eTrade 2010 Annual Report Download - page 60

Financial Regulatory Reform Legislation and Basel III Accords
We believe the majority of the changes in the Dodd-Frank Act will have no material impact on our business.
We believe, however, that the implementation of holding company capital requirements is relevant to us as the
parent company is not currently subject to capital requirements. These requirements are expected to become
effective within the next five years. We have begun to track these ratios internally, using the current capital ratios
that apply to bank holding companies, as we plan for this future requirement. As of December 31, 2010, the
parent company Tier I capital to total adjusted assets ratio was approximately 3.5% compared to the minimum
ratio required to be “well capitalized” of 5%, and the Tier I capital to risk-weighted assets ratio was
approximately 7% compared to the minimum ratio required to be “well capitalized” of 6%. We fully expect that
our holding company capital ratios will exceed the “well capitalized” minimums well in advance of the effective
date and we have no plans to raise additional capital as a result of this new law. Our confidence in our ability to
meet these requirements is reinforced by: our trajectory toward sustainable profitability; anticipated additional
conversions of our convertible debt; and the utilization of our deferred tax asset as we deliver profitable results.
The current risk-based capital guidelines that apply to E*TRADE Bank are based upon the 1988 capital
accord of the BCBS, a committee of central banks and bank supervisors, as implemented by the U.S. federal
banking agencies including the OTS. On September 12, 2010, the GHOS, the oversight body of the BCBS,
announced agreement on the calibration and phase-in arrangements for a strengthened set of capital
requirements, known as the Basel III Accords. The final Basel III Accords were released on December 16, 2010
and are subject to individual adoption by member nations, including the U.S., beginning January 1, 2013. The
GHOS agreement is intended to strengthen the prudential standards for large and internationally active banks and
is not directly applicable to us; however, it may impact how the U.S. regulators implement the Dodd-Frank Act
for other banking institutions, including the possibility of higher capital requirements. The full impact of the
GHOS agreement on the regulatory requirements to which we will be subject is unclear, and will remain
unknown for at least some time until implementing capital regulations are proposed and adopted. We will
continue to monitor the ongoing rule-making process to assess both the timing and the impact of the Dodd-Frank
Act and Basel III Accords on our business.
Other Sources of Liquidity
We also maintain $375 million in uncommitted financing to meet margin lending needs. At December 31,
2010, there were no outstanding balances and the full $375 million was available.
We rely on borrowed funds, from sources such as securities sold under agreements to repurchase and FHLB
advances, to provide liquidity for E*TRADE Bank. Our ability to borrow these funds is dependent upon the
continued availability of funding in the wholesale borrowings market. At December 31, 2010, E*TRADE Bank
had approximately $3.3 billion in additional collateralized borrowing capacity with the FHLB. We also have the
ability to generate liquidity in the form of additional deposits by raising the yield on our customer deposit
accounts.
We had the option to make the interest payments on our 12
1
⁄ 2 % Notes in the form of either cash or
additional 12
1
⁄ 2 % Notes through May 2010. During the second quarter of 2008, we elected to make our first
interest payment of approximately $121 million in cash. During 2008 and 2009, we elected to make our second,
third and fourth interest payments of $121 million, $129 million and $55 million, respectively, in the form of
additional 12
1
⁄ 2 % Notes. Our fifth interest payment, which was due in the second quarter of 2010, was the last
payment for which we had the option to pay in the form of either cash or additional 12
1
⁄ 2 % Notes and we elected
to make this interest payment in the form of cash. We made the November 2010 payment in cash and are
required to pay all remaining interest payments in cash. Based on the balance of the 12
1
⁄ 2 % Notes as of
December 31, 2010, the interest payments are approximately $116 million per annum.
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