TD Bank 2002 Annual Report Download - page 27

Management’s Discussion and Analysis of Operating Performance 25
HOW WE PERFORMED IN 2002
Managing risk
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 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 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.
Accountability and ownership of risk lies with the business units,
whose structure for managing risk is defined based on business
needs to meet governance standards. This is a disciplined
process with appropriate reporting and escalation. Group Risk
Management works with the business units to facilitate
standards, reporting and common methodology.
The risk management review and oversight process that is
now in place is illustrated as follows:
This review and oversight process reflects changes made
since October 31, 2002 to enhance the governance and
oversight of risk at TD. In fiscal 2002, the Risk Committee of
the Board of Directors was part of the Audit and Risk
Management Committee of the Board of Directors which has
been split into two separate committees. See Committees of the
Board on page 89 of this annual report for more details. As a
separate committee, the Risk Committee of the Board of
Directors has a mandate to focus on the management of risk and
risk trends, and oversee significant market, liquidity, credit and
operational risks.
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 Risk Committee
of the Board of Directors.
•a regular review of operational risk, management policies and
strategies, and key initiatives by an executive Risk Oversight
Committee comprised of a team of our senior executives.
•comprehensive reviews by Internal Audit to provide senior
management with assurance as to 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.
Who manages credit risk
We are increasing the resources applied to risk management and
effectively creating an additional level of risk management. We
have split the mandate for risk management between Group Risk
Management and the business units and applied more resources
to both groups. We have also made changes regarding who has
the responsibility for a credit.
Group Risk Management’s primary responsibility will now be
focused on policy as well as authority and exposure limits. In
addition, we are establishing a function responsible for
researching and identifying industry and portfolio trends.
Each business unit will have a credit group that is primarily
responsible for adjudication, and that will operate under strict
authorization and exposure limits. Our strategy makes it clear
that going forward we are lending on a business relationship
basis and therefore each business unit has responsibility
for loans.
Group Risk Management sets the policies and procedures for
managing credit risk on a global basis and provides a second
line of defense for TD. 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.
•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.
Business
Performance
Review Committee
•Chaired by
CEO
•Reviews overall
strategies
and operating
performance
Risk Committee of the Board of Directors
•Considers risk and trends in risk for TD
•Approves risk management policies
•Oversees the management of credit, market,
liquidity and operational risk
Executive Management Committees
Risk Oversight
Committee
•Chaired by
Vice Chair, Risk
Management
•Responsible for
the management
and oversight of
all risk manage-
ment and legisla-
tive compliance
activities of TD,
exclusive of credit
and market risk
Credit and Market
Risk Committee
•Chaired by
CEO
•Reviews large
individual credits,
industry concen-
trations and
major policy
issues involving
credit or
market risk