Discover 2009 Annual Report Download - page 27

Strategic Risk. Strategic risk can arise from adverse business decisions, improper implementation of decisions,
unanticipated economic events, failure to anticipate and respond to industry changes (including regulatory and legislative
changes), failure to create and maintain a competitive business model, and failure to attract and profitably serve
customers. Our Executive Committee actively manages strategic risk through the development, implementation and
oversight of our business strategies, including the development of budgets and business plans. Our business units take
and are accountable for managing strategic risk in pursuit of their objectives. Various policies govern the management of
our strategic risk. In addition, the assessment of strategic risk is an important consideration of various sub-committees of
our Risk Committee. For example, the strategic and other risks associated with new products or services are reviewed and
reported on by our New Initiatives Committee and our Network Steering Committee.
Our Corporate Risk Management function also plays an important role in the management of strategic risk by:
(i) overseeing the objective setting and strategic planning processes from a risk perspective, to gain comfort that strategic
risks have been adequately considered in the setting of objectives and development of strategies; (ii) providing an
independent risk perspective to the new initiatives process; and (iii) assessing if there is effective alignment of
management’s proposed long-term strategic objectives with the risk appetite and strategic limits approved by our board
of directors.
Supervision and Regulation
General
Our operations are subject to extensive regulation, supervision and examination under U.S. federal, state and foreign
laws and regulations. On March 13, 2009, we became a bank holding company under the Bank Holding Company Act
of 1956 (“BHC Act”) and a financial holding company under the Gramm-Leach-Bliley Act (“GLBA”), subject to the
supervision, examination and regulation of the Federal Reserve Board (“Federal Reserve”).
Permissible activities for a bank holding company include those activities that are so closely related to banking as to be
a proper incident thereto such as consumer lending and other activities that have been approved by the Federal Reserve
by regulation or order. Certain servicing activities are also permissible for a bank holding company if conducted for or on
behalf of the bank holding company or any of its affiliates. Impermissible activities for bank holding companies include
activities that are related to commerce such as retail sales of nonfinancial products.
We elected to become a “financial holding company” under GLBA at the time that we became a bank holding
company. The GLBA removed many of the restrictions on the activities of bank holding companies that become financial
holding companies. A financial holding company, and the non-bank companies under its control, is permitted to engage
in activities considered financial in nature; incidental to financial activities; or complementary to financial activities if the
Federal Reserve determines that they pose no risk to the safety or soundness of depository institutions or the financial
system in general.
Our election to become a financial holding company under the GLBA certifies that the depository institutions that we
control meet certain criteria, including capital, management and Community Reinvestment Act requirements. If we were to
fail to continue to meet the criteria for financial holding company status, we could, depending on which requirements we
failed to meet, face restrictions on new financial activities or acquisitions and/or be required to discontinue existing
activities that are not generally permissible for bank holding companies.
Federal Reserve regulations require that bank holding companies serve as a source of strength to each subsidiary bank
and commit resources to support each subsidiary bank. This support may be required at times when a bank holding
company may not be able to provide such support without adversely affecting its ability to meet other obligations.
In addition, as a participant in the CPP, we are subject to specific restrictions under the terms of the CPP, including
limits on our ability to pay dividends (quarterly dividends on our common stock are limited to $0.06 per share or less)
and repurchase our capital stock, limits on executive compensation, and increased oversight by the U.S. Treasury,
regulators and Congress under the Emergency Economic Stabilization Act of 2008, as amended (“EESA”). For details
regarding these restrictions, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Legislative and Regulatory Developments” and “– Liquidity and Capital Resources – U.S. Treasury Capital
Purchase Program.”
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