Regulatory Requirements

CSC is a savings and loan holding company and Schwab Bank, CSC’s primary depository institution subsidiary, is a federal savings bank. CSC is subject to examination, supervision, and regulation by the Federal Reserve. Schwab Bank is subject to examination, supervision, and regulation by the OCC, as its primary regulator, the FDIC as its deposit insurer, and the CFPB. CSC is required to serve as a source of strength for Schwab Bank.

Schwab Bank is subject to various requirements and restrictions under federal and state laws, including regulatory capital requirements and requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit to, or asset purchases from CSC or its other subsidiaries by Schwab Bank. In addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC. The federal banking agencies have broad powers to enforce these regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Under the Federal Deposit Insurance Act, Schwab Bank could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. CSC and Schwab Bank are required to maintain minimum capital levels as specified in federal banking regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on CSC and Schwab Bank. At December 31, 2017, both CSC and Schwab Bank met all of their respective capital requirements.

The regulatory capital and ratios for CSC (consolidated) and Schwab Bank are as follows:



	Actual				Minimum to be Well Capitalized				Minimum Capital Requirement
December 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
CSC
Common Equity Tier 1 Risk-Based Capital	$	14,630	19.3	%	N/A				$	3,414	4.5	%
Tier 1 Risk-Based Capital	17,423		23.0	%	N/A				4,552		6.0	%
Total Risk-Based Capital	17,452		23.0	%	N/A				6,069		8.0	%
Tier 1 Leverage	17,423		7.6	%	N/A				9,218		4.0	%
Schwab Bank
Common Equity Tier 1 Risk-Based Capital	$	13,355	20.1	%	$	4,324	6.5	%	$	2,993	4.5	%
Tier 1 Risk-Based Capital	13,355		20.1	%	5,321		8.0	%	3,991		6.0	%
Total Risk-Based Capital	13,382		20.1	%	6,652		10.0	%	5,321		8.0	%
Tier 1 Leverage	13,355		7.1	%	9,462		5.0	%	7,569		4.0	%

December 31, 2016
CSC
Common Equity Tier 1 Risk-Based Capital	$	12,574	18.4	%	N/A				$	3,068	4.5	%
Tier 1 Risk-Based Capital	15,357		22.5	%	N/A				4,091		6.0	%
Total Risk-Based Capital	15,384		22.6	%	N/A				5,454		8.0	%
Tier 1 Leverage	15,357		7.2	%	N/A				8,516		4.0	%
Schwab Bank
Common Equity Tier 1 Risk-Based Capital	$	11,878	19.8	%	$	3,894	6.5	%	$	2,696	4.5	%
Tier 1 Risk-Based Capital	11,878		19.8	%	4,793		8.0	%	3,595		6.0	%
Total Risk-Based Capital	11,904		19.9	%	5,992		10.0	%	4,793		8.0	%
Tier 1 Leverage	11,878		7.0	%	8,456		5.0	%	6,765		4.0	%

N/A Not Applicable.

Based on its regulatory capital ratios at December 31, 2017, Schwab Bank is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since December 31, 2017 that management believes have changed Schwab Bank’s capital category.

The Federal Reserve requires Schwab Bank to maintain reserve balances at the Federal Reserve based on its deposits that are considered to be transaction accounts. Schwab Bank’s average reserve requirements were $1.6 billion and $1.5 billion in 2017 and 2016, respectively.

Beginning on January 1, 2016, CSC and Schwab Bank became subject to a new capital conservation buffer requirement of 0.625% of risk-weighted assets, increasing each year by 0.625% until fully implemented at 2.5% of risk-weighted assets in January 2019. The capital conservation buffer is in addition to the minimum risk-based capital requirements described above. Failure to maintain the capital conservation buffer would limit an entity’s ability to make capital distributions and discretionary bonus payments to executive officers. At December 31, 2017, both CSC’s and Schwab Bank’s capital levels exceeded the fully implemented capital conservation buffer requirement.

CS&Co, a securities broker-dealer, is subject to the Uniform Net Capital Rule. CS&Co computes its net capital under the alternative method permitted by the Uniform Net Capital Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement of $250,000, which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.

During 2017, optionsXpress, Inc., a wholly-owned subsidiary of the Company, was renamed as Charles Schwab Futures (CS Futures). In October 2017, CS Futures transferred all of its retail brokerage customer accounts along with the related operations to CS&Co. CS Futures was de-registered as a securities broker-dealer with the SEC but remains a registered Futures Commission Merchant with the Commodity Futures Trading Commission.

Net capital and net capital requirements for CS&Co are as follows:



December 31,	2017		2016
Net capital	$	2,118	$	1,846
Minimum net capital required	0.250		0.250
2% of aggregate debit balances	435		355
Net capital in excess of required net capital	1,683		1,491

In accordance with the SEC Customer Protection Rule, CS&Co had portions of its cash and investments segregated for the exclusive benefit of clients at December 31, 2017. The SEC Customer Protection Rule requires broker-dealers to segregate client fully paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit, whereas cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 2017 for CS&Co totaled $15.3 billion. On January 3, 2018, CS&Co deposited a net amount of $704 million of cash into its segregated reserve accounts. Cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 2016 for CS&Co totaled $22.5 billion. On January 4, 2017, a net amount of $1.6 billion of cash was deposited into the segregated reserve accounts.