Discover 2010 Annual Report Download - page 24

Management and the Corporate Risk Management function monitor approved limits and escalation triggers to ensure
that the business is operating within the expressed risk appetite and strategic limits. Risk limits are monitored and
reported on to various risk committees and our board of directors, as appropriate. Through ongoing monitoring of risk
exposures, management is able to identify appropriate risk response and mitigation strategies in order to react
dynamically to changing conditions.
The expressions of risk appetite and strategic limits also serve as tools to preclude business activities that are
inconsistent with our long-term goals. Our risk appetite and strategic limit structure is approved by our board of directors.
Risk Categories
Our risk management program is organized around six major risk categories: credit risk, market risk, liquidity risk,
operational risk, legal and compliance risk and strategic risk. We evaluate the potential impact of a risk event on the
company by assessing financial impact, impact to our reputation, legal and regulatory impact and client/customer
impact.
Credit Risk. Credit risk arises from the potential that a borrower or counterparty will fail to perform on an obligation.
Our credit risk includes consumer credit risk and counterparty credit risk. Consumer credit risk is primarily incurred by
issuing credit cards and granting student loans and personal loans to consumers. Counterparty credit risk is incurred
through a number of activities including settlement, certain marketing programs, treasury and asset/liability management,
network incentive programs, vendor relationships and insurers.
Management of consumer credit risk is the primary responsibility of the Discover Bank Credit Committee. The
responsibilities of the Discover Bank Credit Committee include (i) establishing consumer credit risk philosophy and
tolerance; (ii) establishing procedures for implementing and ensuring compliance with risk identification, measurement,
monitoring and management policies and procedures for consumer credit risk management; and (iii) reviewing, on a
periodic basis, aggregate risk exposures and efficacy of risk measurement, monitoring and management policies and
procedures within the Credit Risk Management Department.
Counterparty credit risk is managed through our Counterparty Credit Committee. Our Counterparty Credit Committee’s
responsibilities include (i) establishing an enterprise-wide approach to counterparty credit risk management through a
program for the identification, measurement, management and reporting of counterparty credit risks; (ii) providing
oversight for controls, limits, thresholds and governance processes related to our ongoing management of counterparty
credit risks; (iii) reviewing the enterprise-wide portfolio of counterparty risks and ensuring those risks remain within
tolerances; and (iv) approving acceptance of and limits for counterparties that represent significant exposure to us.
Market Risk. Market risk is the risk to our financial condition resulting from adverse movements in market rates or
prices, such as interest rates, foreign exchange rates, credit spreads or equity prices. We are exposed to various types of
market risk, in particular interest rate risk and other risks that arise through the management of our investment portfolio.
Market risk exposures are managed through the Asset/Liability Management Committee. The responsibilities of our
Asset/Liability Management Committee include (i) maintaining oversight and responsibility for all risks associated with the
asset/liability management process including risks associated with liquidity and funding, market risk and our investment
portfolio; and (ii) recommending limits to be included in the risk appetite and limit structure.
Liquidity Risk. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of
an inability to obtain adequate funding or liquidate assets without significantly lowering market prices because of
inadequate market depth or market disruptions. Liquidity risk exposures are managed through our Asset/Liability
Management Committee. The responsibilities of our Asset/Liability Management Committee are described above.
Operational Risk. Operational risk arises from the potential that inadequate information systems, operational
problems, breaches in internal controls, fraud or external events will result in reputational harm or losses. Operational risk
also arises from model risk, which is the potential that we will incur a financial loss, make incorrect business decisions or
cause damage to our reputation as a result of (i) errors in financial and decision model design and development,
(ii) misapplication of financial or decision models; and (iii) errors in the financial and decision model production process.
We further differentiate operational risk into the following sub-categories: theft and fraud; employment practices and
workplace safety; customer, products and business practices; technology; physical asset and data security; processing;
financial and reporting; and external provider.
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