Discover 2009 Annual Report Download - page 64

recognizable in a transaction accounted for as a secured borrowing. Because our securitization transactions will be
accounted for under the new accounting rules as secured borrowings rather than asset sales, the cash flows from these
transactions will be presented as cash flows from financing activities rather than cash flows from operating or investing
activities. Notwithstanding this accounting treatment, our securitizations are structured to legally isolate the receivables
from Discover Bank and we would not expect to be able to access the assets of our securitization trusts, even in
insolvency, receivership or conservatorship proceedings. We would, however, continue to have the rights associated with
our retained interests in these trusts.
Actions we took in the third quarter of 2009 to adjust the credit enhancement structure of the trusts had the effect of
causing the assets of the trusts to be included in our risk-weighted assets for regulatory capital purposes effective July
2009. As a result, the consolidation of the trusts under Statement No. 167 on December 1, 2009, had a lesser impact on
our regulatory capital calculations than would have otherwise been the case because much of this effect has already been
reflected as a result of the trust actions. See “–Liquidity and Capital Resources – Funding Sources – Securitization
Financing” below for further discussion of these trust support actions. However, the $1.4 billion charge to retained
earnings as a result of adopting Statement No. 167 will further reduce our regulatory capital ratios, although both
Discover Financial Services and Discover Bank are expected to remain above well-capitalized levels after the adoption of
Statements No. 166 and 167. The following table shows our regulatory capital amounts and ratios on an actual and pro
forma basis as of November 30, 2009, the latter of which gives effect to the estimated $1.4 billion reduction of retained
earnings expected to be recorded on December 1, 2009 in connection with adopting Statements No. 166 and 167:
November 30, 2009
Actual
November 30, 2009
Pro Forma
(dollars in thousands)
Discover Financial Services
Total Capital....................................................................................................................................... $9,516,965 $8,104,091
Tier 1 Capital ..................................................................................................................................... $8,139,309 $6,728,192
Total Risk-Based Capital Ratio ............................................................................................................... 17.9% 15.9%
Tier 1 Risk-Based Capital Ratio.............................................................................................................. 15.3% 13.2%
Tier 1 Leverage Ratio ........................................................................................................................... 18.1% 10.2%
Discover Bank
Total Capital....................................................................................................................................... $8,210,450 $6,797,568
Tier 1 Capital ..................................................................................................................................... $6,572,320 $5,161,203
Total Risk-Based Capital Ratio ............................................................................................................... 15.8% 13.7%
Tier 1 Risk-Based Capital Ratio.............................................................................................................. 12.6% 10.4%
Tier 1 Leverage Ratio ........................................................................................................................... 15.9% 8.3%
Legislative and Regulatory Developments
Legislation Addressing Credit Card Practices
In May 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) was enacted.
The CARD Act makes numerous changes to the Truth in Lending Act, affecting the marketing, underwriting, pricing,
billing and other aspects of the consumer credit card business. Several provisions of the CARD Act became effective in
August 2009, but most of the requirements will become effective in February 2010 and others will become effective in
August 2010. Legislation has been proposed to accelerate the effective date of all of the CARD Act provisions effective as
soon as the legislation is enacted, but prospects for enactment are uncertain. The CARD Act and its implementing
regulations:
• Prohibit interest rate increases on outstanding balances except under limited circumstances;
• Prohibit interest rate increases on new balances during the first year an account is opened except under limited
circumstances;
• Require allocation of payments in excess of the required minimum payment to balances with the highest annual
percentage rate (“APR”) before balances with a lower APR (for accounts with different APRs on different balances);
• Restrict imposition of a default APR on existing balances unless an account is 60 days past due and require that the
increased APR resulting from a default be reduced if payments are timely made for six months;
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