TD Bank 2012 Annual Report Download - page 69

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS 67
In support of a strong risk culture, TD applies the following principles
to how it manages risks:
• 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 business management and all
employees, individually and collectively.
• Independent Oversight – Risk policies, monitoring, and reporting
will be established independently and objectively.
• Integrated Risk and Control Culture – Risk management
disciplines 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 and grow
shareholder value.
APPROACH TO RISK MANAGEMENT PROCESSES
TD’s approach to the risk management process is comprised of four
basic components: identification and assessment, measurement,
control, and monitoring and reporting.
Risk Identification and Assessment
Risk identification and assessment is focused on recognizing and
understanding existing risks, risks that may arise from new or evolving
business initiatives and emerging risks from the changing environment.
TD’s objective is to establish and maintain its integrated risk identifica-
tion and assessment processes that enhance the understanding of
risk interdependencies, consideration of how risk types intersect, and
support the identification of emerging risk.
Risk Measurement
The ability to quantify risks is a key component of TD’s risk management
process. TD’s risk measurement process aligns with regulatory require-
ments such as capital adequacy, leverage ratios, liquidity measures,
stress testing and maximum credit exposure guidelines established by
its regulators. Additionally, TD has a process in place to quantify risks
to provide accurate and timely measurements of the risks it assumes.
In quantifying risk, TD uses various risk measurement methodologies,
including Value-at-Risk (VaR) analysis, scenario analysis, stress testing,
and limits. Other examples of risk measurements include credit expo-
sures, provision for credit losses, peer comparisons, trending analysis,
liquidity coverage, and capital adequacy metrics. TD also requires
significant business segments and corporate oversight functions to
assess their own key risks and internal controls annually through a
structured Risk and Control Self-Assessment (RCSA) program. Internal
and external risk events are monitored to assess whether TD’s internal
controls are effective. This allows TD to identify, escalate, and monitor
significant risk issues as needed.
Risk Control
TD’s risk control processes are established and communicated through
Risk Committee and Management approved policies, and associated
management approved procedures, control limits and delegated
authorities which reflect TD’s risk appetite and risk tolerances.
TD’s approach to risk control also includes risk and capital assessments
to appropriately capture key risks in TD’s measurement and management
of capital adequacy. This involves the review, challenge, and endorse-
ment by senior management committees of the Internal Capital
Adequacy Assessment Process (ICAAP) and related economic capital
practices. At TD, performance is measured based on the allocation of
risk-based capital to businesses and the cost charged against that capital.
Risk Monitoring and Reporting
TD monitors and reports on risk levels on a regular basis against TD’s
risk appetite and reports on risk monitoring activities to senior manage-
ment, the Board and its Committees, and appropriate executive and
management committees. The ERMC, the Risk Committee, and the
Board also receive annual and periodic reporting on enterprise wide
stress testing and an annual update on TD’s ICAAP. Complementing
regular risk monitoring and reporting, ad hoc risk reporting is provided
to senior management, the Risk Committee, and the Board as appro-
priate for new and emerging risk or any significant changes to the
Bank’s risk profile.
Enterprise Stress Testing
Enterprise-wide stress testing at TD is part of the long-term strategic,
financial, and capital planning exercise that helps understand and vali-
date the risk appetite. TD’s Enterprise-wide stress testing program
involves the development, application, and assessment of severe but
plausible stress scenarios on earnings, capital, and liquidity. It enables
management 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, TBSM, 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
appetite. Each SET member is also accountable to the CEO for moni-
toring, 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 strate-
gies and ensures that mitigating actions are taken where appropriate.
The CEO reports to the Board on the implementation of TD’s strate-
gies, 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 posi-
tion, 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. Additionally, each material acquisition is
assessed for its fit with our strategy and risk appetite in accordance
with our Due Diligence Policy. This assessment is reviewed by the SET
and Board as part of the decision process.