Discover 2011 Annual Report Download - page 40

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Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our ability to meet
our liquidity and funding needs, which could materially adversely impact our business operations and overall financial
condition.
We must effectively manage the liquidity risk to which we are exposed. We require liquidity in order to meet cash
requirements such as day-to-day operating expenses, extensions of credit on our consumer loans and required payments of
principal and interest on our borrowings. Our primary sources of liquidity and funding are payments on our credit card loan
receivables, deposits, and proceeds from securitization transactions and securities offerings. We may maintain too much
liquidity, which can be costly and limit financial flexibility, or we may be too illiquid, which could result in financial distress
during a liquidity stress event. Our liquidity portfolio had a balance of approximately $8.5 billion as of November 30, 2011,
compared to $10.1 billion as of November 30, 2010. Our total contingent liquidity sources as of November 30, 2011 amounted
to $26.2 billion (consisting of $8.5 billion in our liquidity portfolio, $8.4 billion in incremental Federal Reserve discount
window capacity, $2.4 billion in a revolving credit facility, and $6.8 billion of undrawn capacity in private securitizations),
compared to $22.5 billion at November 30, 2010. Effective December 16, 2011, we terminated the $2.4 billion revolving credit
facility due to the availability of other sources of contingent liquidity.
In the event that our current sources of liquidity do not satisfy our needs, we would be required to seek additional
financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general
availability of credit to the financial services industry, new regulatory restrictions and requirements, and our credit ratings.
Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the volatility experienced in the capital
and credit markets during the financial crisis, may limit our ability to repay or replace maturing liabilities in a timely manner.
As such, we may be forced to delay raising funding or be forced to issue or raise funding at undesirable terms and/or costs,
which could decrease profitability and significantly reduce financial flexibility. Further, in disorderly financial markets or for
other reasons, it may be difficult or impossible to liquidate some of our investments to meet our liquidity needs.
While market conditions have stabilized and, in many cases, improved, there can be no assurance that significant
disruption and volatility in the financial markets will not occur in the future. For example, recent concerns regarding U.S. debt
and budget matters and the sovereign debt crisis in Europe have caused uncertainty in financial markets. Although the U.S. debt
limit was increased, a failure to raise the U.S. debt limit and/or a downgrade of U.S. debt ratings in the future could, in addition
to causing economic and financial market disruptions, materially adversely affect our ability to access capital markets on
favorable terms and the market value of the U.S. government securities that we hold, as well as have other material adverse
effects on the operation of our business and our financial results and condition. Other material adverse effects could include a
reduction in our credit ratings resulting from a further decrease in the probability of government support for large financial
institutions such as Discover assumed by the rating agencies in their current credit ratings. If we are unable to continue to fund
our assets through deposits or access capital markets on favorable terms, or if we experience an increase in our borrowing costs
or otherwise fail to manage our liquidity effectively, our liquidity, operating results, financial results and condition may be
materially adversely affected.
An inability to accept or maintain deposits in the future could materially adversely affect our liquidity position and our
ability to fund our business.
We obtain deposits from consumers either directly or through affinity relationships and through third-party securities
brokerage firms that offer our deposits to their customers. We had $26.2 billion in deposits acquired directly or through affinity
relationships and $13.3 billion in deposits originated through securities brokerage firms as of November 30, 2011, compared to
$20.6 billion and $13.7 billion, respectively, as of November 30, 2010. Competition from other financial services firms that use
deposit funding and the rates we offer on our deposit products may affect deposit renewal rates, costs or availability. Changes
we make to the rates offered on our deposit products may affect our profitability (through funding costs) and our liquidity
(through volumes raised). 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 or online banking generally, which could reduce the
number of consumers choosing to make deposits with us, third parties continuing or entering into affinity relationships with us,
or third-party securities brokerage firms 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 Federal Deposit Insurance Act (the "FDIA") prohibits insured banks, including our subsidiary
Discover Bank, from accepting brokered deposits (as defined in the FDIA) 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."
As of November 30, 2011, we had brokered deposits (as defined in the FDIA) of $16.9 billion. While Discover Bank met the
FDIC's definition of “well-capitalized” as of November 30, 2011, there can be no assurance that it will continue to meet this
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