TD Bank 2012 Annual Report Download - page 81

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS 79
(millions of Canadian dollars) 2012 2011
Financial and performance standby letters of credit $ 15,802 $ 14,445
Documentary and commercial letters of credit 279 271
Commitments to extend credit1
Original term to maturity of one year or less 31,845 25,789
Original term to maturity of more than one year 50,016 42,518
Total $ 97,942 $ 83,023
1 Commitments to extend credit exclude personal lines of credit and credit card
lines, which are unconditionally cancellable at the Bank’s discretion at any time.
PLEDGED ASSETS, REPURCHASE AGREEMENTS AND COLLATERAL
In the ordinary course of business, securities and other assets are pledged
against liabilities or contingent liabilities, including repurchase agreements,
securitization liabilities and securities borrowing transactions. Assets are
also deposited for the purposes of participation in clearing and payment
CREDIT AND LIQUIDITY COMMITMENTS
TABLE 61
CREDIT AND LIQUIDITY COMMITMENTS
In the normal course of business, TD enters into various commitments
and contingent liability contracts. The primary purpose of these contracts
is to make funds available for the financing needs of customers. TD’s
policy for requiring collateral security with respect to these contracts
and the types of collateral security held is generally the same as for
loans made by TD.
The values of credit instruments reported below represent the maxi-
mum amount of additional credit that TD could be obligated to extend
should contracts be fully utilized. The following table provides the
contractual maturity of notional amounts of credit, guarantee, and
liquidity commitments should contracts be fully drawn upon and clients
default. Since a significant portion of guarantees and commitments are
expected to expire without being drawn upon, the total of the contrac-
tual amounts is not representative of future liquidity requirements.
REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY
In December 2010, the Basel Committee on Banking Supervision
(BCBS) issued a final framework document outlining two new liquidity
standards in addition to supplemental reporting metrics applicable to
all internationally active banks. The document prescribes the Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as minimum
regulatory standards effective January 1, 2015 and January 1, 2018
respectively. Regulators and banks continue to work together conduct-
ing quantitative impact studies to assist in evaluating the impact of
these new standards on financial markets and refining associated
calibration factors and/or operational requirements. The Bank contin-
ues to assess the potential impacts and effects upon its liquidity risk
management framework across all relevant and affected reporting
business segments, until such time as the LCR standard is fully defined
by mid-2013. The structure of TD Bank’s “Severe Combined Stress”
scenario exhibits similarity with the severe shock used as the basis
to calibrate the BCBS’ LCR standard.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events.
Operating a complex financial institution exposes our businesses to
a broad range of operational risks, including failed transaction process-
ing and documentation errors, fiduciary and information breaches,
technology failures, business disruption, theft and fraud, workplace
injury and damage to physical assets as a result of internal or
outsourced business activities. The impact can result in significant
financial loss, reputational harm or regulatory censure and penalties.
Operational risk is embedded in all our business activities including
the practices for managing other risks such as credit, market and
liquidity risk. We must mitigate and manage operational risk so that
we can create and sustain shareholder value, successfully execute our
business strategies, operate efficiently and provide reliable, secure and
systems (Large Value Transfer System in Canada) and depositories
(Clearing and Depository Services Inc. or the Depository Trust & Clearing
Corporation) or to have access to the facilities of central banks in
domestic and foreign jurisdictions, such as the Bank of Canada, Federal
Reserve Bank, European Central Bank, and the Bank of England, or as
security for contract settlements with derivative exchanges or other
derivative counterparties (e.g., London Clearing House). As at October 31,
2012, securities and other assets with a carrying value of $142.2 billion
(2011 – $118.1 billion) were pledged as collateral in respect of these
transactions. As previously noted, assets that are encumbered as a result
of pledging activities are not considered as ”available liquidity” in
determining TD’s liquid-asset surplus positions.
In the ordinary course of business, the Bank enters into security
lending arrangements where it agrees to lend unpaid customer securi-
ties, or its own securities, to borrowers on a fully collateralized basis.
The Bank’s own securities lent as of October 31, 2012 amounted to
$13.0 billion (2011 – $11.4 billion).
In addition, the Bank may accept financial assets as collateral that
the Bank is permitted to sell or repledge in the absence of default.
These transactions are conducted under terms that are usual and
customary to standard lending and security borrowing and lending
activities. As of October 31, 2012, the fair value of financial assets
accepted as collateral that the Bank is permitted to sell or repledge in
the absence of default was $18 billion (2011 – $20.5 billion). The fair
value of financial assets accepted as collateral that has been sold or
repledged (excluding cash collateral) was $6.4 billion as of October 31,
2012 (2011 – $6.7 billion).
As at October 31, 2012, $10.5 billion (2011 – $7.4 billion) of consumer
instalment and other personal loan assets were also pledged in respect
of covered bonds issued by the Bank. These assets were sold by the
Bank to a SPE which is consolidated by the Bank. A discussion on the
structure of this SPE and assets held is included in Note 9 to the Bank’s
Consolidated Financial Statements.
convenient access to financial services. We maintain a formal enter-
prise-wide operational risk management framework that emphasizes
a strong risk management and internal control culture throughout TD.
Under Basel II, we use the Standardized Approach to operational
risk regulatory capital. Work is underway to build upon TD’s opera-
tional risk management framework to meet the requirements of the
Advanced Measurement Approach for operational risk, and to proceed
towards implementation.
WHO MANAGES OPERATIONAL RISK
Operational Risk Management is an independent function that designs
and maintains TD’s overall operational risk management framework.
This framework sets out the enterprise-wide governance processes,
policies and practices to identify, assess, report, mitigate and control
operational risk. Risk Management ensures that there is appropriate
monitoring and reporting of our operational risk exposures to senior
management via the Operational Risk Oversight Committee, the ERMC
and the Risk Committee of the Board.
We also maintain program groups who oversee specific enterprise
wide operational risk policies that require dedicated mitigation and
control activities. These policies govern the activities of the Corporate
functions responsible for the management and appropriate oversight
over business continuity, outsourcing management, financial crime
risk management, project change management, technology risk
management, and information security.
The senior management of individual business units is responsible
for the day-to-day management of operational risk following our
established operational risk management policies. Within each business
segment and corporate area, an independent risk management function
uses the elements of the operational risk management framework
according to the nature and scope of the operational risks inherent
in the area. The senior executives in each business unit participate
in a Risk Management Committee that oversees operational risk
management issues and initiatives.