Discover 2009 Annual Report Download - page 28

Banking Subsidiaries
We operate two banking subsidiaries, each of which is in the United States. Discover Bank offers credit card loans,
student loans and personal loans, as well as checking accounts, certificates of deposit and money market accounts. It
does not offer commercial loans other than business credit cards. Discover Bank is chartered and regulated by the Office
of the Delaware State Bank Commissioner (the “Delaware Commissioner”) and the Federal Deposit Insurance Corporation
(“FDIC”), which insures its deposits and serves as the bank’s federal banking regulator. Our other bank, Bank of New
Castle, is chartered and regulated by the Delaware Commissioner and the FDIC, which also insures its deposits.
Dividends
There are various federal and state law limitations on the extent to which Discover Bank can finance or otherwise
supply funds to us through dividends, loans or otherwise. These limitations include minimum regulatory capital
requirements, federal and state banking law requirements concerning the payment of dividends out of net profits or
surplus, and general federal and state regulatory oversight to prevent unsafe or unsound practices. In general, federal
and applicable state banking laws prohibit, without first obtaining regulatory approval, insured depository institutions,
such as Discover Bank, from making dividend distributions if such distributions are not paid out of available earnings or
would cause the institution to fail to meet applicable capital adequacy standards.
Capital
We, Discover Bank and Bank of New Castle are subject to capital adequacy guidelines adopted by federal banking
regulators. For a further discussion of the capital adequacy guidelines, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity and Capital Resources.” As a bank holding company, we are
required to maintain minimum capital ratios. Currently, we are required to maintain Tier 1 and total capital equal to at
least 4% and 8% of our total risk-weighted assets, respectively. We are also required to maintain a minimum “leverage
ratio” (Tier 1 capital to adjusted total assets) of 4% to 5%, depending upon criteria defined and assessed by the Federal
Reserve. At November 30, 2009, Discover Financial Services met all requirements to be deemed “well-capitalized.”
FDIA
The Federal Deposit Insurance Act (the “FDIA”) imposes various requirements on insured depository institutions. For
example, the FDIA requires, among other things, the federal banking agencies to take “prompt corrective action” in
respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five
capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with
various relevant capital measures and certain other factors that are established by regulation. At November 30, 2009,
Discover Bank and Bank of New Castle met all applicable requirements to be deemed “well-capitalized.” Recent
regulations proposed by the U.S. bank regulators, referred to as the Basel II proposal, could alter the capital adequacy
framework for participating banking organizations. We will continue to closely monitor developments on these matters
and assess their impact on us and our banking subsidiaries.
The FDIA also prohibits any depository institution from making any capital distributions (including payment of a
dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be
“undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital
restoration plan. For a capital restoration plan to be acceptable, among other things, the depository institution’s parent
holding company must guarantee that the institution will comply with such capital restoration plan.
If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the
appointment of a receiver or conservator.
Each of our banking subsidiaries may also be held liable by the FDIC for any loss incurred, or reasonably expected to
be incurred, due to the default of the other U.S. banking subsidiary and for any assistance provided by the FDIC to the
other U.S. banking subsidiary that is in danger of default.
The FDIA prohibits a bank from accepting brokered deposits or offering interest rates on any deposits significantly
higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited),
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