Discover 2014 Annual Report Download - page 92

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funding costs, deterioration in credit ratings could reduce our borrowing capacity in the unsecured debt and asset
securitization capital markets.
We also have agreements with certain of our derivative counterparties that contain provisions that require DFS
and Discover Bank to maintain an investment grade credit rating from specified major credit rating agencies. Because
the credit rating of DFS did not meet the specified thresholds, we had posted $4 million of collateral with our
counterparties at December 31, 2014. Discover Bank's credit rating met specified thresholds set by its counterparties.
However, if Discover Bank’s credit rating were reduced by one ratings notch, Discover Bank would be required to post
additional collateral, which, as of December 31, 2014, would have been $97 million.
A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal
at any time by the assigning rating organization, and each rating should be evaluated independently of any other
rating. The credit ratings are summarized in the following table:
Moody’s
Investors
Service Standard & Poor’s Fitch Ratings
Senior Unsecured Debt
Discover Financial Services ............................................................................................... Ba1 BBB- BBB+
Discover Bank .................................................................................................................. Baa3 BBB BBB+
Outlook for Senior Unsecured Debt ....................................................................................... Stable Positive Stable
Subordinated Debt
Discover Bank .................................................................................................................. Ba1 BBB- BBB
Discover Card Execution Note Trust
Class A(1) ......................................................................................................................... Aaa(sf) AAA(sf) AAAsf
Class B(1) ......................................................................................................................... Aa1(sf) AA+(sf) AA-sf
Class C(2) ......................................................................................................................... N/A N/A N/A
(1) An “sf” in the rating denotes rating agency identification for structured finance product ratings.
(2) All Class C notes are currently held by subsidiaries of Discover Bank and, therefore, are not publicly rated.
Liquidity
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy
debt obligations under normal and stress conditions at the Discover Financial Services and Discover Bank entity levels
and on a consolidated basis. In addition to the funding sources discussed above, we also maintain high quality, liquid,
unencumbered assets in our investment portfolio.
We maintain a liquidity risk and funding management policy which outlines the overall framework and general
principles for managing the liquidity risk across our businesses. The policy is approved by the board of directors with
the implementation responsibilities delegated to the Asset and Liability Management Committee (the “ALCO”). We seek
to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity,
which could cause financial distress. Liquidity risk is centrally managed by the ALCO, which is chaired by our Treasurer
and has cross-functional membership. The ALCO monitors liquidity risk profile and determines any actions that may
need to be taken.
We employ a variety of metrics to monitor and manage liquidity. We developed liquidity early warning
indicators (“EWI”) to detect initial phases of liquidity stress events and a reporting and escalation process that is
designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures, and
are monitored on a daily basis and reported to the ALCO regularly. An EWI breach triggers prompt review and
decision making by our senior management team, and in certain instances may lead to the convening of a senior-level
response team and activation of the contingency funding plan.
In addition, liquidity stress testing is conducted regularly and contingency funding planning is in place to address
potential liquidity shortfalls. We evaluate a range of stress scenarios including idiosyncratic and systemic events that
could impact funding sources and our ability to meet liquidity needs. These scenarios measure the liquidity position at
Discover Financial Services, Discover Bank and on a consolidated basis from daily to up to a two-year horizon by
analyzing the stress on liquidity versus the ability to generate contingent liquidity. We maintain contingent funding