TD Bank 2007 Annual Report Download - page 66

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis62
•฀ The Audit and Compliance functions independently monitor
and report to management and the Board of Directors on the
effectiveness of risk management policies, procedures and
internal controls.
•฀ Each business unit owns and is accountable for managing risk,
operating within the limits of the Bank’s risk management
policies, and is responsible for escalating significant risk issues
as appropriate. Each business segment has established a risk
governance structure that includes appropriate executive level
risk oversight. In the case of TD Banknorth, a Board of Directors
and independent Board Risk and Audit Committees are in
place to provide this oversight. As a U.S. Financial Institution,
TD Banknorth is regulated by the Office of the Controller of
the Currency (OCC) and the Federal Reserve Bank of Boston
(FRB). The TD Banknorth Board and its committees receive
reports from these regulators in the normal course of their
examinations.
•฀ Business management and risk management professionals in
each business unit ensure that policies, processes and internal
controls are in place to manage not only the business but also
the risks inherent in that business.
HOW WE MANAGE RISK
We have a comprehensive and proactive risk management
approach that combines the experience and specialized knowl-
edge of individual business units, risk professionals and the
corporate oversight functions. Our approach is designed to
promote a strong risk management culture and ensure
alignment to our strategic objectives. It includes:
•฀ Maintaining appropriate enterprise-wide risk management
policies and practices including guidelines, requirements and
limits to ensure risks are managed to acceptable levels;
•฀ Subjecting risk management policies to regular review and
evaluation by the Executive Committees and review and
approval by the Risk Committee of the Board;
•฀ An integrated enterprise-wide risk monitoring and reporting
process that communicates key elements of our risk profile,
both quantitatively and qualitatively, to senior management
and the Board of Directors;
• Maintaining risk measurement methodologies that support
risk quantification, including Value-at-Risk (VaR) analysis,
scenario analysis and stress-testing;
•฀ Annual self-assessments by significant business units and
corporate oversight functions of their key risks and internal
controls. Overall significant risk issues are identified,
escalated and monitored as needed;
•฀ Supporting appropriate performance measurement that
allocates risk-based economic capital to businesses and
charges a cost against that capital;
•฀ Actively monitoring internal and external risk events to assess
whether our internal controls are effective;
•฀ Independent and comprehensive reviews conducted by the
Audit Department of the quality of the internal control envi-
ronment and compliance with established risk management
policies and procedures.
HOW RISK IS MANAGED AT TD AMERITRADE
Although the Bank does not have a controlling interest in
TD Ameritrade, it does have oversight of the risk function
through appropriate board and management governance and
protocols.
The Bank appoints five of the twelve TD Ameritrade directors,
and this number currently includes our Chief Executive Officer,
our Group Head Wealth Management and an independent Bank
director. TD Ameritrade bylaws, which state that future Chief
Executive Officer appointments require approval of two-thirds
of the Board, ensure the selection of TD Ameritrade’s Chief
Executive Officer will require the support of the Bank. The
directors we appoint participate in a number of TD Ameritrade
Board committees, including chairing the Audit and the
Compensation Committees.
Management’s oversight processes and protocols are aligned
to coordinate necessary inter-company information flow. In
addition to regular communication at the Chief Executive
Officer level, monthly operating reviews of TD Ameritrade
permit the Bank to examine and discuss their operating results
and key risks. As well, certain functions, such as Internal Audit,
Finance and Compliance, have relationship protocols that allow
for the sharing of information on risk and control issues.
Quarterly reports to our Audit Committee and Risk Committee
include comments on any significant internal audit issue at
TD Ameritrade; risk issues are reported up to the Risk
Committee as required, and at least annually.
Basel II
Basel II is a framework developed by the Basel Committee on
Banking Supervision, with the objectives of improving the con-
sistency of capital requirements internationally and making
required regulatory capital more risk sensitive. Basel II sets out
several options which represent increasingly more risk-sensitive
approaches to calculating credit-, market- and operational-risk-
based regulatory capital. Under the more sophisticated
approaches, banks develop their own internal estimates of risk
parameters, which are used in the determination of risk-
weighted assets and calculation of regulatory capital.
We have adopted the most sophisticated Advanced Internal
Ratings Based (AIRB) approach for credit risk for all material
portfolios. Under this approach, we have developed internal risk
rating systems based on key risk estimates; first, probability of
default (PD) – the degree of likelihood that the borrower will
not be able to meet scheduled repayments; second, loss given
default (LGD) – the amount of the loss when a borrower
defaults on a loan; and third, exposure at default (EAD) – the
total amount to which we may be exposed at the time of
default. These estimates are derived from our historical loss
experience and updated regularly. Our formal application for
approval to adopt the AIRB approach was submitted to the
Office of the Superintendent of Financial Institutions (OSFI) on
October 31, 2007, and we continue to have qualified resources
dedicated to implementing Basel II in 2008 and thereafter. OSFI
approval to implement the AIRB approach involves a rigorous
supervisory review process to confirm that we comply with
Basel II’s comprehensive standards. When approved, we will be
permitted to assess credit risk using our own internal risk rating
systems for the purposes of calculating regulatory capital.
TD Banknorth, while a material subsidiary, will initially adopt
Basel II’s “Standardized Approach” to credit risk, with its mate-
rial portfolios moving to the AIRB approach over time.
We are working towards the implementation of market risk
requirements within the OSFI-established timelines. In addition,
we are initially adopting the Standardized Approach (TSA) for
operational risk in Canada, with TD Banknorth implementing
the Basic Indicator Approach (BIA). Dedicated qualified resources
and detailed plans are in place to implement the Advanced
Measurement Approach (AMA) for operational risk over time.
Basel II will result in increased disclosures of risk management
information and the impact on capital beginning in fiscal 2008.
The following pages describe the key risks we face and how
they are managed.