TD Bank 2009 Annual Report Download - page 73

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 69
WHO MANAGES STRATEGIC RISK
The CEO manages strategic risk supported by the members of SET and
the ERMC. The CEO, together with the SET, defines the overall strategy,
in consultation with and subject to approval by the Board. The Executive
Vice President Corporate Development, Group Strategy & Treasury and
Balance Sheet Management, leads the Bank’s longer term strategy
development with input and support from senior executives across the
Bank. Each member of the SET is responsible for establishing and
managing strategies for their business areas and for ensuring such
strategies are aligned with the overall enterprise strategy. Each SET
member is also accountable to the CEO for monitoring, managing,
and reporting on the effectiveness and risks of their business strate-
gies. The ERMC oversees the direction and trend of significant and
emerging risks related to the Bank’s strategies and that mitigating
action is taken where appropriate.
The CEO reports to the Board on the implementation of Bank
strategies, identifying the risks within those strategies and explaining
how they are managed.
HOW WE MANAGE STRATEGIC RISK
The strategies and operating performance of significant business units
and corporate functions are assessed regularly by the CEO and the
relevant members of SET through the strategic planning process and
strategic business and operating performance reviews.
The annual strategic planning process includes business segment
strategies, key strategic initiatives, and an evaluation as to whether
business level and enterprise-level strategies align. Strategic business
reviews include a comprehensive review of business strategies, compet-
itive position, financial performance, initiatives for strategy execution,
and key business risks. The frequency of strategic business reviews
depends on the risk profile and size of the business or function.
The shaded areas of this MD&A represent a discussion on risk
management policies and procedures relating to credit, market, and
liquidity risks as required under the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3862, Financial Instruments –
Disclosures, which permits these specific disclosures to be included
in the MD&A. Therefore, the shaded areas which include Credit Risk,
Market Risk, and Liquidity Risk, form an integral part of the audited
Consolidated Financial Statements for the year ended October 31,
2009 and 2008.
Credit Risk
Credit risk is the risk of loss if a borrower or counterparty in a transac-
tion fails to meet its agreed payment obligations.
Credit risk is one of the most significant and pervasive risks in banking.
Every loan, extension of credit or transaction that involves the transfer
of payments between the Bank and other parties or financial institutions
exposes the Bank to some degree of credit risk.
Our primary objective is to be methodical in our credit risk assessment
so that we can better understand, select, and manage our exposures
to reduce significant fluctuations in earnings.
Our strategy is to ensure central oversight of credit risk in each
business, reinforcing a culture of transparency, accountability, inde-
pendence, and balance.
WHO MANAGES CREDIT RISK
The responsibility for credit risk management is enterprise-wide. To
reinforce ownership of credit risk, credit risk control functions are
integrated into each business but report to Risk Management to
ensure objectivity and accountability.
Each business segment’s credit risk control unit is primarily responsible
for credit decisions and must comply with established policies, exposure
guidelines and credit approval limits, and policy/limit exception proce-
dures. It must also adhere to established standards of credit assessment
and obtain Risk Management’s approval for material credit decisions.
Risk Management provides independent oversight of credit risk by
developing centralized policies that govern and control portfolio risks
and product-specific policies as required.
The Risk Committee of the Board ultimately oversees the manage-
ment of credit risk and annually approves all major credit risk policies.
HOW WE MANAGE CREDIT RISK
Credit Risk is managed through a centralized infrastructure:
•
Risk Management centrally approves all credit risk policies, including
exception management guidelines, as well as the discretionary limits
of officers throughout the Bank for extending lines of credit.
•Guidelines are established to monitor and limit country risk, industry
risk, and group exposure in the portfolios in accordance with enter-
prise-wide policies approved by the Risk Committee of the Board.
•Our Commercial Banking and Wholesale Banking businesses use credit
risk models and policies to establish borrower and facility risk ratings,
quantify and monitor the level of risk, and facilitate its management.
The businesses also use risk ratings to determine the amount of credit
exposure we are willing to extend to a particular borrower.
•
Our retail businesses use approved scoring techniques and stan-
dards in extending, monitoring, and reporting personal credit in our
retail businesses.
•
Management processes are used to monitor country, industry, and
counterparty risk ratings which include daily, monthly, and quarterly
review requirements for credit exposures.
•
The key parameters used in our credit risk models are monitored on
an ongoing basis.
Unanticipated economic or political changes in a foreign country could
affect cross-border payments for goods and services, loans, dividends,
trade-related finance, as well as repatriation of the Bank’s capital in that
country. The Bank currently has counterparty exposure in a number
of countries, with the majority of the exposure in North America. We
measure country risk using approved risk rating models and qualitative
factors that are also used to establish country exposure guidelines
covering all aspects of credit exposure across all businesses. Country
risk ratings are managed on an ongoing basis and are subject to a
detailed review at least annually.
As part of our credit risk strategy, we set limits on the amount of
credit we are prepared to extend to specific industry sectors. We moni-
tor our concentration to any given industry to ensure that our loan
portfolio is diversified. We limit our risk using guidelines based on an
internal risk rating score that combines our industry risk rating model
and detailed industry analysis.
If several industry segments are affected by common risk factors, we
assign a single exposure guideline to those segments. In addition, for
each material industry, Risk Management assigns a maximum exposure
limit or a concentration limit which is a percentage of our total whole-
sale and commercial exposure. We regularly review industry risk ratings
to ensure that those ratings properly reflect the risk of the industry.
We also set limits on the amount of credit we are prepared to extend
to a particular entity or group of entities (also referred to as “entity
risk”). All entity risk is approved by the appropriate decision-making
authority using guidelines based on the borrower’s risk rating, the
facility risk rating(s) and the risk rating of the industry in which the
borrower operates. This exposure is monitored on a regular basis. As
at October 31, 2009, entity risk is within approved limits and the Bank
does not have material entity exposure to any entity considered higher
risk (as defined by management’s internal monitoring process).
From time-to-time we may use credit derivatives to mitigate industry
concentration and borrower-specific exposure as part of our portfolio
risk management techniques.
Exceptions to policy/limit guidelines are permitted subject to approval
via established procedures.