eTrade 2008 Annual Report Download - page 14

against net capital, operations that require an intensive use of capital could be limited. Such operations may
include investing activities, marketing and the financing of customer account balances. Also, our ability to
withdraw capital from brokerage subsidiaries could be restricted, which in turn could limit our ability to repay
debt and redeem or purchase shares of our outstanding stock.
Similarly, the Bank is subject to various regulatory capital requirements administered by the OTS. Failure to
meet minimum capital requirements can trigger certain mandatory, and possibly additional discretionary actions
by regulators that, if undertaken, could harm a bank’s operations and financial statements. A bank must meet
specific capital guidelines that involve quantitative measures of a bank’s assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. A bank’s capital amounts and classification are
also subject to qualitative judgments by the regulators about the strength of components of its capital, risk
weightings of assets, off-balance sheet transactions and other factors.
Quantitative measures established by regulation to ensure capital adequacy require a bank to maintain
minimum amounts and ratios of Total and Tier 1 Capital to Risk-weighted Assets and of Tier 1 Capital to
adjusted total assets. To satisfy the capital requirements for a “well capitalized” financial institution, a bank must
maintain higher Total and Tier 1 Capital to Risk-weighted Assets and Tier 1 Capital to adjusted total assets
ratios.
As a non-grandfathered savings and loan holding company, we are subject to regulations that could restrict our
ability to take advantage of certain business opportunities
We are required to file periodic reports with the OTS and are subject to examination by the OTS. The OTS
also has certain types of enforcement powers over us, ETB Holdings, Inc. and certain of its subsidiaries,
including the ability to issue cease-and-desist orders, force divestiture of the Bank and impose civil and monetary
penalties for violations of federal banking laws and regulations or for unsafe or unsound banking practices. In
addition, under the Gramm-Leach-Bliley Act, our activities are restricted to those that are financial in nature and
certain real estate-related activities. We may make merchant banking investments in companies whose activities
are not financial in nature if those investments are made for the purpose of appreciation and ultimate resale of the
investment and we do not manage or operate the company. Such merchant banking investments may be subject
to maximum holding periods and special recordkeeping and risk management requirements. In 2007, the
Company moved its subsidiary, E*TRADE Clearing, LLC to become an operating subsidiary of E*TRADE
Bank, resulting in increased regulatory oversight and restrictions on the activities of E*TRADE Clearing, LLC.
We believe all of our existing activities and investments are permissible under the Gramm-Leach-Bliley
Act, but the OTS has not yet fully interpreted these provisions. Even if our existing activities and investments are
permissible, we are unable to pursue future activities that are not financial in nature. We are also limited in our
ability to invest in other savings and loan holding companies.
In addition, the Bank is subject to extensive regulation of its activities and investments, capitalization,
community reinvestment, risk management policies and procedures and relationships with affiliated companies.
Acquisitions of and mergers with other financial institutions, purchases of deposits and loan portfolios, the
establishment of new Bank subsidiaries and the commencement of new activities by Bank subsidiaries require
the prior approval of the OTS, and in some cases the FDIC, which may deny approval or limit the scope of our
planned activity. These regulations and conditions could place us at a competitive disadvantage in an
environment in which consolidation within the financial services industry is prevalent. Also, these regulations
and conditions could affect our ability to realize synergies from future acquisitions, could negatively affect us
following the acquisition and could also delay or prevent the development, introduction and marketing of new
products and services.
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