TD Bank 2014 Annual Report Download - page 100

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS98
Capital Adequacy Risk
Capital adequacy risk is the risk of insufficient capital available in rela-
tion to the amount of capital required to carry out the Bank’s strategy
and/or satisfy regulatory and internal capital adequacy requirements.
Capital is held to protect the viability of the Bank in the event of
unexpected financial losses. Capital represents the loss-absorbing
funding required to provide a cushion to protect depositors and other
creditors from unexpected losses.
Regulators prescribe minimum levels of capital, which are referred
to as capital limits. Managing the capital levels of a financial institution
exposes the Bank to the risk of breaching regulatory capital limits.
WHO MANAGES CAPITAL ADEQUACY RISK
The Board of Directors has the ultimate responsibility for overseeing
adequacy of capital and capital management. The Board reviews the
adherence to capital limits and thresholds and reviews and approves
the annual capital plan and the Global Capital Management Policy.
The Risk Committee of the Board reviews and approves the Capital
Adequacy Risk Management Framework and oversees management’s
actions to maintain an appropriate ICAAP framework, commensurate
with the Bank’s risk profile. The Chief Risk Officer ensures the Bank’s
ICAAP is effective in meeting capital adequacy requirements.
The ALCO recommends and maintains the Capital Adequacy Risk
Management Framework and the Global Capital Management Policy
for effective and prudent management of the Bank’s capital position
and supports maintenance of adequate capital. It oversees the alloca-
tion of capital limits for business segments and reviews adherence
to capital limits and thresholds.
Enterprise Capital Management is responsible for forecasting
and monitoring compliance with capital limits and thresholds, on a
consolidated basis. Enterprise Capital Management updates the capital
forecast and makes recommendations to the ALCO regarding capital
issuance, repurchase and redemption. Risk Capital Assessment, within
Risk Management, leads the ICAAP and EWST processes. Business
segments are responsible for managing to allocated capital limits.
Additionally, U.S. regulated subsidiaries of the Bank and certain
other jurisdictions manage their capital adequacy risk in accordance
with local regulatory requirements. However, related local capital
management policies and procedures conform with those of TD.
HOW TD MANAGES CAPITAL ADEQUACY RISK
Capital resources are managed to ensure the Bank’s capital position
can support business strategies under both current and future business
operating environments. The Bank manages its operations within the
capital constraints defined by both internal and regulatory capital
requirements, ensuring that it meets the higher of these requirements.
Regulatory capital requirements represent minimum capital levels.
The Board determines capital limits and thresholds in excess of mini-
mum capital requirements. The purpose of capital limits is to reduce
the risk of a breach of minimum capital requirements, due to an unex-
pected stress event, allowing management the opportunity to react
to declining capital levels before capital limits are breached. Capital
thresholds are higher than limits, taking into account normal capital
volatility. Capital limits and thresholds are defined in the Global Capital
Management Policy.
The Bank also determines its internal capital requirements through
the ICAAP process using models to measure the risk-based capital
required based on its own tolerance for the risk of unexpected losses.
This risk tolerance is calibrated to the required confidence level so
that the Bank will be able to meet its obligations, even after absorbing
worst case unexpected losses over a one-year period, associated with
management’s target debt rating.
In addition, the Bank has a Capital Contingency Plan that is
designed to prepare management to ensure capital adequacy through
periods of Bank specific or systemic market stress. The Capital
Contingency Plan determines the governance and procedures to be
followed if the Bank’s consolidated capital levels are forecast to fall
below capital limits or thresholds. It outlines potential management
actions that may be taken to prevent such a breach from occurring.
A comprehensive periodic monitoring process is undertaken to plan
and forecast capital requirements. As part of the annual planning
process, business segments are allocated individual capital limits.
Capital usage is monitored and reported to the ALCO.
The Bank assesses the sensitivity of its forecast capital requirements
and new capital formations to various economic conditions through its
EWST process. The impacts of the EWST are applied to the capital fore-
cast and are considered in the determination of capital thresholds.
Legal and Regulatory Compliance Risk
Legal and Regulatory Compliance Risk is the risk associated with the
failure to meet the Bank’s legal obligations from legislative, regulatory,
or contractual perspectives. This includes risks associated with
the failure to identify, communicate, and comply with current and
changing laws, regulations, rules, regulatory guidance, self-regulatory
organization standards, and codes of conduct. It also includes anti-
money laundering, anti-terrorist financing and economic sanctions risk.
Financial services is one of the most closely regulated industries,
and the management of a financial services business such as the
Bank’s is expected to meet high standards in all business dealings and
transactions, wherever TD operates. As a result, the Bank is exposed
to legal and regulatory compliance risk in virtually all of its activities.
Failure to meet legal and regulatory requirements not only poses
a risk of censure or penalty, and may lead to litigation, but also puts
the Bank’s reputation at risk. Financial penalties, sanctions, and other
costs associated with legal proceedings and unfavourable judicial or
regulatory judgments may also adversely affect the Bank’s business,
results of operations and financial condition.
Legal and regulatory compliance risk differs from other banking
risks, such as credit risk or market risk, in that it is typically not
a risk actively or deliberately assumed by management in expectation
of a return. It occurs as part of the normal course of operating the
Bank’s businesses.
WHO MANAGES LEGAL AND REGULATORY COMPLIANCE RISK
Business segments and corporate areas are responsible for managing
day-to-day legal and regulatory compliance risk, while the Legal,
Compliance, Global Anti-Money Laundering and Regulatory Risk
(including Regulatory Relationships and Government Affairs) groups
assist them by providing advice and oversight. Representatives of
these groups participate, as required, in senior operating committees
of the Bank’s businesses. Also, the senior management of these groups
have established regular meetings with and reporting to the Audit
Committee, which oversees the establishment and maintenance of
processes and policies that ensure the Bank is in compliance with the
laws and regulations that apply to it (as well as its own policies).
The Legal, Compliance, Global Anti-Money Laundering and
Regulatory Risk groups also establish risk-based programs and stan-
dards to proactively manage known and emerging legal and regulatory
compliance risk. The Compliance, Global Anti-Money Laundering and
Regulatory Risk groups also provide independent oversight and deliver
operational control processes to comply with applicable legislation and
regulatory requirements.