TD Bank 2009 Annual Report Download - page 80

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS76
Liquidity Risk
Liquidity risk is the risk that we cannot meet a demand for cash or
collateral or fund our obligations as they come due. Demand for
cash can arise from withdrawals of deposits, debt maturities and
commitments to provide credit or liquidity support. Liquidity risk also
includes the risk of not being able to sell assets in a timely manner
at a reasonable price.
As a financial organization, we must always ensure that we have
access to enough readily-available funds to cover our financial obliga-
tions as they come due and to sustain and grow our assets and
operations under normal and stress conditions. In the event of a funding
disruption, we need to be able to continue to function without being
forced to sell too many of our assets and/or significantly alter our
business strategies. The process that ensures adequate access to funds
is known as liquidity risk management.
WHO IS RESPONSIBLE FOR LIQUIDITY RISK MANAGEMENT
The ALCO oversees our liquidity risk management program. It ensures
that there is an effective management structure to properly measure and
manage liquidity risk. In addition, the Global Liquidity Forum, compris-
ing senior management from TBSM, Risk Management, Finance and
Wholesale Banking, identifies and monitors our liquidity risks. When
necessary, the Forum recommends actions to the ALCO to maintain our
liquidity positions within limits under normal and stress conditions.
We have one Global Liquidity Risk Management Policy, but the major
operating areas measure and manage liquidity risks as follows:
•TBSM is responsible for consolidating and reporting the Bank’s
global liquidity position and for managing the Canadian Personal
and Commercial Banking and domestic Wealth Management
liquid
ity positions.
•
Wholesale Banking, working closely with Trading Risk in Risk
Management, is responsible for managing the liquidity risks inher-
ent in each of the Wholesale Banking portfolios and its regulated
consolidated subsidiaries.
•The U.S. Personal and Commercial Banking segment is responsible
for managing its liquidity position. TBSM works closely with
the segment to ensure consistency with the global liquidity risk
management framework.
•Each area must comply with the Global Liquidity Risk Management
Policy. The policy is periodically reviewed by the Risk Committee
of the Board. Management responsible for liquidity in each of our
U.S. segment and overseas branches and/or subsidiaries is also
required to implement the policies and related liquidity risk manage-
ment programs that are necessary in order to meet local business
conditions and/or regulatory requirements. Each of these policies is
subject to review by the Global Liquidity Forum and approval by ALCO.
HOW WE MANAGE LIQUIDITY RISK
Our overall liquidity requirement is defined as the amount of liquidity
we need to fund expected cash flows, 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.
To define the amount of liquidity that must be held at all times for
a specified minimum 90 day period, we use a conservative Base-Case
scenario stress test that models potential liquidity requirements and
asset marketability during a confidence crisis that has been triggered
in the markets specifically with respect to our ability to meet obligations
as they come due. In addition to this Bank-specific event, the Base-
Case scenario also incorporates the impact of a stressed market-wide
liquidity event that results in a significant reduction in access to both
short- and long-term funding for all institutions, a significant increase
in our cost of funds and a significant decrease in the marketability of
assets. This scenario ensures that we have sufficient liquidity to cover
total requirements equal to 100% of our unsecured wholesale debt
coming due, potential retail and commercial deposit run-off and fore-
casted operational requirements. In addition, we include coverage of
Bank-sponsored funding programs, such as the Bankers’ Acceptances
we issue on behalf of clients, and Bank-sponsored ABCP.
To meet the resulting total liquidity requirements, we hold assets
that can be readily converted into cash. Assets must be currently
marketable, of sufficient credit quality and available for sale to be
considered readily convertible into cash. Liquid assets are represented
in a cumulative liquidity gap framework based on settlement timing
and market depth. Assets that are not available without delay because
they are needed for collateral or other similar purposes are not consid-
ered readily convertible into cash.
Our surplus liquid-asset position is our total liquid assets less our
unsecured wholesale funding requirements, potential non-wholesale
deposit run-off and contingent liabilities coming due in a given specified
time bucket. On October 31, 2009, our aggregate surplus liquid-asset
position for up to 90 days, as measured under the Base-Case scenario
for Canadian Personal and Commercial Banking (including domestic
Wealth Management) and Wholesale Bank operations was $6.8 billion,
(2008 – $7.9 billion). The cumulative surplus liquid-asset position for
U.S. Personal and Commercial Banking operations as at October 31,
2009 was $10.0 billion.
We also use an extended liquidity coverage test to measure our
ability to fund our operations on a fully secured basis for a period of
up to one year. For the purposes of calculating the results of this
test we estimate the marketability and pledging potential of available
assets not considered liquid within 90 days under the Base-Case
scenario and then deduct an estimate for potential wholesale liability
and deposit run-off and additional utilization of committed lines of
credit over a 91 to 364 day period. On October 31, 2009, our estimate
of liquid assets less requirements, as measured under the extended
liquidity coverage test, for Canadian Personal and Commercial Banking
and Wholesale Banking operations was $14.9 billion, (2008 –
$5.5 billion) and for U.S. Personal and Commercial Banking operations
was $16.8 billion.
As noted, the Base-Case scenario stress test models a Bank-specific
liquidity event combined with the impact of a market-wide event on
funding asset values and spreads. In response to the significant deterio-
ration in global financial markets that started in September 2008 and
lasted until approximately April 2009, ALCO and the Risk Committee
of the Board approved managing to a Systemic Market Event liquidity
scenario stress test. Building on the Base-Case scenario described above,
under the Systemic Market Event scenario, we further adjusted asset
liquidity and potential use of committed lines of credit to reflect the
then current stressed market-wide conditions. In addition, we added
incremental liquidity related to the estimated pledging value of high
quality, unencumbered Bank-owned assets eligible as collateral under
secured borrowing programs, such as the Bank of Canada’s Term
Purchase and Resale Agreement (Term PRA) to the position. Similar
to our Base-Case scenario, a surplus liquid-asset position is required
for all measured time periods up to 90 days. We reported a positive
surplus position as required during the entire period that the Bank’s
liquidity position was managed under the Systemic Market Event
scenario. During this period, the Global Liquidity Forum met frequently
and closely monitored global funding market conditions and the
potential impacts to our funding access and resultant liquidity position
on a daily basis, recommending appropriate action as needed to
ALCO. The ALCO and the Risk Committee approved the return to
managing to the Base-Case scenario in September 2009.
While each of our major operations has responsibility for the meas-
urement and management of its own liquidity risks, we also manage
liquidity on an enterprise-wide basis in order to maintain consistent
and efficient management of liquidity risk across all of our operations.
We have contingency plans in place to provide direction in the event
of a specific local liquidity crisis.
We also regularly review the level of increased collateral our trading
counterparties would require in the event of a downgrade of the Bank’s
credit rating. The impact of a one notch downgrade would be minimal
and could be readily managed in the normal course of business.