eTrade 2007 Annual Report Download - page 53

Other Liquidity Matters
We currently anticipate that our available cash resources and credit will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least the next 12 months. We may need to raise
additional funds in order to support regulatory capital needs at our Bank, reduce holding company debt, support
more rapid expansion, develop new or enhanced products and services, respond to competitive pressures, acquire
businesses or technologies or take advantage of unanticipated opportunities.
RISK MANAGEMENT
As a financial services company, we are exposed to risks in every component of our business. The
identification and management of existing and potential risks are the keys to effective risk management. Our risk
management framework, principles and practices support decision-making, improve the success rate for new
initiatives and strengthen the organization. Our goal is to balance risks and rewards through effective risk
management. Risks cannot be completely eliminated; however, we do believe risks can be identified and
managed within the Company’s risk tolerance.
We manage risk through a governance structure involving the various boards, senior management and
several risk committees. We use management level risk committees to help ensure that business decisions are
executed within our desired risk profile.
The Corporate Risk Committee, consisting of senior management executives, monitors the risk process and
significant risks throughout the Company. In addition to this committee, various enterprise risk committees and
departments throughout the Company aid in the identification and management of risks. These departments
include internal audit, compliance, finance, legal, treasury, credit and enterprise risk management.
Interest Rate Risk Management
Interest rate risk is the risk of loss from adverse changes in interest rates. Interest rate risks are monitored
and managed by the E*TRADE Bank’s Asset Liability Committee (“ALCO”). The ALCO reviews balance sheet
trends, market interest rate and sensitivity analyses. The analysis of interest sensitivity to changes in market
interest rates under various scenarios is reviewed by ALCO. The scenarios assume both parallel and non-parallel
shifts in the yield curve. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional
information about our interest rate risks.
Credit Risk Management
Credit risk is the risk of loss resulting from adverse changes in a borrower’s or counterparty’s ability to meet
its financial obligations under agreed upon terms. Our primary sources of credit risk are our loan and securities
portfolios, where it results from extending credit to customers and purchasing securities, respectively. The degree
of credit risk associated with our loans and securities varies based on many factors including the size of the
transaction, the credit characteristics of the borrower, features of the loan product or security, the contractual
terms of the related documents and the availability and quality of collateral. Credit risk is one of the most
common risks in financial services and is one of our most significant risks.
Credit risk is monitored by our Credit Risk Committee. The Credit Risk Committee’s duties include
monitoring asset quality trends, evaluating market conditions including those in residential real estate markets,
determining the adequacy of our allowance for loan losses, 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 reviews and modifies credit
policies as appropriate.
Conditions in the residential real estate and credit markets deteriorated sharply during 2007, particularly in
the second half of 2007. The significant and abrupt evaporation of secondary market liquidity for various types of
mortgage loans, particularly home equity loans, has decreased the overall availability of housing credit. As a
result, many borrowers, particularly those in markets with declining housing prices, have been unable to
refinance existing loans. This combination of a decline in the availability of credit and a decline in housing prices
creates significant credit risk in our loan portfolio, particularly in our home equity loan portfolio.
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