TD Bank 2011 Annual Report Download - page 66

TD BANK GROUP ANNUAL REPORT 2011 MANAGEMENT’S DISCUSSION AND ANALYSIS64
Risk Management is responsible for establishing practices and processes
to formulate, report, monitor, and review the application of TD’s risk
appetite and related metrics. Risk Management also monitors and eval-
uates the effectiveness of these practices and metrics. The following
principles govern Risk Management in carrying out its mandate:
• Enterprise-wide in Scope – Risk Management will span all areas
of TD, including third-party alliances and joint venture undertakings,
and all boundaries, both geographic and regulatory.
• Transparent and Effective Communication – Matters relating to
risk will be communicated and escalated in a timely, accurate, and
forthright manner.
• Enhanced Accountability – Risks will be explicitly owned, under-
stood, and actively managed by the business and all employees.
• Independent Oversight – Risk policies, procedures, and reporting
will be established independently and objectively.
• Integrated Risk and Control Culture – Risk management disci-
plines will be integrated into TD’s daily routines, decision-making,
and strategy.
• Strategic Balance – Risk will be managed to an acceptable level
of exposure, recognizing the need to protect shareholder value.
Adherence to the TD’s risk appetite is managed and monitored enter-
prise-wide by Risk Management, supported by management oversight
committees. Key policies and metrics have been implemented to safe-
guard against major risks. These key metrics are reported to senior
management and the Board and Risk Committee regularly. Other
metrics are tracked on an ongoing basis by management, and esca-
lated to senior management and the Board, or a committee of the
Board, as required.
In assessing compliance with TD’s risk appetite and quantifying
risk, TD uses various risk measurement methodologies, including
Value-at-Risk (VaR) analysis, scenario analysis, and stress testing.
We also require significant business units and corporate oversight
functions to assess their own key risks and internal controls annually
through a structured risk and control self-assessment program.
Internal and external risk events are also actively monitored to
assess whether our internal controls are effective. This allows us
to identify, escalate, and monitor significant risk issues as needed.
Our approach to managing risk also requires us to define the inter-
action between risk and capital assessment so that relevant risks can
be appropriately captured in TD’s measurement and management of
capital adequacy. This involves the review, challenge, and endorsement
by senior management committees of the Internal Capital Adequacy
Assessment Process (ICAAP) and related economic capital practices.
Our performance is measured based on the allocation of risk-based
capital to businesses and the cost charged against that capital. Lastly,
we review and assess annually TD management’s performance against
TD’s risk appetite as an input into compensation decisions.
Enterprise Stress Testing
Enterprise-wide stress testing at TD is part of the long-term strategic,
financial, and capital planning exercise that helps define and under-
stand risk tolerance. TD’s Enterprise-wide stress testing program
involves the development, application, and assessment of severe but
plausible stress scenarios on earnings and capital. It enables manage-
ment to identify and articulate enterprise-wide risks and understand
potential vulnerabilities that are relevant to TD’s risk profile. Stress
testing engages senior management in each business segment,
Finance, Treasury and Balance Sheet Management, Economics,
and Risk Management. The results are reviewed by senior executives,
incorporated in TD’s planning process and presented to the Risk
Committee and the Board.
The following pages describe the key risks we face and how they
are managed.
Strategic Risk
Strategic risk is the potential for financial loss or reputational damage
arising from ineffective business strategies, improper implementation
of business strategies, or a lack of responsiveness to changes in the
business environment.
WHO MANAGES STRATEGIC RISK
The CEO manages strategic risk supported by the members of the 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 Enterprise Strategy group, under the leadership of the Group
Head, Corporate Development, Enterprise Strategy, and Treasury is
charged with developing TD’s overall longer-term strategy with input
and support from senior executives across TD. In addition, each member
of the SET is responsible for establishing and managing strategies for
their business areas (organic and via acquisitions) and for ensuring such
strategies are aligned with the overall enterprise strategy and risk appe-
tite. Each SET member is also accountable to the CEO for monitoring,
assessing, managing, and reporting on the effectiveness and risks of
their business strategies. The ERMC oversees the identification and
monitoring of significant and emerging risks related to TD’s strategies
and ensures that mitigating actions are taken where appropriate.
The CEO reports to the Board on the implementation of TD’s
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 the SET through an integrated financial and stra-
tegic planning process, management meetings, operating/financial
reviews, and strategic business reviews. Our annual planning process
considers individual segment strategies and key initiatives and ensures
alignment between business-level and enterprise-level strategies.
Once the strategy is set, regular strategic business reviews conducted
throughout the year ensure that alignment is maintained in its imple-
mentation. The reviews include an evaluation of the strategy of each
business, the overall operating environment including competitive
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 overall
state of Strategic Risk and adherence to TD’s risk appetite is reviewed
by the ERMC in the normal course.