Discover 2011 Annual Report Download - page 27

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meet certain capital and management criteria to maintain our status as a financial holding company. If we or our depository
institutions 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 and the Federal Deposit Insurance Act, as amended by the Reform Act, 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.
The Reform Act addresses risks to the economy and the payments system, especially those posed by large systemically
significant financial firms. Bank holding companies with $50 billion or more in total consolidated assets, including Discover,
are considered systemically significant under the Reform Act and are subject to heightened prudential standards to be
established by the Federal Reserve. The Reform Act could have a significant impact on us by, for example, requiring us to limit
or change our business practices, limiting our ability to pursue business opportunities, requiring us to invest valuable
management time and resources in compliance efforts, imposing additional costs on us, limiting fees we can charge for
services, requiring us to meet more stringent capital, liquidity and leverage ratio requirements (including those under Basel III),
impacting the value of our assets, or otherwise adversely affecting our businesses. For more information regarding the Reform
Act, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment
and Developments” and “Risk Factors.”
Capital, Dividends and Share Repurchases
We, Discover Bank and Bank of New Castle are subject to capital adequacy guidelines adopted by federal banking
regulators, which include maintaining minimum capital and leverage ratios for capital adequacy and higher ratios to be deemed
"well-capitalized." As a bank holding company, 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. Further, under the
Federal Reserve's annual capital plan requirements, we are required to demonstrate that under stress scenarios we will maintain
a Tier 1 common ratio (meaning the ratio of Tier 1 common capital to total risk-weighted assets) above 5%. At November 30,
2011, Discover Financial Services met all requirements to be deemed “well-capitalized.” For related information regarding our
bank subsidiaries, see "-FDIA" below.
Current or future regulatory initiatives may require us to hold more capital in the future. In December 2011, the Federal
Reserve issued proposed rules to implement heightened prudential standards for large bank holding companies, including us, as
required by the Reform Act, including risk-based capital and leverage standards. In November 2011, the Federal Reserve
issued a final rule requiring the submission of annual capital plans to the Federal Reserve for its review and non-objection. The
instructions accompanying the Federal Reserve's final rule regarding capital plans indicate that the Federal Reserve expects
covered companies to show that they can achieve “readily and without difficulty the ratios required by the Basel III framework
as they would come into effect in the United States.” For more information regarding recent regulatory initiatives, see “-
Regulatory Environment and Developments - Capital and Liquidity.”
There are various federal and state law limitations on the extent to which our banking subsidiaries can provide 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 our banking subsidiaries, 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. For more information, see “-FDIA” below.
Additionally, as referred to above, we are required to submit an annual capital plan to the Federal Reserve that includes
an assessment of our expected uses and sources of capital over the planning horizon. Our ability to make capital distributions,
including our ability to pay dividends or repurchase shares of our common stock, is subject to the Federal Reserve's review and
non-objection of our annual capital plan. In certain circumstances, we will not be able to make a capital distribution unless the
Federal Reserve has approved such distribution. For additional information regarding capital, dividends and share repurchases,
see "Risk Factors - We may be limited in our ability to pay dividends and repurchase our common stock," "Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," “Management's
Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments -
Capital and Liquidity,” "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources - Capital" and Note 19: Capital Adequacy to our consolidated financial statements.
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