Discover 2010 Annual Report Download - page 73

Bankruptcy Legislation
A bill referred to the Senate Judiciary Committee in the previous Congress would disallow claims in Chapter 7
bankruptcy based on “high cost” consumer debt and exclude consumers with such debt from the bankruptcy “means test.”
The means test requires debtors who can afford to repay a portion of their debts through Chapter 13 repayment plan do
so, rather than discharge all indebtedness under Chapter 7. The proposed legislation, if enacted, could increase the
percentage of bankruptcy filers who obtain full debt discharges to the detriment of all unsecured lenders, and could result
in increased charge-offs of our loan receivables.It is unclear whether this legislation will be considered by the next
Congress.
Congress has also considered legislation to allow bankruptcy courts to restructure first mortgage loans (e.g., by
reducing the loan amount to the value of the collateral, a process referred to as “cramdown”). Such a change would likely
increase the number of individuals who file for bankruptcy, which would adversely impact all creditors including us.
While the House of Representatives approved a cramdown bill, the Senate did not. This or similar legislation could be
reintroduced in the next Congress.
In addition, a Congressional subcommittee in the previous Congress approved a bill that would remove current
limitations on the dischargeability of private student loan debts in bankruptcy. If enacted, the bill would make it
substantially easier for borrowers of private student loans to obtain a discharge of their student loan debts. This bill could
be reintroduced in the next Congress. If such legislation were to be enacted into law, it could substantially increase the
credit losses of our private student loan business.
Compensation Developments
In June 2010, the Federal Reserve, together with the FDIC and the other banking agencies, issued final guidance
designed to ensure that incentive compensation practices of financial organizations take into account risk and are
consistent with safety and soundness. The Federal Reserve recently conducted a special horizontal review of compensation
practices at more than twenty large complex banking organizations, including us, with the expectation that incentive
compensation practices appropriately balance risk and financial results and avoid creating incentives for employees to
take imprudent risks. The Reform Act described above under “ – Financial Regulatory Reform” imposes additional
disclosures and restrictions on compensation.
FDIC Initiatives Regarding Assessments
The Reform Act contains several provisions that could increase the FDIC deposit insurance premiums paid by Discover
Bank. One provision includes a change in the assessment base for federal deposit insurance from the amount of total
deposits to consolidated assets less tangible equity. Another provision includes an increase in the minimum reserve ratio
of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits (with the FDIC having until September 30, 2020
to meet the new minimum through assessments on insured depository institutions with assets of $10 billion or more) while
also removing the cap on the size of the fund. As required by the Reform Act, in October 2010, the FDIC announced its
plan to increase the required reserve ratio of the Deposit Insurance Fund to 1.35% by September 30, 2020 utilizing new
rate schedules. This was followed by two proposals issued by the FDIC in November 2010. In its first proposal, the FDIC
proposed to implement the provision of the Reform Act that changes the assessment base for deposit insurance premiums
from one based on insured deposits to one based on average consolidated assets less tangible equity and change the
assessment rate schedules so that approximately the same amount of revenue would be collected under the new
assessment base as under the rate schedules proposed by the FDIC in October 2010. The second FDIC proposal would
revise the risk-based assessment system for all large insured depository institutions (generally, those with at least $10
billion in total assets). Any future increases in assessments would decrease our earnings and could adversely affect our
results of operations.
International Initiatives Related to Capital and Liquidity
The Basel Committee on Banking Supervision released two consultative documents proposing significant changes to
bank capital, leverage and liquidity requirements in December 2009, commonly referred to as “Basel III.” The Basel
Committee considered public comments received on the December proposal, the results of a qualitative impact study and
the economic impact over the transition period. In July 2010, the Committee issued statements that reflected, among other
things, decisions reached on certain elements of the comprehensive proposals, including the overall design of the capital
and liquidity reform package.
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