eTrade 2008 Annual Report Download - page 59

Liquidity Risk Management
Liquidity risk is monitored and managed primarily by the ALCO. We have in place a comprehensive set of
liquidity and funding policies that are intended to maintain our flexibility to address liquidity events specific to
us or the market in general.
We believe liquidity risk management is especially important during periods of stress in the financial
markets. During the fourth quarter of 2007, we experienced a disruption in our customer base, which caused a
significant decline in customer deposits. These deposits are the primary source of liquidity for E*TRADE Bank,
so this sudden and rapid decline created a substantial amount of liquidity risk. We followed our existing liquidity
policies and contingency plans and successfully met our liquidity needs during this extraordinary period. We
believe that our ability to meet liquidity needs during this time validates the effectiveness of our liquidity policies
and contingency plans.
See Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources for additional information.
Interest Rate Risk Management
Interest rate risks are monitored and managed by the ALCO. 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.
Operational Risk Management
Operational risks exist in most areas of the Company from clearing to customer service. While we make
every effort to protect against failures in the internal controls system, no system is completely fail proof.
Loss of company and customer assets due to fraud represents one of our most significant operational risks.
Fraud losses typically result from unauthorized use of customer and corporate funds and resources. We monitor
customer transactions and use scoring tools which prevent a significant number of fraudulent transactions on a
daily basis. However, new techniques and strategies are constantly being developed by perpetrators to commit
fraud. In order to minimize this threat, we offer our customers various security measures, including a token based
security system. This token creates a unique password which changes every sixty seconds and must be used
along with the customer’s self-selected password to access their account. We believe this system is an extremely
effective tool for preventing unauthorized access to a customer’s account.
The failure of a third party vendor to adequately meet its responsibilities could result in financial loss and
impact our reputation. The Vendor Risk Management group monitors our vendor relationships and arrangements.
The vendor risk identification process includes evaluating contracts, renewal options and vendor performance. To
ensure the financial soundness of providers, we conduct financial reviews of our large providers. In addition,
onsite operational audits are conducted annually for significant providers.
Processing issues and external events may result in opportunity loss depending on the situation. These types
of losses include issues resulting from human error, equipment failures, significant weather events or other
related types of events. External events resulting in actual losses could be due to Internet performance issues,
litigation, change in public policy and our reputation.
CONCENTRATIONS OF CREDIT RISK
Loans
We track and review many factors to predict and monitor credit risk in our loan portfolios, which are
primarily made up of loans secured by residential real estate. These factors, which are documented at the time of
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