Discover 2010 Annual Report Download - page 40

direct-to-consumer deposits and $13.7 billion in brokered deposits as of November 30, 2010, compared to $12.6 billion
in direct-to-consumer deposits and $19.5 billion in brokered deposits as of November 30, 2009.
Competition from other financial services firms that use deposit funding may affect deposit renewal rates, costs or
availability. If we are required to offer higher interest rates to attract or maintain deposits, our funding costs will be
adversely impacted. 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 FDIA prohibits a bank, including our subsidiary Discover 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), 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. While Discover Bank met the FDIC’s definition of
“well-capitalized” as of November 30, 2010, there can be no assurance that it will continue to meet this definition. For a
comparison of Discover Bank’s capital ratios to the “well-capitalized” capital requirements, see Note 19: Capital
Adequacy to our consolidated financial statements. Additionally, our regulators can adjust the requirements to be well-
capitalized at any time and have authority to place limitations on our deposit businesses, including the interest rate we
pay on deposits.
An inability to attract or maintain deposits in the future could materially adversely affect our liquidity position and our
ability to fund our business.
If we are unable to securitize our receivables, it may have a material adverse effect on our liquidity, cost of funds and
overall financial condition.
Historically, we have used the securitization of credit card receivables, which involves the transfer of receivables to a
trust and the issuance by the trust of beneficial interests to third-party investors, as a significant source of funding. Our
average level of securitized borrowings from third parties was $17.2 billion for fiscal year 2010 and $22.7 billion for
fiscal year 2009. Due to market events and disruption in the capital markets as well as uncertainty related to various
regulatory initiatives impacting the asset-backed securitization markets, we have been less active in the public and private
securitization markets since mid-2008 and it is uncertain whether the securitization markets will be available in the future
on terms or volumes that are similar to historical levels.
The Reform Act imposes a number of significant changes related to asset-backed securities that may impact our ability
and desire to securitize our receivables. For example, the Reform Act nullified Rule 436(g) of the Securities Act of 1933
(the “Securities Act”) effective immediately, which subjects the rating agencies to “expert liability” under Section 11 of the
Securities Act for misstatements or omissions of materials facts in connection with credit ratings contained in registration
statements. In response to this measure, the major credit rating agencies issued statements indicating that they would be
unwilling to provide issuers with consent to use credit ratings in their registration statements. In order to provide a
transition period, the Securities and Exchange Commission (the “SEC”) issued a “no-action” letter in July 2010 allowing
issuers to omit credit ratings from registration statements until January 24, 2011. In November 2010, the SEC issued a
second letter extending this no-action period indefinitely. Failure to ultimately resolve this issue could impact the market
for registered asset-backed securities.
The SEC has also proposed revised rules for asset-backed securities offerings that, if adopted, would substantially
change the disclosure, reporting and offering process for public and private offerings of asset-backed securities.
Significant changes to the disclosure requirements or registration process for securitizations could make them more
expensive, making securitization less viable as a funding source.
The ability of issuers of asset-backed securities to obtain necessary credit ratings for their issuances has been based, in
part, on qualification under the FDIC’s safe harbor rule for assets transferred in securitizations. The FDIC recently issued a
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