Discover 2010 Annual Report Download - page 27

Financial Condition and Results of Operations – Liquidity and Capital Resources.” As a bank holding company, we are
required to maintain minimum capital ratios. Currently, we are required to maintain Tier 1 and total capital equal to at
least 4% and 8% of our total risk-weighted assets, respectively. We are also required to maintain a minimum “leverage
ratio” (Tier 1 capital to adjusted total assets) of 4% to 5%, depending upon criteria defined and assessed by the Federal
Reserve. At November 30, 2010, Discover Financial Services met all requirements to be deemed “well-capitalized.”
The Basel Committee on Banking Supervision released two consultative documents proposing significant changes to
bank capital and leverage requirements in December 2009, commonly referred to as “Basel III,” and released the Basel III
rules text in December 2010. Implementation of Basel III in the U.S. will require U.S. banking regulators to adopt
regulations and guidelines, which may differ in significant ways from the recommendations published by the Basel
Committee. It is unclear how U.S. banking regulators will define “well-capitalized” in their implementation of Basel III. For
a further discussion of Basel III, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Legislative and Regulatory Developments – International Initiatives Related to Capital and Liquidity.”
The Reform Act also includes provisions related to increased capital requirements. Such provisions would establish
minimum leverage and risk-based capital requirements on a consolidated basis for all depository institution holding
companies and insured depository institutions that cannot be quantitatively less than the strictest requirements in effect for
depository institutions as of the date of enactment of the Reform Act (i.e., July 21, 2010).
We are not able to predict at this time the precise content of capital guidelines or regulations that may be adopted by
regulatory agencies having authority over us and our subsidiaries or the impact that any changes in regulation would
have on us. However, we expect that the new standards will generally require us or our banking subsidiaries to maintain
more capital, with common equity as a more predominant component, which could significantly impact our return on
equity, financial condition, operations, capital position and ability to pursue business opportunities.
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, 2010,
Discover Bank and Bank of New Castle met all applicable requirements to be deemed “well-capitalized.” As noted above,
Basel III and the Reform Act could alter the capital adequacy framework for participating 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 such 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),
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