TD Bank 2006 Annual Report Download - page 68

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
64
The Bank has one global liquidity risk policy, but the major
operating areas measure and manage liquidity risks as follows:
•The Treasury and Balance Sheet Management department is
responsible for consolidating and reporting the Bank’s global
liquidity risk position and for managing the Canadian Personal
and Commercial Banking liquidity position.
•Wholesale Banking is responsible for managing the liquidity
risks inherent in the wholesale banking portfolios.
•TD Bank USA is responsible for managing its liquidity position.
•Each area must comply with the Global Liquidity Risk
Management policy that is periodically reviewed and approved
by the Risk Committee of the Board.
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. We do not rely on short-term
wholesale funding for purposes other than funding marketable
securities or short-term assets.
We measure liquidity requirements using a conservative base
case scenario to define the amount of liquidity that must be
held at all times for a specified minimum period. This scenario
provides coverage for 100% of our unsecured wholesale debt
coming due, as well as other potential deposit run-off and relat-
ed liabilities. We also use an extended liquidity coverage test to
ensure that we can fund our operations on a fully collateralized
basis for a period up to one year.
We meet liquidity requirements by holding assets that can be
readily converted into cash, and by managing our cash flows.
Toqualify for liquidity purposes, assets must be currently mar-
ketable, of sufficient credit quality and available for sale. Liquid
assets are represented in a cumulative liquidity gap framework
based on settlement timing and market depth. Assets needed for
collateral purposes or those that are similarly unavailable are not
included for liquidity purposes.
While each of our major operations has responsibility for the
measurement and management of its own liquidity risks, we also
manage liquidity on a global basis to ensureconsistent and effi-
cient management of liquidity risk across all of our operations.
On October 31, 2006 our consolidated surplus liquid asset posi-
tion up to 90 days was $18.8 billion, compared with a surplus
liquid asset position of $23.6 billion on October 31, 2005.Our
surplus liquid asset position is the Bank’s total liquid assets less
the Bank’s unsecured wholesale funding requirements, potential
non-wholesale deposit run-offand contingent liabilities coming
due in 90 days.
If a liquidity crisis wereto occur,we have contingency plans
in place to ensure that we can meet all our obligations as they
come due.
FUNDING
The Bank has a large base of stable retail and commercial
deposits, making up over 63%of our total funding. In addition,
we have an active wholesale funding program to provide access
to widely diversified funding sources, including asset securitiza-
tion. The Bank’s wholesale funding is diversified geographically,
by currency and by distribution network. We maintain limits on
the amounts of deposits that we can hold from any one deposi-
tor so that we do not overly rely on one or a small group of
customers as a source of funding. We also limit the amount of
wholesale funding that can mature in a given time period.
In 2006, the Bank securitized and sold $3.0 billion of mort-
gages and $3.5 billion of lines of credit. In addition, the Bank
issued $3.7 billion of other medium and long-term funding, $2.3
billion of subordinated debt and $0.4 billion of preferred shares.
Insurance Risk
Insurance risk is the risk of loss due to actual insurance claims
exceeding the insurance claims expected in product pricing.
This risk can arise due to improper estimation or selection of the
underlying risks, poor product design, extreme or catastrophic
events, as well as the inherent randomness associated with the
risks insured.
Insurance by nature involves the distribution of products that
transfer individual risks with the expectation of a return built into
the insurance premiums earned. We are exposed to insurance
risk in our property and casualty insurance business and our life
and health insurance and reinsurance businesses.
WHO MANAGES INSURANCE RISK
Primary responsibility for managing insurance risk lies with senior
management within the insurance business units, with oversight
from Risk Management. The Audit Committee of the Board of
Directors acts as the Audit and Conduct Review Committee for
the Canadian insurance company subsidiaries. The insurance
company subsidiaries also have their own separate boards of
directors, as well as independent appointed Actuaries, that
provide additional risk management oversight.
HOW WE MANAGE INSURANCE RISK
Wemaintain a number of policies and practices to manage insur-
ance risk. Sound product design is an essential element. The vast
majority of risks insured are short-term in nature, i.e. they do not
involve long term pricing guarantees. Geographic diversification
and product line diversification are important elements, as well.
Reinsurance protection is purchased to further minimize expo-
sure to fluctuations in claims, notably the exposure to natural
catastrophes in the property and casualty insurance business.
Wealso manage risk through effective underwriting and claim
adjudication practices, ongoing monitoring of experience, and
stress testing scenario analysis.
Operational Risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or from
external events.
Operating a complex financial institution exposes our busi-
nesses to a broad range of operational risks, including: failed
transaction processing and documentation errors, fiduciary and
information breaches, technology failures, business disruption,
theft and fraud, workplace safety and damage to physical assets
originating from internal or outsourced business activities. The
impact can result in financial loss, reputational harm or regulato-
ry censureand penalties.
Managing operational risk is imperative and essential to
creating and sustaining shareholder value, operating efficiently
and providing reliable, secure and convenient access to financial
services. This involves ensuring the Bank maintains an effective
operational risk management framework of policies, processes,
resources and internal controls for managing operational risk to
acceptable levels.