TD Bank 2003 Annual Report Download - page 36

TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Management’s Discussion and Analysis34
The Bank has a comprehensive ongoing risk management
approach that incorporates the experience and specialized knowl-
edge of our business units, as well as the corporate oversight
functions. Key strategic elements of our approach are governance
and senior management oversight. This includes:
•An annual review of significant risk policies and critical assess-
ment of the Bank’s business strategies from a risk perspective
by the Risk Committee of the Board;
•A comprehensive strategic planning process and regular
monitoring of strategies by the Senior Executive Team;
•A regular review of risk management policies, strategies, and
key initiatives by the appropriate Executive Management
Committees;
•Formal review of risk issues by both the business unit and the
Senior Executive Team;
•Standard risk reporting throughout the Bank, to the Board and
the Senior Executive Team captures and presents all elements
of the Bank’s risk profile, both qualitatively and quantitatively;
•Comprehensive reviews by Audit to provide senior manage-
ment with reports as to the quality of the internal control envi-
ronment and compliance with established risk management
policies and procedures; and
•Annual self assessments by the significant business and corpo-
rate oversight functions of their key risks and internal controls.
These assessments use the Bank’s internal control framework.
The Bank’s framework is consistent with the most widely used
framework developed by the Committee of Sponsoring
Organizations of the Treadway Committee (COSO).
The following pages describe the main risks we face and our
strategies for managing them.
STRATEGIC RISK
Strategic risk is the potential for loss arising from ineffective
business strategies, the absence of integrated business strate-
gies, the inability to implement those strategies, and the
inability to adapt the strategies to changes in the business
environment.
We are exposed to strategic risk at all levels of the organization,
in every aspect of our business. The most significant strategic
risks faced by the Bank are assessed, managed and mitigated by
Executive Management with oversight by the Board.
Who manages strategic risk
The Senior Executive Team manages the Bank’s strategic risk and
is comprised of the 18 most senior executives of the Bank. Every
senior executive who manages a significant business or corporate
oversight function with the Bank is represented on the Senior
Executive Team.
The Bank’s overall strategy is established by the President and
CEO and the Senior Executive Team, including a consultation and
approval process with the Board. Each executive is responsible for
managing strategies within their business or functional area and
for ensuring that those strategies align with the Bank’s overall
strategy. They are accountable to the President and CEO and the
Senior Executive Team to monitor, manage and report on busi-
ness risks inherent in their strategies.
The President and CEO reports to the Board on the imple-
mentation of Bank strategies, identifying business risks within
these strategies and how these risks are being managed.
How we manage strategic risk
The Senior Executive Team, chaired by the President and CEO,
reviews overall strategies and operating performance of the
Bank’s significant business units and corporate functions in busi-
ness performance review sessions. The frequency of strategy
review in these sessions depends on the risk profile and magni-
tude of the business employing the strategy.
CREDIT RISK
Credit risk is the potential for financial loss if a borrower or
counterparty in a transaction fails to meet its obligations.
We are exposed to credit risk through our traditional lending
activities and transactions involving settlements between us
and our counterparties, including other financial institutions.
These include direct loans, commitments to extend credit,
settlement exposures, derivative transactions and securities
inventories.
Who manages credit risk
Risk Management sets the policies and procedures for managing
credit risk on a global basis. Its responsibilities include:
•Setting guidelines that limit portfolio concentrations of credit
exposure by country, industry and affiliated group;
•Approving discretionary limits of officers throughout the Bank
for extending lines of credit;
•Setting standards for measuring credit exposure;
•Approving the scoring techniques used in extending personal
credit;
•Approving all policies relating to all products and services that
have credit risk; and
•Setting the criteria for rating risk on business accounts, based
on a 21-category rating system.
The Risk Committee of the Board reviews and approves all
major credit risk policies periodically.
Each business unit has a credit group that is primarily responsi-
ble for adjudication, and it operates under the policies and strict
authorization and exposure limits established by Risk Management.
Our strategy makes it clear that we are lending on a business
relationship basis.
We manage all of our businesses in an extremely disciplined
and conservative manner, with a strict focus on economic returns
for all client relationships.
The Credit and Market Risk Committee, which is chaired by the
President and CEO, reviews and approves large individual credits,
reviews industry concentrations and resolves any major policy
issues involving market or credit risk.
How we manage credit risk
By country
Country risk is the risk that economic or political change in a
country could affect cross-border payments for goods and servic-
es, loans, trade-related finance and dividends, as well as the
repatriation of the Bank’s capital from the foreign country. We
currently have exposure in 57 countries, with the largest portion
in North America. We establish country exposure guidelines
based on an internal risk rating system. Country limits cover all
aspects of credit exposure across our various businesses.
Business and government loans
We also establish industry and group limits for credit exposure
to businesses and governments. We use a systematic approach
to set and communicate risk guidelines for each business industry
in our loan portfolio. These guidelines are based on a risk assess-
ment of the industry. We have identified 28 major business indus-
try groups and divided them into 117 segments. We assign a risk
rating to each industry segment on a scale of one to six.
Our analysis focuses on key risks inherent in a given industry,
such as its cycles, exposure to technological change, political
influence, regulatory change or barriers to entry. If we believe that
several industry segments are affected by common risk factors,
we assign a single exposure guideline to them. Risk Management
assigns a concentration limit for each industry as a percentage of
total industrial exposure. We also conduct ongoing reviews of
industry risk ratings and segmentation.