eTrade 2012 Annual Report Download - page 72

business, including trading activity as well as income from related businesses, including market making,
securities lending and margin lending; turmoil in the global financial markets which could reduce trade volumes
and margin borrowing and increase our dependence on our more active customers who receive lower pricing; and
new entrants into the discount brokerage market which could put pressure on margins and thus reduce revenues.
Reputational Risk Management
Reputational risks are reviewed, challenged and monitored by various risk committees and the ERMC. We
recognize that reputational risk can manifest itself in all areas of our business often in conjunction with other risk
types. We acknowledge that there is particular reputational risk from many factors including, but not limited to:
• deterioration in the loan portfolios;
• impact of investigations and lawsuits;
• failure of controls supporting the accuracy of financial reports and disclosures;
• risk of business disruption and system failures;
• risk of security breaches and identity theft; and
• risk of public regulatory findings.
Legal, Regulatory and Compliance Risk Management
Legal, regulatory and compliance risks are reviewed, challenged and monitored by various risk committees
and the ERMC. We recognize that legal, regulatory and compliance risks can manifest in all areas of our
business. Particularly pertinent risks include extensive government regulation, including banking and securities
rules and regulations, which could restrict our business practices; recently enacted regulatory reform legislation
which may have a material impact on our operations; and investigations and lawsuits. In addition, if we are
unable to meet these new requirements, we could face negative regulatory consequences, which would have a
material negative effect on our business; not complying with applicable securities and banking laws, rules and
regulations, either domestically or internationally could subject us to disciplinary actions, damages, penalties or
restrictions that could significantly harm our business; and not maintaining the capital levels required by
regulators could subject us to prompt correction actions, increasingly strong sanctions, cease-and-desist orders,
and ultimately FDIC receivership.
These risks also arise in situations where the laws or rules governing certain regulated products or activities
may be ambiguous, untested, or in the process of significant change or revision. This risk exposes us to fines,
civil money penalties, payment of damages, and the voiding of contracts. It can lead to diminished reputation,
reduced franchise value, limited business opportunities, reduced expansion potential, and an inability to enforce
contracts.
CONCENTRATIONS OF CREDIT RISK
Loans
We track and review factors to predict and monitor credit risk in the mortgage loan portfolio on an ongoing
basis. These factors include: loan type, estimated current loan-to-value (“LTV”)/combined loan-to-value
(“CLTV”) ratios, delinquency history, documentation type, borrowers’ current credit scores, housing prices, loan
acquisition channel, loan vintage and geographic location of the property. In economic conditions in which
housing prices generally appreciate, we believe that loan type, LTV/CLTV ratios, documentation type and credit
scores are the key factors in determining future loan performance. In a housing market with declining home
prices and less credit available for refinance, we believe the LTV/CLTV ratio becomes a more important factor
in predicting and monitoring credit risk. These factors are updated on at least a quarterly basis. We track and
review delinquency status to predict and monitor credit risk in the consumer and other loan portfolio on at least a
quarterly basis.
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