TD Bank 2012 Annual Report Download - page 79

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS 77
Our surplus liquid-asset position for each major business segment is
calculated by deducting “required liquidity” from “available liquidity”
for each specified time bucket. We do not consolidate the surplus
liquid-asset positions of our U.S. Personal and Commercial Banking
segment with the positions of other segments due to restrictions on
the investment of funds generated from deposit taking activities by
member financial institutions of the Federal Reserve system in the U.S.
Also, available cash held in certain Wealth Management and Insurance
subsidiaries are not included in the liquid-asset position of the
Canadian Personal and Commercial Banking segment due to regula-
tory restrictions involving the investment of such funds with the
Toronto-Dominion Bank (Parent). For the year ended October 31,
2012, our average monthly aggregate surplus liquid-asset position
for up to 90 days, as measured under the “Severe Combined Stress”
scenario was as follows:
• $11.3 billion (2011 – $6.1 billion) for Canadian Personal and
Commercial Banking (including the domestic Wealth business),
Corporate, and Wholesale Banking operations.
• $9.6 billion (2011 – $8.9 billion) for U.S. Personal and Commercial
Banking operations.
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 one
year. For the purposes of calculating the results of the 365-day bank
specific stress scenario, we estimate the marketability and pledging
potential of available assets not considered liquid within 90 days under
the “Severe Combined Stress” 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 365 day period.
For the year ended October 31, 2012, the average monthly estimate
of liquid assets less requirements, as determined in the extended
liquidity coverage test was as follows:
• $2.5 billion (2011 – $16.5 billion) for Canadian Personal and
Commercial Banking (including the domestic Wealth business),
Corporate and Wholesale Banking operations.
• $12.9 billion (2011 – $12.3 billion) for U.S. Personal and Commercial
Banking operations.
While each of our dedicated treasury areas has responsibility for the
measurement and management of liquidity risks in their respective
business segments, TBSM is responsible for managing liquidity on
an enterprise-wide basis in order to maintain consistent and efficient
management of liquidity risk across all of our operations. TD maintains
foreign branches in key global centres such as New York and London
to support Wholesale Banking activities. The Parent company routinely
provides a guarantee of liquidity support to all of its foreign branches
and consolidated subsidiaries.
The ongoing measurement of business segment liquidity in accordance
with various stressed limits ensures there will be sufficient available fund-
ing sources in the event of a liquidity event. Additional stress scenarios
related to severe idiosyncratic and systemic events caused by particular
economic, financial and or operational risk conditions are also used to
evaluate the potential range of required liquidity levels. We have contin-
gency funding plans (CFP) in place for each major business segment and
local jurisdiction. Each CFP provides direction on how management can
best utilize available sources of funding under each identified liquidity
stress event in the most efficient and effective manner possible, with
the objective of returning resultant liquidity positions to target liquidity
levels. Accordingly, CFP documentation is an integral component of the
Bank’s overall liquidity risk management program.
Credit ratings are important to our borrowing costs and ability
to raise funds. Rating downgrades could potentially result in higher
financing costs and reduce access to capital markets. A lowering of
credit ratings may also affect our ability to enter into normal course
derivative or hedging transactions and impact the costs associated
with such transactions. Credit ratings and outlooks provided by ratings
agencies reflect their views and are subject to change from time to
time, based on a number of factors including our financial strength,
competitive position and liquidity as well as factors not entirely within
our control, including the methodologies used by rating agencies and
conditions affecting the overall financial services industry.
October 31, 20121
Short-term Senior long-term
Ratings agency debt rating debt rating and outlook
Rating under review
for possible
Moody’s P–1 Aaa downgrade
S&P A–1+ AA– Negative
Fitch F1+ AA– Stable
DBRS R–1 (high) AA Stable
1 The above ratings are for The Toronto-Dominion Bank legal entity. A more exten-
sive listing, including subsidiaries’ ratings, is available on the Bank’s website at
http://www.td.com/investor/credit.jsp. Credit ratings are not recommendations
to purchase, sell or hold a financial obligation inasmuch as they do not comment
on market price or suitability for a particular investor. Ratings are subject to
revision or withdrawal at any time by the rating organization.
We regularly review the level of increased collateral our trading coun-
terparties would require in the event of a downgrade of TD’s credit
rating. We hold liquid assets to ensure we are able to provide addi-
tional collateral required by trading counterparties in the event of
a one-notch reduction in our senior long-term credit ratings. Severe
downgrades could have a significant impact by increasing our cost of
borrowing and/or requiring the Bank to post additional collateral for
the benefit of our trading counterparties. The table below presents
the additional collateral payments that could have been called at the
reporting date in the event of one, two and three-notch downgrades
of our credit ratings.
(billions of Canadian dollars) Average for the period ended
2012 2011
One-notch downgrade $ 0.6 $ 0.5
Two-notch downgrade 1.4 1.6
Three-notch downgrade 1.6 1.8
FUNDING
TD routinely has access to a wide variety of short and long-term
unsecured and secured funding sources including securitization channels
that it uses to meet operational requirements in normal operating
conditions. TD’s funding activities are conducted in accordance with
the Global Liquidity & Asset Pledging Policy. This Policy requires that,
among other things, all assets be funded to the appropriate term
(i.e., contractual term to maturity for banking book assets or stressed
market depths for trading assets).
A key approach to managing funding activities is to maximize the
use of branch sourced deposits. Table 58 illustrates the Bank’s large
base of stable personal and commercial, domestic Wealth business and
TD Ameritrade sweep deposits (P&C Deposits) that make up more than
70% of total deposit funding. Approximately 69% of this amount is
insured under various insurance deposit schemes, including the Canada
Deposit Insurance Corporation and the Federal Deposit Insurance
Corporation. The amount of long-term funding provided by demand
or non-maturity personal and commercial deposits is determined based
on demonstrated balance permanence and estimated sudden “run-off”
under the “Severe Combined Stress” scenario.
CREDIT RATINGS
TABLE 56
ADDITIONAL COLLATERAL REQUIREMENTS
FOR RATING DOWNGRADES
TABLE 57