TD Bank 2002 Annual Report Download - page 34

Management’s Discussion and Analysis of Operating Performance
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HOW WE PERFORMED IN 2002
Liquidity requirements are met by holding sufficient assets
that can be readily converted into cash and managing our cash
flows. Assets that qualify for liquidity purposes must be
currently marketable, of sufficient credit quality and be
accessible for sale. Liquid assets are represented in a cumulative
liquidity gap framework based on settlement timing and current
market depth. Assets that are encumbered or needed for
collateral purposes are not included for liquidity purposes.
We manage liquidity on a global basis, ensuring the prudent
management of liquidity risk in all of our operations. On October
31, 2002, our consolidated surplus liquid asset position at
thirty days was $5.5 billion in Canadian dollars, compared with
a position of $.5 billion Canadian on October 31, 2001. The
surplus liquid asset position is total liquid assets less TD’s
unsecured wholesale funding requirements, potential non-
wholesale deposit run-off and contingent liabilities coming due
in thirty days.
If there was a liquidity crisis, we have contingency plans to
make sure we meet all of our obligations as they come due.
Funding
TD has a large base of stable retail and commercial deposits
with personal deposits making up over 53% of the total. In
addition, TD has an active wholesale funding program which
incorporates the asset securitization infrastructure necessary to
ensure we have access to widely diversified funding sources.
TD’s wholesale funding is also diversified geographically and by
distribution networks. There are also depositor concentration
limits in place to ensure that we do not overly rely on one or
a small group of customers as a source of funding.
In fiscal 2002, TD securitized and sold $3.5 billion of
mortgages and issued $1.5 billion of other medium and
long term funding. All funding amounts are represented in
Canadian dollars.
Operational risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems, or from
external sources.
Operational risk is inherent in all business activities. Operational
risk encompasses a broad range of risks, which includes
transaction processing errors, fiduciary breaches, technology
failures, business disruption, fraud and damage to physical
assets originating from internal or outsourced business activities.
Its impact can result in financial and reputational loss,
regulatory penalties and censure.
While operational risk cannot be fully eliminated, proactive
management of operational risk exposures to acceptable levels is
a key objective of TD. Managing operational risk is essential to
protecting, enhancing and creating shareholder value, operating
efficiency and providing a safe working environment for staff
and customers.
Who manages operational risk
Group Risk Management is responsible for establishing and
coordinating the implementation of a global operational risk
management framework, which consists of the policies and
processes for the identification, assessment, mitigation and
control of operational risk. Through the framework, corporate
policies and standards are defined and reporting requirements
are established. In addition, Group Risk Management
coordinates strategic operational risk management activities
throughout the organization.
Group Risk Management chairs the Operational Risk Manage-
ment Committee and provides reporting to senior management,
the Risk Oversight Committee and the Risk Committee of the
Board of Directors on the level of operational risk within TD and
the effectiveness of enterprise risk management practices.
Primary responsibility for the day-to-day management of
operational risk lies with business unit management, with the
support of specialist groups such as Information Technology,
Finance and Human Resources. Business unit management is
responsible for ensuring that the business complies with the
operational risk management framework through the
establishment and maintenance of appropriate policies,
procedures, internal controls and business continuity plans.
Each business unit operates a Risk Management Committee,
comprised of the senior executives in the unit.
Internal Audit provides assurance to business unit
management, senior management, and the Audit Committee of
the Board of Directors on the extent to which business units
adhere to the operational risk management framework, the
quality and effectiveness of the system of internal controls and
identifies any significant control weaknesses in the Bank.
How we manage operational risk
Group Risk Management works closely with the risk
management functions in the business units to facilitate the
implementation of the operational risk management framework
and the implementation of leading industry practices. Group
Risk Management is responsible for:
•continually identifying, measuring and reporting on the
operational risk exposures of our businesses
•allocating economic capital based on assessments of
operational risk
•overseeing the execution of key enterprise-wide risk
management practices including an extensive system of
internal controls, trained and competent people, segregating
incompatible functions and clearly defined operating practices
•assessing, on a continuous basis, TD’s insurable risk
exposures, developing and implementing appropriate risk
management solutions. These include managing a broad
portfolio of insurance coverage combined with other risk
transfer vehicles that protect TD from the adverse impact of
internal and external events in the course of doing business
•managing a comprehensive Business Recovery Planning
program, which includes standard policies and management
oversight to minimize risk, duration and cost arising from
unexpected disruptions affecting our operations.
Each of TD’s business units has defined an independent risk
management function that:
•oversees the implementation of enterprise-wide risk
management practices within their business unit
•identifies, measures and reports on the operational risk
exposures of their business
•works with business unit management to identify, develop and
implement risk management practices specific to their
business, including comprehensive business recovery plans.
Our focus in 2003 will be on the implementation of an
enterprise-wide operational risk self-assessment process and
tools, and the development of additional risk quantification
methodologies.