Discover 2015 Annual Report Download - page 94

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Bank Holding Company Liquidity
The primary uses of funds at the unconsolidated DFS level include debt and capital service (interest and
dividend payments and return of principal), and capital management activity, which may include the periodic
repurchase of shares of our common stock. Our primary sources of funds at the bank holding company level include the
proceeds from the issuance of unsecured debt and preferred stock in the capital markets, as well as dividends from our
subsidiaries, particularly Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding company
could lose or experience impaired access to the capital markets. In addition, our regulators have the discretion to
restrict dividend payments from Discover Bank to the bank holding company.
We utilize a measure referred to as Number of Months of Pre-Funding to determine the length of time Discover
Financial Services can meet upcoming funding obligations including common and preferred dividend payments and
debt service obligations using existing cash resources. At December 31, 2015, Discover Financial Services had
sufficient cash resources to fund the dividend and debt service payments for more than 18 months.
We structure our debt maturity schedule to minimize the amount of debt maturing at the bank holding company
level within a short period of time. As of December 31, 2015, there is no upcoming debt maturity in 2016 at the bank
holding company level. Our ALCO and board of directors regularly review our compliance with our liquidity limits as a
bank holding company, which are established in accordance with the liquidity risk appetite articulated by our board.
Capital
Our primary sources of capital are from the earnings generated by our businesses and common and preferred
stock issuances in the capital markets. We seek to manage capital to a level and composition sufficient to support the
risks of our businesses, meet regulatory requirements, meet rating agency targets and debt investor expectations and
support future business growth. Within these constraints, we are focused on deploying capital in a manner that provides
attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the
economic environment, strategic initiatives, and legislative and regulatory developments.
Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, Discover Financial Services,
along with Discover Bank, must maintain minimum levels of capital. Failure to meet minimum capital requirements can
result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could limit our business activities and have a direct material effect on our financial position and results. We
must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet
items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. Current or future legislative or
regulatory initiatives may require us to hold more capital in the future.
In 2013, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC issued the Basel III rules
applicable to Discover Financial Services and Discover Bank. Under those rules, Discover Financial Services and
Discover Bank are classified as "Standardized Approach" entities, defined as U.S. banking organizations with
consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet
foreign exposures less than $10 billion. Additional phase-in requirements related to components of the final capital
rules will become effective through 2019. The Basel III rules include new minimum and "well-capitalized" risk-based
capital and leverage ratios, effective January 1, 2015, and refine the definition of what constitutes "capital" for
purposes of calculating those ratios of which certain requirements are subject to phase-in periods through the end of
2018 (the "transition period"). During the transition period, the effects of the changes to capital (i.e. certain deductions
and adjustments) are recognized in 20% increments from 2015 through 2018. For example, one of the deductions from
CET1 capital, goodwill and intangibles, is subject to a 40% of total deduction in 2015 that will increase to 60% in 2016
and so on, until reaching 100% deduction of total in 2018. For additional information regarding the risk-based capital
and leverage ratios, see Note 18: Capital Adequacy to our consolidated financial statements.
The Basel III rules also introduce a new capital conservation buffer on top of the minimum risk-weighted asset
ratios. The measure is designed to absorb losses during periods of economic stress. The calculation of the buffer will be
phased in beginning on January 1, 2016 at the rate of 0.625% and will increase by 0.625% on each subsequent
January 1 until it reaches the maximum 2.5% on January 1, 2019. When the capital conservation buffer is fully phased-
in on January 1, 2019, this will effectively result in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0%,
(ii) Tier 1 capital to risk-weighted assets of at least 8.5% and (iii) Total capital to risk-weighted assets of at least 10.5%.
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation
buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.