Minimum Requirement		Well Capitalized Requirement
($ in thousands)	Amount		Ratio		Ratio		Ratio		Amount		Ratio		Ratio		Ratio

Total capital (to risk-weighted assets)
Company	$	3,400,642	12.4	%	8.0	%	10.0	%	$	3,082,945	12.2	%	8.0	%	10.0	%
East West Bank	$	3,371,885	12.3	%	8.0	%	10.0	%	$	3,039,524	12.1	%	8.0	%	10.0	%
Tier I capital (to risk-weighted assets)
Company	$	2,976,002	10.9	%	6.0	%	8.0	%	$	2,686,627	10.7	%	6.0	%	8.0	%
East West Bank	$	3,095,245	11.3	%	6.0	%	8.0	%	$	2,754,201	11.0	%	6.0	%	8.0	%
CET1 capital(to risk-weighted assets)
Company	$	2,976,002	10.9	%	4.5	%	6.5	%	$	2,650,413	10.5	%	4.5	%	6.5	%
East West Bank	$	3,095,245	11.3	%	4.5	%	6.5	%	$	2,754,201	11.0	%	4.5	%	6.5	%
Tier I leverage capital (to adjusted average assets)
Company	$	2,976,002	8.7	%	4.0	%	5.0	%	$	2,686,627	8.5	%	4.0	%	5.0	%
East West Bank	$	3,095,245	9.1	%	4.0	%	5.0	%	$	2,754,201	8.8	%	4.0	%	5.0	%
Risk weighted assets
Company	$	27,357,753	N/A		N/A		N/A		$	25,232,575	N/A		N/A		N/A
East West Bank	$	27,310,540	N/A		N/A		N/A		$	25,129,885	N/A		N/A		N/A
Adjusted quarterly average total assets ⁽¹⁾
Company	$	34,209,827	N/A		N/A		N/A		$	31,458,517	N/A		N/A		N/A
East West Bank	$	34,163,667	N/A		N/A		N/A		$	31,385,333	N/A		N/A		N/A


(1)	Reflects adjusted average total assets for the three months ended December 31, 2016 and 2015.

N/A = not applicable.

Reserve Requirement — The Bank is required to maintain a percentage of its deposits as reserves at the Federal Reserve Bank of San Francisco (the “FRB”). The daily average reserve requirement was approximately $503.8 million and $395.6 million as of December 31, 2016 and 2015, respectively.

Regulatory Matters — The Bank entered into a Written Agreement, dated November 9, 2015, with the FRB (the “Written Agreement”), to correct less than satisfactory Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) programs detailed in a joint examination by the FRB and the California Department of Business Oversight (“DBO”). The Bank also entered into a related MOU with the DBO. The Written Agreement, among other things, requires the Bank to:

•

within 60 days of the Written Agreement, submit a written plan to strengthen the Board’s oversight of the Bank’s compliance with the applicable laws, rules and regulations relating to AML, including compliance with the BSA, the rules and regulations issued thereunder by the U.S. Department of Treasury, and the AML requirements of Regulation H of the Board of Governors (collectively, “BSA/AML Requirements”);

•

within 60 days of the Written Agreement, submit a written revised program for compliance with all applicable BSA/AML Requirements, which, at a minimum, will include, among other things, a system of internal controls to ensure compliance with all applicable BSA/AML Requirements and controls designed to ensure compliance with all applicable requirements relating to correspondent accounts for foreign financial institutions;


•	within 60 days of the Written Agreement, submit a written revised program for conducting appropriate levels of customer due diligence, including policies, procedures, and controls to ensure that the Bank collects, analyzes, and retains complete and accurate customer information for all account holders, including customers of the Bank’s foreign operations;


•	within 60 days of the Written Agreement, submit an enhanced written program to reasonably ensure the identification and timely, accurate and complete reporting by the Bank of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities as required by applicable suspicious activity reporting laws and regulations;


•	within 60 days of the Written Agreement, submit a written plan to the FRB for the full installation, testing, and activation of an effective automated transaction monitoring system to reasonably ensure the identification and timely, accurate, and complete reporting by the Bank of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities;

•

within 30 days following completion of the customer account remediation required by the Written Agreement, engage an independent consultant to conduct a review of, and prepare a report detailing findings relating to, account and transaction activity associated with any high risk customer accounts during a six-month period in 2014 to determine whether suspicious activity involving high risk customer accounts or transactions was properly identified and reported; and


•	within 60 days of the Written Agreement, submit a plan to enhance the Bank’s compliance with Office of Foreign Assets Control (“OFAC”) Regulations, including enhanced OFAC screening procedures and an improved methodology for assessing OFAC risks.

The Company believes that the Bank is making progress in executing the compliance plans and programs required by the Written Agreement and MOU, although there can be no assurances that our plans and progress will be found to be satisfactory by our regulators. To date, the Bank has added significant resources to meet the monitoring and reporting obligations imposed by the Written Agreement and will continue to require significant management and third party consultant resources to comply with the Written Agreement and MOU, and to address any additional findings or recommendations by the regulators. These incremental administrative and third party costs, as well as the operational restrictions imposed by the Written Agreement, may adversely affect the Bank’s results of operations.

If additional compliance issues are identified or if the regulators determine that the Bank has not satisfactorily complied with the terms of the Written Agreement, the regulators could take further actions with respect to the Bank and, if such further actions were taken, such actions could have a material adverse effect on the Bank. The operating and other conditions of the Written Agreement could lead to an increased risk of being subject to additional regulatory actions by the DBO or FRB or other government agencies, as well as additional actions resulting from future regular annual safety and soundness and compliance examinations by the federal and state regulators that downgrade the regulatory ratings of the Bank.