eTrade 2006 Annual Report Download - page 54

The Credit Risk Committee’s duties include monitoring asset quality trends, evaluating market conditions
including residential real estate markets, determining the adequacy of the allowance, establishing underwriting
standards, approving large credit exposures, approving large portfolio purchases and delegating credit approval
authority. The Credit Risk Committee uses detailed tracking and analysis to measure credit performance and
routinely reviews and modifies credit policies as appropriate. The section below includes some of the information
reviewed by the committee in determining asset quality and the level of adequacy of the allowance.
In addition to the Bank’s Credit Risk Committee, margin receivables are monitored by brokerage
management. These receivables are evaluated to determine if the margin receivables have sufficient collateral,
that is the value of the securities held as collateral are sufficient to cover the margin receivable balance. In
addition, brokerage management monitors situations where trades have occurred and payment was not received
due to fraud or returned checks and other electronic transaction rejects. These situations are rare but do
occasionally occur.
Operational Risk Management
Operational risk is the risk of loss resulting from fraud, inadequate controls or the failure of the internal
control process, third party vendor issues, processing issues and external events. Operational risks exist in most
areas of the Company from advertising to customer service. While we make every effort to protect against
failures in the internal controls system, no system is completely fail proof.
The failure of a third party vendor to adequately meet its responsibilities could result in financial losses and
reputation risks. The Vendor Risk Management group monitors our vendor relationships. Third party vendor
arrangements are overseen by the Vendor Risk Management group. The vendor risk identification process
includes evaluating contracts, renewal options and vendor performance. To ensure the financial soundness of
providers, we conducted financial reviews of our large providers. In addition, onsite operational audits are
conducted annually for significant providers.
Fraud losses result from unauthorized use of customer and corporate funds and resources. We monitor
customer transactions and attempt to identify fraudulent transactions promptly. However, new techniques are
constantly being developed by perpetrators to commit fraud.
Among other security measures, we offer customers token based security. The tokens display a six digit
code that changes every sixty seconds. The number on the display and a password must be used together to
access the customers account. This system is an extremely effective tool for preventing unauthorized access to a
customer’s account.
Processing issues and external events may result in opportunity loss or actual losses depending on the
situation. These types of losses include issues resulting from inadequate staffing, equipment failures, significant
weather events or other related types of events. External events resulting in opportunity or actual losses could
include the failure of a competitor to meet its customers’ needs, Internet performance issues, legal, reputation,
public policy and strategic risks.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in conformity with accounting principles generally
accepted in the United States of America. Note 1—Organization, Basis of Presentation and Summary of
Significant Accounting Policies to the consolidated financial statements contains a summary of our significant
accounting policies, many of which require the use of estimates and assumptions. We believe that of our
significant accounting policies, the following are noteworthy because they are based on estimates and
assumptions that require complex, subjective judgments by management, which can materially impact reported
results. Changes in these estimates or assumptions could materially impact our financial condition and results of
operation.
51