Discover 2009 Annual Report Download - page 39

increased competition will affect deposit renewal rates, costs or availability. If we are required to offer higher interest
rates to attract or maintain deposits, our funding costs will be adversely impacted. In addition, our ability to maintain
existing or obtain additional deposits may be impacted by factors beyond our control, including perceptions about our
financial strength, which could lead to consumers choosing not to make deposits with us or third-party brokers not
offering our deposit products.
Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels
of our bank subsidiaries. The FDIA prohibits a bank, including our subsidiary Discover 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), unless (1) it is well-capitalized or (2) it is adequately
capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized may not pay an interest rate on
any deposit, including direct-to-consumer deposits, in excess of 75 basis points over the national rate published by the
FDIC. There are no such restrictions on a bank that is well-capitalized. While Discover Bank met the FDIC’s definition of
“well-capitalized” as of November 30, 2009, there can be no assurance that it will continue to meet this definition. For a
comparison of Discover Bank’s capital ratios to the “well-capitalized” capital requirements, see Note 21: Capital
Adequacy to our consolidated financial statements. Additionally, our regulators can adjust the requirements to be well-
capitalized at any time and have authority to place limitations on our deposit businesses, including the interest rate we
pay on deposits. An inability to attract or maintain deposits in the future could materially adversely affect our liquidity
position and our ability to fund our business.
If we do not securitize our receivables, it may have a material adverse effect on our liquidity, cost of funds and overall
financial condition.
Historically, we have used the securitization of credit card receivables, which involves the transfer of receivables to a
trust and the issuance by the trust of beneficial interests to third-party investors, as a significant source of funding. Our
average level of securitized borrowings, excluding retained issuances, was $22.6 billion and $26.9 billion for the 2009
and 2008 fiscal years, respectively. Due to market events and disruption in the capital markets, the public and private
securitization markets were not available to us from mid-2008 and into the first half of 2009. We re-entered the
securitization markets in July and September 2009, with $1.5 billion and $1.3 billion, respectively, of public asset-
backed securities issuances out of our securitization trusts that were eligible for funding under TALF. It is uncertain,
however, whether the securitization markets will be available on terms or volumes that are attractive to us going forward,
particularly after TALF expires in March 2010.
Further, while we have capacity to issue new asset-backed securities from our securitization trusts, there has been
uncertainty in the securitization market recently over existing FDIC guidance regarding standards for legal isolation of the
transferred assets following the change in accounting rules pertaining to transfers of financial assets and consolidations.
This uncertainty has made it difficult to obtain necessary credit ratings for the issuances of asset-backed securities,
including the required ratings for securities to qualify as eligible securities under TALF. Issuances after TALF expires on
March 31, 2010 are subject to the final determination of the FDIC regarding the legal isolation standard, the potential
framework of which was described in the FDIC’s Advance Notice of Proposed Rulemaking in December 2009. The form
that this rule will ultimately take is uncertain at this time, but it may impact our ability and/or desire to issue asset-backed
securities in the future.
In addition, legislation approved in the U.S. House of Representatives in December 2009, and a similar measure under
consideration in the U.S. Senate, propose extensive changes to the laws regulating financial services firms. These
proposals include new requirements for the securitization market, including new rules around risk retention and
disclosure. The form that this legislation may ultimately take is unknown at this time, but this legislation may impact our
ability and desire to securitize our receivables.
The Securities and Exchange Commission (the “SEC”) is considering changes to the disclosure requirements for asset
securitizations and changes to the requirements for shelf registration of asset securitizations. At this point, we cannot
predict what specific changes will be proposed or adopted. However, significant changes to the disclosure requirements
or registration process for our securitizations could make them more expensive or reduce our access to the capital
markets, in either case making securitization less viable as a funding source.
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