TD Bank 2010 Annual Report Download - page 70

TD BANK GROUP ANNUAL REPORT 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS68
Our surplus liquid-asset position is our total liquid assets less our
unsecured wholesale funding requirements, potential non-wholesale
deposit run-off and contingent liabilities coming due in a given specified
time bucket. On October 31, 2010, our aggregate surplus liquid-asset
position for up to 90 days, as measured under the “Severe Combined
Stress” scenario for Canadian Personal and Commercial Banking
(including domestic Wealth Management) and Wholesale Bank opera-
tions was $10.7 billion, (2009 – $6.8 billion). The surplus liquid-asset
position for U.S. Personal and Commercial Banking operations as at
October 31, 2010 was $7.0 billion (2009 – $10.0 billion).
We also use an extended liquidity coverage test to measure our
ability to fund our operations on a fully secured basis for a period
of up to one year. For the purposes of calculating the results of
this test, we estimate the marketability and pledging potential of
available assets not considered liquid within 90 days under the
“Severe Combined Stress” scenario and then deduct an estimate
for potential wholesale liability and deposit run-off and additional
utilization of committed lines of credit over a 91 to 365 day period.
On October 31, 2010, our estimate of liquid assets less require-
ments, as measured under the extended liquidity coverage test, for
Canadian Personal and Commercial Banking and Wholesale Banking
operations was $15.4 billion (2009 – $14.9 billion) and for U.S.
Personal and Commercial Banking operations was $13.4 billion
(2009 – $16.8 billion).
While each of our business segments has responsibility for the
measurement and management of its own liquidity risks, we also
manage liquidity on an enterprise-wide basis in order to maintain
consistent and efficient management of liquidity risk across all of
our operations.
We have contingency funding plans in place to provide direction
in the event of a specific local liquidity crisis.
Credit ratings are important to our borrowing costs and ability to
raise funds. A ratings downgrade could potentially result in higher
financing costs and reduce access to capital markets. A lowering of
credit ratings may also affect our ability to enter into normal course
derivative or hedging transactions and impact the costs associated with
such transactions. We regularly review the level of increased collateral
our trading counterparties would require in the event of a downgrade
of TD’s credit rating. We believe that the impact of a one notch down-
grade would be minimal and could be readily managed in the normal
course of business, but more severe downgrades could have a more
significant impact by increasing our cost of borrowing and/or requiring
us to post additional collateral for the benefit of our trading counter-
parties. Credit ratings and outlooks provided by the ratings agencies
reflect their views and are subject to change from time to time, based
on a number of factors, including our financial strength, competitive
position and liquidity as well as factors not entirely within our control,
including the methodologies used by the rating agencies and conditions
affecting the financial services industry generally.
targeted survival horizon and related liquidity and funding management
strategies comprise an integrated liquidity risk management program
designed to ensure that we maintain a low exposure to adverse changes
in liquidity levels due to identified causes of liquidity risk.
WHO IS RESPONSIBLE FOR LIQUIDITY RISK MANAGEMENT
The ALCO oversees our liquidity risk management program. It ensures
that there is an effective management structure to properly measure and
manage liquidity risk. In addition, the Global Liquidity Forum, comprising
senior management from TBSM, Risk Management, Finance, and
Wholesale Banking, identifies and monitors our liquidity risks. When
necessary, the Forum recommends actions to the ALCO to maintain
our liquidity positions within limits under normal and stress conditions.
We have one Global Liquidity Risk Management Policy, but the
major operating areas measure and manage liquidity risks as follows:
•
TBSM is responsible for consolidating and reporting TD’s global liquid-
ity
position and for managing the Canadian Personal and Commercial
Banking and domestic Wealth Management liquidity positions.
• Wholesale Banking, working closely with Trading Risk in Risk
Management, is responsible for managing the liquidity risks inherent
in each of the Wholesale Banking portfolios and its regulated
consolidated subsidiaries.
• TD’s U.S. Treasury Group is responsible for managing the liquidity
position of the U.S. Personal and Commercial Banking segment.
TBSM works closely with the segment to ensure consistency with
the global liquidity risk management framework.
• Each area must comply with the Global Liquidity Risk Management
Policy. The policy is periodically reviewed by the Risk Committee.
Management responsible for liquidity in our U.S. segment and each
of our regulated overseas branches and/or subsidiaries is also required
to implement the policies and related liquidity risk management
programs that are necessary in order to meet local business conditions
and/or regulatory requirements. Each of these policies is subject to
review by the Global Liquidity Forum and approval by ALCO.
HOW WE MANAGE LIQUIDITY RISK
Our overall liquidity requirement is defined as the amount of liquidity
we need to fund expected cash flows, as well as a prudent liquidity
reserve to fund potential cash outflows in the event of a disruption in
the capital markets or other event that could affect our access to
liquidity. We do not rely on short-term wholesale funding for purposes
other than funding marketable securities or short-term assets.
To define the amount of liquidity that must be held at all times for
a specified minimum 90 day period, we use a conservative “Severe
Combined Stress” scenario that models potential liquidity requirements
and asset marketability during a confidence crisis that has been trig-
gered in the markets specifically with respect to our ability to meet
obligations as they come due. In addition to this Bank-specific event,
the “Severe Combined Stress” scenario also incorporates the impact
of a stressed market-wide liquidity event that results in a significant
reduction in access to both short- and long-term funding for all institu-
tions, a significant increase in our cost of funds and a significant
decrease in the marketability of assets. This scenario ensures that we
have sufficient liquidity to cover total requirements equal to 100%
of our unsecured wholesale debt coming due, potential retail and
commercial deposit run-off and forecasted operational requirements.
In addition, we include coverage of Bank-sponsored funding programs,
such as the Bankers’ Acceptances we issue on behalf of clients, and
Bank-sponsored ABCP.
To meet the resulting total liquidity requirements, we hold assets
that can be readily converted into cash. Assets must be currently
marketable, of sufficient credit quality and available for sale to be
considered readily convertible into cash. Liquid assets are represented
in a cumulative liquidity gap framework based on settlement timing
and market depth. Assets that are not available without delay due to
collateral requirements or other similar purposes are not considered
readily convertible into cash.
As at Oct. 31, 20101
Senior long-term
Ratings agency Short-term debt rating debt rating and outlook
Moody’s P–1 Aaa negative
S&P A–1+ AA– positive
Fitch F–1+ AA– stable
DBRS R–1 (high) AA stable
1 The above ratings are for The Toronto-Dominion Bank legal entity. A more
extensive listing, including subsidiaries’ ratings, is available on TD’s website at
http://www.td.com/investor/credit.jsp. Credit ratings are not recommendations
to purchase, sell or hold a financial obligation inasmuch as they do not comment
on market price or suitability for a particular investor. Ratings are subject to
revision or withdrawal at any time by the rating organization.
CREDIT RATINGS
TABLE 43