TD Bank 2003 Annual Report Download - page 42

TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Management’s Discussion and Analysis40
Who manages liquidity risk
The Asset/Liability Committee oversees the liquidity risk manage-
ment program and ensures that there is an effective management
structure in place to properly measure and manage liquidity risk.
The Global Liquidity Forum, comprised of senior management
from Finance, Risk Management and Wholesale Banking, is
responsible for identifying and monitoring our liquidity risks and
recommending action as necessary to the Asset/Liability Committee
to maintain our liquidity position within limits in both normal and
stress conditions.
While the Bank operates under one global liquidity risk policy,
measurement and management of our liquidity risks are separat-
ed into the major operating areas best positioned to manage the
risks. The Treasury and Balance Sheet Management department
within Finance is responsible for consolidating and reporting the
Bank’s global liquidity risk position and for managing the
Personal and Commercial Banking liquidity position. Wholesale
Banking is responsible for managing the liquidity risks inherent
in the wholesale and corporate banking portfolios and TD
Waterhouse is responsible for managing its liquidity position.
Each area must adhere to the Global Liquidity Risk Management
policy that is reviewed and approved by the Risk Committee of
the Board periodically.
How we manage liquidity risk
The Bank’s overall liquidity requirement is defined as the amount
of liquidity required to fund expected cash outflows 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. The Bank does not rely on
short-term wholesale funding for purposes other than funding
marketable securities or short-term assets. Liquidity requirements
are measured under different stress scenarios with a base case
scenario defining the minimum amount of liquidity that must be
held at all times. This scenario provides coverage for 100% of our
unsecured wholesale debt coming due as well as other potential
deposit run-off and contingent liabilities for a minimum period of
ninety days. Other scenarios may require greater coverage. We
also use an extended liquidity coverage test to monitor our ability
to fund our operations on a fully collateralized basis, in the event
that we are unable to replace our short-term unsecured debt
beyond this timeframe for a period up to one year.
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 available for sale.
Liquid assets are represented in a cumulative liquidity gap frame-
work 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, 2003, our consolidated surplus liquid asset position
up to 90 days was $8.7 billion in Canadian dollars, compared
with a surplus liquid asset position of $4.2 billion Canadian on
October 31, 2002. The surplus liquid asset position is total liquid
assets less the Bank’s unsecured wholesale funding requirements,
potential non-wholesale deposit run-off and contingent liabilities
coming due in 90 days.
If there was a liquidity crisis, we have contingency plans in place
to make sure we meet all of our obligations as they come due.
Funding
The Bank has a large base of stable retail and commercial
deposits making up over 60% of our total funding. In addition,
the Bank has an active wholesale funding program, which incor-
porates the asset securitization infrastructure necessary to ensure
we have access to widely diversified funding sources. The Bank’s
wholesale funding is also diversified geographically, by currency
and by distribution networks. Depositor concentration limits are
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 2003, the Bank securitized and sold $7.3 billion of
mortgages and issued $5.7 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, including transaction
processing errors, fiduciary breaches, technology failures, busi-
ness 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.
Managing operational risk is essential to protecting, enhancing
and creating shareholder value, operating efficiency and provid-
ing a safe working environment for staff and customers. While
operational risk cannot be fully eliminated, proactive manage-
ment of operational risk exposures to acceptable levels is a key
objective of the Bank.
Who manages operational risk
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 addi-
tion, Risk Management coordinates strategic operational risk
management activities throughout the organization, including
any reporting to senior management, the Operational Risk
Oversight Committee and the Risk Committee of the Board on
the level of operational risk within the Bank and the effectiveness
of enterprise risk management practices.
Primary responsibility for the day-to-day management of oper-
ational risk lies with business unit management, with the support
of specialist groups such as Information Technology, Finance,
Compliance and Human Resources. Business unit management
is responsible for ensuring that the business complies with the
operational risk management framework through the establish-
ment 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.
The Audit department reports to business unit management,
senior management, the Audit Committee and the Risk
Committee of the Board on operational risk management prac-
tices, the quality and effectiveness of the system of internal
controls and identifies any significant weaknesses in the Bank.
How we manage operational risk
Risk Management works closely with the risk management func-
tions in the business units to facilitate the implementation of the
operational risk management framework and the implementation
of leading industry practices. 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 manage-
ment practices including an extensive system of internal
controls, trained and competent people, segregating incom-
patible functions and clearly defined operating practices;