TD Bank 2002 Annual Report Download - page 33

Management’s Discussion and Analysis of Operating Performance 31
HOW WE PERFORMED IN 2002
Managing foreign exchange risk
Foreign exchange risk refers to losses that could result from
changes in foreign currency exchange rates. Assets and
liabilities that are denominated in foreign currencies have
foreign exchange risk.
We are exposed to foreign exchange risk:
•when our foreign currency assets are greater or less than our
liabilities in that currency. This creates a foreign currency
open position.
•from our investments in foreign operations.
Our objective is to minimize the impact of an adverse foreign
exchange rate change on reported net income and equity, and to
minimize the impact of an adverse foreign exchange rate change
on TD’s capital ratios. Minimizing the impact of an adverse
foreign exchange rate change on reported equity will cause
some variability in the capital ratios due to the amount of risk-
weighted assets that are denominated in a foreign currency. In
the event that the Canadian dollar weakens, the Canadian dollar
equivalent of TD’s risk-weighted assets in a foreign currency
increases thereby increasing TD’s capital requirement. As a
result, the foreign exchange risk arising from TD’s net
investment in foreign operations are hedged up to the point
where the capital ratios change by no more than a tolerable
amount for a given change in foreign exchange rates. The
tolerable amount increases as TD’s capital ratio increases.
TD’s policy related to open currency exposure is to limit
exposure to no more than $200 million in aggregate. Our policy
related to foreign exchange capital exposure is to minimize an
adverse foreign exchange rate change on reported equity subject
to the constraint that TD’s capital ratios can change by no more
than 10 basis points for a 5% change in foreign exchange rates.
If target capital ratios are exceeded, TD’s policy is to allow for a
25 basis point change in capital ratios for a 5% change in
foreign exchange rates.
Liquidity risk
Liquidity risk is the risk that we cannot meet a demand for
cash or fund our obligations as they come due. Demand for
cash can arise from withdrawals of deposits, debt maturities
and commitments to provide credit. Liquidity risk also
includes the risk of not being able to liquidate assets in a
timely manner at a reasonable price.
During 2002, we implemented a revised global liquidity risk
management framework to create a more integrated and
effective liquidity management process that provides for
enhanced reporting, a revised liquidity coverage structure, a
more dynamic process and delegates management of liquidity
risk by major business segment.
It is TD’s policy to ensure that there is adequate liquidity
coverage across all business units to sustain our ongoing
operations in the event of a funding disruption with limited
reliance on the forced sale of assets. We also ensure that
there is sufficient liquidity available to fund asset growth and
strategic opportunities.
Who manages liquidity risk
The Risk Oversight Committee oversees the liquidity risk
management program and ensures that there is an effective
management structure in place to properly measure and manage
liquidity risk. The Global Liquidity Forum, comprised of senior
management from Group Finance, Group Risk Management and
TD Securities, is responsible for identifying and monitoring
our liquidity risks and recommending action as necessary to
maintain our liquidity position within limits in both normal and
stress conditions.
While TD operates under one global liquidity risk policy,
measurement and management of our liquidity risks are
separated into the major operating areas best positioned to
manage the risks. The Treasury and Balance Sheet Management
department within Group Finance is responsible for consolidating
and reporting TD’s global liquidity risk position and for managing
the TD Canada Trust liquidity position. TD Securities is
responsible for managing the liquidity risks inherent in the
wholesale and corporate banking portfolios and TD Waterhouse
is responsible for managing its liquidity position. Each area must
adhere to the Global Liquidity Risk Management policy that is
reviewed and approved by the Risk Committee of the Board of
Directors on an annual basis.
How we manage liquidity risk
TD’s overall liquidity requirement is measured as the amount of
liquidity required to fund expected cash outflows as well as a
prudent liquidity reserve to fund potential cash outflows if there
was a disruption in the capital markets or other event that could
affect our access to liquidity. TD does not rely on short-term
wholesale funding for purposes other than funding marketable
securities or short-term assets. Liquidity requirements are
measured under different stress scenarios with a base case
scenario defining the minimum amount of liquidity that must
be held at all times. This scenario provides coverage for 100%
of our unsecured wholesale debt coming due as well as other
potential deposit run-off and contingent liabilities for a minimum
period of thirty days. Other scenarios may require greater
coverage. We also use cash collateral reporting to monitor
our ability to fund our operations on a fully collateralized
basis, in the event that we are unable to replace our short-
term unsecured debt beyond this timeframe for a period up
to one year.
Total financial position
economic value at risk by interest rate shock1
(millions of dollars as of October 31, 2002)
$25
0
-25
-50
-75
-100
-150 -75 0 75 150
Changes in present value after-tax
Parallel interest rate shock (basis points)
1The interest rate risk exposure of non-maturity deposits and loans is
measured based on assumed maturity profiles.