Capital One 2006 Annual Report Download - page 40

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compliance may become more difficult and costly. We face additional compliance challenges as a result of our acquisition of
North Fork, which may be more costly and/or require more management attention than we anticipate. In addition, we face
similar risks with respect to our international businesses, where changing laws and regulations may have an adverse impact
on our results. For a description of the laws and regulations to which we are subject, please refer to Supervision and
Regulation, pages 11-17. The regulatory environment in which we operate could have a negative impact on our business and
our financial results.
We Face the Risk of Fluctuations in Our Expenses and Other Costs that May Hurt Our Financial Results
Our expenses and other costs, such as operating, labor and marketing expenses, directly affect our earnings results. In light of
the extremely competitive environment in which we operate, and because the size and scale of many of our competitors
provide them with increased operational efficiencies, it is important that we are able to successfully manage our expenses.
Many factors can influence the amount of our expenses, as well as how quickly they may increase. Investments in
infrastructure, which may be necessary to maintain a competitive business, may increase operational expenses in the short-
run. As our business develops, changes or expands, additional expenses can arise from management of outsourced services,
asset purchases, structural reorganization, a reevaluation of business strategies and/or expenses to comply with new or
changing laws or regulations. Integration of acquired entities may also increase our expenses, and we may be less able to
predict the operational expenses of newly acquired businesses. If we are unable to successfully manage our expenses, our
financial results will suffer.
Reputational Risk and Social Factors May Impact our Results
Our ability to originate and maintain accounts is highly dependent upon the perceptions of consumer and commercial
borrowers and deposit holders and other external perceptions of our business practices and/or our financial health. Adverse
perceptions regarding our reputation in the consumer, commercial and funding markets could lead to difficulties in
generating and maintaining accounts as well as in financing them. Particularly, negative perceptions regarding our reputation
could lead to decreases in the levels of deposits that consumer and commercial customers and potential customers choose to
maintain with us. In addition, adverse developments or perceptions regarding the practices of our competitors, or our industry
as a whole, may also negatively impact our reputation. Finally, negative perceptions regarding the reputations of third parties
with whom we have important relationships, such as our independent auditors, also may adversely impact our reputation.
Adverse impacts on our reputation, or the reputation of our industry, could result in greater regulatory and/or legislative
scrutiny, which may lead to laws or regulations that may change or constrain the manner in which we engage with our
customers and the products we offer them. Adverse reputational impacts or events also may increase our litigation risk. See
The Credit Card Industry Faces Increased Litigation Risks Relating to Industry Structure on page 21.
In addition, a variety of social factors may cause changes in credit card and other consumer finance use, payment patterns and
the rate of defaults by accountholders and borrowers domestically and internationally. These social factors include changes in
consumer confidence levels, the publics perception of the use of credit cards and other consumer debt, and changing
attitudes about incurring debt and the stigma of personal bankruptcy.
We May Face Limited Availability of Financing, Variation in Our Funding Costs and Uncertainty in Our
Securitization Financing
In general, the amount, type and cost of our funding, including financing from other financial institutions, the capital markets
and deposits, directly impact our expenses in operating our business and growing our assets and therefore, can positively or
negatively affect our financial results.
A number of factors could make such financing more difficult, more expensive or unavailable on any terms both
domestically and internationally (where funding transactions may be on terms more or less favorable than in the United
States), including, but not limited to, financial results and losses, specific events that adversely impact our reputation,
disruptions in the capital markets, specific events that adversely impact the financial services industry, counter-party
availability, interest rate fluctuations, rating agencies actions, and the general state of the U.S. and world economies. Also,
because we depend on the capital markets for funding and capital, we could experience reduced availability and increased
cost of funding if our debt ratings were lowered. Also, we compete for funding with other banks, savings banks and similar
companies, some of which are publicly traded. Many of these institutions are substantially larger, may have more capital and
other resources and may have better debt ratings than we do. In addition, as some of these competitors consolidate with other
financial institutions, these advantages may increase. Competition from these institutions may increase our cost of funds.
As part of our capital markets financing, we actively securitize our consumer loans. The occurrence of certain events may
cause the securitization transactions to amortize earlier than scheduled, which would accelerate the need for additional
funding. This early amortization could, among other things, have a significant effect on the ability of certain of our business