TD Bank 2002 Annual Report Download - page 36

Management’s Discussion and Analysis of Operating Performance
34
HOW WE PERFORMED IN 2002
Risk-weighted assets at year end
(millions of dollars) 2002 2001 2000
Risk- Risk- Risk-
weighted weighted weighted
Balance balance Balance balance Balance balance
Balance sheet assets
Cash resources $ 6,538 $ 1,108 $ 5,945 $ 991 $ 4,187 $ 657
Securities purchased under
resale agreements 13,060 282 20,205 324 13,974 238
Securities 82,197 6,247 97,194 6,946 85,387 8,286
Loans 122,627 63,965 119,673 66,514 120,721 72,351
Customers’ liability under
acceptances 7,719 7,066 9,122 8,246 9,812 9,008
Other assets 45,899 6,288 35,699 6,342 30,737 7,704
Total balance sheet assets $ 278,040 $ 84,956 $ 287,838 $ 89,363 $ 264,818 $ 98,244
Off-balance sheet assets
Credit instruments 14,559 18,350 16,130
Derivative financial instruments 6,259 6,373 4,661
Total off-balance sheet assets 20,818 24,723 20,791
Total risk-weighted asset
equivalent – credit risk 105,774 114,086 119,035
– market risk 14,859 13,032 11,125
Total risk-weighted assets $ 120,633 $ 127,118 $ 130,160
About capital ratios
Capital ratios are measures of financial strength and flexibility.
OSFI defines two primary ratios to measure capital adequa-
cy, the Tier 1 capital ratio and the total capital ratio. OSFI sets
target levels for Canadian banks:
•The Tier 1 capital ratio is defined as Tier 1 capital
divided by risk-weighted assets. OSFI has established
a target Tier 1 capital requirement of 7%.
•The total capital ratio is defined as total regulatory capital
divided by risk-weighted assets. OSFI has established
a target total capital requirement of 10%.
Risk-weighted assets
Our total balance sheet assets decreased by $10 billion or
3% in 2002. Total risk-weighted assets decreased as a result
of our ongoing management of risk-weighted assets across all
of our businesses.
We review balance sheet and off-balance sheet exposures
when assessing risk.
See Managing risk page 25 and Off-balance sheet arrangements page 11
Interest coverage on subordinated notes and debentures
The Bank is required to disclose certain information to its
noteholders. The Bank’s interest requirements on all
subordinated notes and debentures, after adjustment for new
issues and retirement of subordinated debt, amounted to
$286 million for the year ended October 31, 2002. The Bank
reported a net loss, before interest on subordinated debt and
income tax, of $234 million for the year ended October 31,
2002, and accordingly did not provide interest coverage on its
subordinated notes and debentures. On an operating cash basis,
the Bank’s interest requirements on all subordinated notes and
debentures, after adjustment for new issues and retirement of
subordinated debt, amounted to $286 million and the Bank’s
operating cash basis net income before interest on subordinated
debt and income tax was $724 million which was 2.5 times our
interest requirement for this period. Operating cash basis
measurements are defined in the “How the Bank reports”section
on page 7 of this annual report.
Revised capital accord
Last year, the Basel Committee on Banking Supervision
published for consultation the New Basel Capital Accord to
replace the accord originally introduced in 1988 and
supplemented in 1996. The underlying principles of the new
Accord are intended to be suitable for application to banks of
varying levels of complexity and sophistication. The proposed
Accord will allow banks to determine capital levels consistent
with the manner in which they measure, manage and mitigate
risk. The new framework provides a spectrum of methodologies,
from simple to advanced, for the measurement of both credit and
operational risk.
By providing a flexible approach to measurement method-
ology, each bank will be able, subject to review by regulators, to
adopt approaches which best fit its level of sophistication and
risk profile. The objective of the framework is to provide rewards
for more rigorous and accurate risk management by reducing
regulatory capital required under weaker or less sophisticated
approaches. While the overall objective of the new Accord is to
neither increase nor decrease the level of overall capital in the
system, some financial institutions will see an increase in
regulatory capital, while others will see a decrease. The impact
will depend upon the approach used by a particular institution
and its own risk profile. The impact on the Bank remains unclear
since the Accord continues to be revised. A quantitative impact
study has been performed and is currently being reviewed. OSFI
expects that the major Canadian banks will adopt the most
sophisticated methods.
The global financial services industry uniformly commented
that it is not clear that the stated objective of the Accord, which
is to reward banks for more accurate risk measurement by
assessing a lower capital requirement, would in fact be achieved
with the capital factors which were proposed. There have been
numerous positive revisions to the Accord to reflect these
comments. The scope of the revisions has resulted in the delay
of implementation of the new Capital Accord by one year to the
beginning of fiscal 2006. The Bank is actively participating in
the consultative process and quantitative impact studies. The
Bank is making plans to implement the systems and procedural
changes required to meet the requirements of the New Basel
Capital Accord in fiscal 2006.