Discover 2011 Annual Report Download - page 28

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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, 2011, Discover Bank and Bank
of New Castle met all applicable requirements to be deemed “well-capitalized.” As noted above, recently-issued Federal
Reserve rules and additional future rulemaking, including with respect to implementation of Basel III, could alter the capital
adequacy framework for covered banking organizations.
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 the 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), unless
(1) it is "well-capitalized," or it is "adequately capitalized" and receives a waiver from the FDIC. A bank that is "adequately
capitalized" and that accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in
excess of 75 basis points over certain prevailing market rates. There are no such restrictions under the FDIA on a bank that is
"well-capitalized." As of November 30, 2011, Discover Bank and Bank of New Castle each met the FDIC's definition of a
"well-capitalized" institution for purposes of accepting brokered deposits. An inability to accept brokered deposits in the future
could materially adversely impact our funding costs and liquidity. For more information, see “Risk Factors - An inability to
accept or maintain deposits in the future could materially adversely affect our liquidity position and our ability to fund our
business.”
The FDIA also affords FDIC-insured depository institutions, such as Discover Bank and Bank of New Castle, the ability
to “export” favorable interest rates permitted under the laws of the state where the bank is located. Discover Bank and Bank of
New Castle are both located in Delaware and, therefore, charge interest on loans to out-of-state borrowers at rates permitted
under Delaware law, regardless of the usury limitations imposed by the state laws of the borrower's residence. Delaware law
does not limit the amount of interest that may be charged on loans of the type offered by Discover Bank or Bank of New
Castle. This flexibility facilitates the current nationwide lending activities of Discover Bank and Bank of New Castle.
The FDIA subjects us to deposit insurance assessments. Under the Reform Act, in order to bolster the reserves of the
Deposit Insurance Fund, the minimum reserve ratio set by the FDIC was increased to 1.35%. The FDIC recently set a reserve
ratio of 2%, 65 basis points above the statutory minimum. The FDIC has also approved two rules that amend its deposit
insurance regulations. The first implements a provision of the Reform Act that changes the assessment base for deposit
insurance premiums from one based on domestic deposits to one based on average consolidated total assets minus average
tangible equity. The second revises the risk-based assessment system for all large insured depository institutions (generally,
institutions with at least $10 billion in total assets, including Discover Bank) to one based on a scorecard method. Further
increases may occur in the future. The Reform Act has removed the statutory cap for the reserve ratio, leaving the FDIC free to
set a cap in the future.
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