TD Bank 2001 Annual Report Download - page 26

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HOW WE PERFORMED IN 2001
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING PERFORMANCE
At TD Bank Financial Group, our goal is to earn satisfactory
returns from our various business activities within an acceptable
level of risk. To do this, we need to understand the risks
involved in our businesses and to ensure that the risks we
assume are within prudent limits.
Through our retail and wholesale businesses, we are exposed
to four kinds of risk:
•credit risk •market risk
•liquidity risk •operational risk.
Managing risk means assessing the potential impact of each
risk, and establishing policies and procedures to minimize them.
Our objective is to be the best risk manager among Canadian
banks, and we have established a strong risk management
infrastructure to achieve this.
Our guiding principle is to involve qualified risk management
professionals, who are independent of the business units, in
setting our policy framework and in defining risk limits. The
risk management review and oversight process can be illustrated
as follows:
TD has a comprehensive ongoing risk management framework
that incorporates the experience and specialized knowledge of
our business units, Group Risk Management, Audit, Legal,
Compliance, Finance, Human Resources and other corporate
functions. Key strategic elements of our framework are
governance and senior management oversight. This includes:
•an annual review of major risk policies by the Audit and Risk
Management Committee of the Board of Directors
•an annual review of operational risk, management policies
and strategies and a regular review of key initiatives by an
executive Risk Policy Committee comprised of a team of
senior executives
•comprehensive internal audits by Internal Audit to assess the
quality of the internal control environment and compliance
with established risk management policies and procedures.
The following pages describe the main risks we face and our
strategies for managing them.
CREDIT RISK
Credit risk is the potential for financial loss if a borrower or
counterparty in a transaction fails to meet its obligations.
We are exposed to credit risk through our traditional lending
activities and transactions involving settlements between us and
our counterparties, including other financial institutions. These
include direct loans, commitments to extend credit, settlement
exposures, derivative transactions and securities inventories.
Our goal is to limit the average of actual annual losses on
credit exposures through an economic cycle to .35% of net
average loans and customers’ liability under acceptances.
Who manages credit risk
Group Risk Management sets the policies and procedures for
managing credit risk on a global basis. Its responsibilities
include:
•setting guidelines that limit portfolio concentrations of credit
exposure by country, industry and affiliated group
•approving discretionary limits of officers throughout TD for
extending lines of credit
•central control of all major credit decisions
•setting standards for measuring credit exposure
•approving the scoring techniques used in extending
personal credit
•approving all policies relating to all products and services
that have credit risk
•setting the criteria for rating risk on business accounts,
based on a 21-category rating system
•an annual review of all business and government loans
conducted under the direction of TD’s senior risk
management, including a review of the account’s risk
rating and of each classified business credit exposure at
least quarterly.
The Audit and Risk Management Committee of the Board of
Directors reviews and approves all major credit policies and
procedures every year.
How we manage credit risk
By country
Country risk is the risk that economic or political change in a
country could affect cross-border payments for goods and
services, loans, trade-related finance and dividends, as well as
the repatriation of TD’s capital from the foreign country. We
currently have exposure in 70 countries, with the largest portion
in North America. We establish country exposure guidelines
based on an internal risk rating system. Country limits cover all
aspects of credit exposure across our various businesses.
Managing risk
Business
Performance
Review Committee
•Chaired by
Chairman and
CEO
•Reviews overall
strategies
and operating
performance
Audit and Risk Management Committee of the Board of Directors
•Oversees financial reporting process
•Approves major risk policies
•Reviews trend in risk profile
•Reviews internal controls and receives internal audit reports
Executive Management Committees
Risk Policy
Committee
•Chaired by EVP,
Group Risk
Management
•Reviews major
policies and
strategies for
managing
credit, market
and operational
risks
Asset Liability
Committee
•Chaired by
Chairman and
CEO
•Oversees interest
rate, foreign
exchange and
liquidity policies
and risk in
non-trading
operations