TD Bank 2006 Annual Report Download - page 63

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis 59
At the management level, functions such as Risk Management,
Compliance and Audit have established protocols that facilitate
the exchange of information between the two companies. In
particular, senior TD Banknorth Risk Management staff, including
the Chief Risk Officer, meets regularly with their Bank Risk
Management counterparts to discuss current and emerging risk
issues. The Bank’s Chief Auditor reviews all TD Banknorth audit
reports and provides information on significant TD Banknorth
audit and risk issues to the Bank’s Audit Committee of the Board
quarterly. The Bank’s Chief Compliance Officer meets regularly
with TD Banknorth’s senior compliance staff to review key com-
pliance issues, activities and reports. Additionally, TD Banknorth‘s
asset/liability management activities are based on the Bank’s
models and measurement processes.
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,
Vice Chairman for Corporate Operations, 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
Officers will require the support of TD. The directors we appoint
participate in a number of TD Ameritrade Board committees,
including chairing the Audit and the Compensation Committees.
Management’soversight 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 audit and risk issues at TD
Ameritrade.
The following pages describe the key risks the Bank faces and
how they aremanaged.
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.
The most significant strategic risks faced by the Bank are mon-
itored, assessed, managed and mitigated by senior management,
with oversight by the Board.
WHO MANAGES STRATEGIC RISK
The Senior Executive Team manages the Bank’s strategic risk. The
Senior Executive Team is composed of the most senior executives
of the Bank, representing every significant business and corpo-
rate oversight function.
The Bank’soverall strategy is established by the President and
Chief Executive Officer and the Senior Executive Team, in consulta-
tion with and subject to approval by the Boardof Directors. In
addition, the Enterprise Committee is responsible for the execution
of merger and acquisition transactions. Each executive who man-
ages a significant business or function is responsible for managing
strategies within that area, and for ensuring that they arealigned
with the Bank’soverall strategy. They are also accountable to the
President and Chief Executive Officer and the Senior Executive
Team for monitoring, managing and reporting on business risks
inherent in their respective strategies.
The President and Chief Executive Officer reports to the Board
on the implementation of Bank strategies, identifying business
risks within those strategies and how they are managed.
HOW WE MANAGE STRATEGIC RISK
The strategies and operating performance of the Bank’s signifi-
cant business units and corporate oversight functions are
reviewed by the Senior Executive Team in business performance
review sessions. The frequency with which strategies are
reviewed in these sessions depends on the risk profile and the
magnitude of the business or function concerned.
Credit Risk
Credit risk is the potential for financial loss if a borrower or
counterparty in a transaction fails to meet its obligations.
Credit risk is one of the most significant and pervasive risks in
banking. Every loan, extension of credit or transaction that
involves settlements between the Bank and other parties or finan-
cial institutions – such as derivative transactions and securities
inventories – exposes the Bank to some degree of credit risk. For
this reason, we lend exclusively on a relationship basis, and we
manage all of our businesses in a disciplined and conservative
manner, with a strict focus on economic returns for all client
relationships.
Our primary objective is to create a thorough, transparent and
methodological approach to credit risk in order to better under-
stand, select and dynamically manage our exposures to deliver
reduced earnings volatility.
Our strategy is to ensure strong central oversight of credit risk
in each business, reinforcing a culture of accountability, independ-
ence and balance.
WHO MANAGES CREDIT RISK
The responsibility for credit risk management is enterprise-wide
in scope. A strong risk management culture has been integrated
into the daily routines, decision making and strategy setting of
the businesses within the Bank. Understanding and managing
credit risk is the responsibility of each and every business.
Credit risk control functions are integrated into the businesses
to reinforce ownership of credit risk, but report jointly to the
business head and Risk Management to ensure objectivity and
accountability. These groups are primarily responsible for adjudi-
cation, subject to compliance with established policies, exposure
guidelines and discretionary limits, and adherence to established
standards of credit assessment.
Independent oversight of credit risk is provided by Risk
Management, through the development of centralized policies
to governand control portfolio risks and moreproduct specific
policies as required.
The Risk Committee of the Board ultimately oversees the
management of credit risk and approves all major credit risk
policies of the Bank.
HOW WE MANAGE CREDIT RISK
Credit Risk is managed through a centralized infrastructure
based on:
•The centralized approval, by Risk Management, of all credit risk
policies and the discretionary limits of officers throughout the
Bank for extending lines of credit.
•The establishment of guidelines to monitor and limit concentra-
tions in the portfolios in accordance with the Board-approved,
enterprise-wide policies governing country risk, industry risk
and group exposures.
•The development and implementation of models and policies
for establishing Borrower and Facility Risk Ratings to quantify
the level of risk and facilitate its management in our
Commercial Banking and Wholesale Banking businesses.