TD Bank 2014 Annual Report Download - page 214

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS212
REGULATORY CAPITAL
NOTE 34
The Bank manages its capital under guidelines established by OSFI. The
regulatory capital guidelines measure capital in relation to credit, market,
and operational risks. The Bank has various capital policies, procedures,
and controls which it utilizes to achieve its goals and objectives.
The Bank’s capital management objectives are:
• To be an appropriately capitalized financial institution as
determined by:
– The Bank’s Risk Appetite Statement;
– Capital requirements defined by relevant regulatory authorities;
and
– The Bank’s internal assessment of capital requirements consistent
with the Bank’s risk profile and risk tolerance levels.
• To have the most economically achievable weighted average cost
of capital (after tax), consistent with preserving the appropriate mix
of capital elements to meet targeted capitalization levels.
• To ensure ready access to sources of appropriate capital, at reason-
able cost, in order to:
– Insulate the Bank from unexpected events; or
– Support and facilitate business growth and/or acquisitions consis-
tent with the Bank’s strategy and risk appetite.
•
To support strong external debt ratings, in order to manage the Bank’s
overall cost of funds and to maintain accessibility to required funding.
These objectives are applied in a manner consistent with the Bank’s over-
all objective of providing a satisfactory return on shareholders’ equity.
Basel III Capital Framework
Changes in capital requirements approved by the Basel Committee on
Banking and Supervision (BCBS) are commonly referred to as Basel III.
These changes are intended to strengthen global capital rules with the
goal of promoting a more resilient global banking sector.
Under Basel III, total capital consists of three components, namely
Common Equity Tier 1 (CET1), Additional Tier 1, and Tier 2 Capital.
The sum of the first two components is defined as Tier 1 Capital.
CET1 Capital is mainly comprised of common shares, retained earn-
ings, and accumulated other comprehensive income, and is the highest
quality capital and the predominant form of Tier 1 Capital. CET1 Capital
also includes regulatory adjustments and deductions for items such as
goodwill, other intangibles, and amounts by which capital items (that
is, significant investments in CET1 Capital of financial institutions,
mortgage servicing rights, and deferred tax assets from temporary
differences) exceed allowable thresholds. Tier 2 Capital is mainly
comprised of subordinated debt, certain loan loss allowances, and
minority interests in subsidiaries’ Tier 2 instruments.
Under Basel III, risk-weighted assets are higher, primarily as a
result of the 250% risk-weighted threshold items not deducted from
CET1 Capital, securitization exposures being risk weighted (previously
deducted from capital), and new capital charges for derivatives credit
valuation adjustment and credit risk related to asset value correlation
for financial institutions. Regulatory capital ratios are calculated by
dividing CET1, Tier 1, and Total Capital by RWA.
The BCBS is finalizing a leverage ratio requirement with planned
implementation in 2018, intended to serve as a supplementary
measure to the risk-based capital requirements, with the objective of
constraining excessive leverage. In October 2014, OSFI released its final
guideline for the Leverage Ratio Requirements and replaces the Assets-
to-Capital Multiple with the Leverage Ratio, effective January 1, 2015.
Capital Position and Capital Ratios
The Basel framework allows qualifying banks to determine capital
levels consistent with the way they measure, manage, and mitigate
risks. It specifies methodologies for the measurement of credit, market,
and operational risks. The Bank uses the advanced approaches for the
majority of its portfolios which results in regulatory and economic capi-
tal being more closely aligned than was the case under Basel I. Since
the U.S. banking subsidiaries (TD Bank, N.A. including South Financial
and Chrysler Financial) were not originally required by their main
regulators to convert to Basel II prior to being acquired by the Bank,
the advanced approaches are not yet being utilized for the majority
of assets in TD Bank, N.A.
For accounting purposes, IFRS is followed for consolidation of
subsidiaries and joint ventures. For regulatory capital purposes,
insurance subsidiaries are deconsolidated and reported as a deduction
from capital. Insurance subsidiaries are subject to their own capital
adequacy reporting such as OSFI’s Minimum Continuing Capital
Surplus Requirements and Minimum Capital Test. Currently, for
regulatory capital purposes, all the entities of the Bank are either
consolidated or deducted from capital and there are no entities
from which surplus capital is recognized.
Some of the Bank’s subsidiaries are individually regulated by either
OSFI or other regulators. Many of these entities have minimum capital
requirements which they must maintain and which may limit the
Bank’s ability to extract capital or funds for other uses.
During the year ended October 31, 2014, the Bank complied with
the OSFI guideline related to capital ratios and the assets-to-capital
multiple (ACM). This guideline is based on “A global regulatory
framework for more resilient banks and banking systems” (Basel III)
issued by the Basel Committee on Banking Supervision (BCBS). OSFI’s
target CET1, Tier 1 and Total Capital ratios for Canadian banks are
7%, 8.5% and 10.5%, respectively.
The Bank’s regulatory capital position as at October 31 was as follows:
Regulatory Capital Position
(millions of Canadian dollars, except as noted) As at
October 31 October 31
2014 20131
Common Equity Tier 1 Capital $ 30,965 $ 25,822
Common Equity Tier 1 Capital ratio2 9.4% 9.0%
Tier 1 Capital $ 35,999 $ 31,546
Tier 1 Capital ratio2,3 10.9% 11.0%
Total Capital4 $ 44,255 $ 40,690
Total Capital ratio2,5 13.4% 14.2%
Assets-to-capital multiple6 19.1 18.2
1
The amounts have not been adjusted to reflect the impact of the New IFRS Standards
and Amendments.
2
The final CAR Guideline postponed the Credit Valuation Adjustment (CVA) capital
charge until January 1, 2014, and is being phased in until the first quarter of 2019.
Effective 2014, each capital ratio has its own risk-weighted assets (RWA) measure
due to the OSFI prescribed scalar for inclusion of the CVA. For 2014, the scalars for
inclusion of CVA for CET1, Tier 1 and Total Capital RWA were 57%, 65%, and
77%, respectively.
3
Tier 1 Capital ratio is calculated as Tier 1 Capital divided by Tier 1 Capital RWA.
4
Total Capital includes CET1, Tier 1, and Tier 2 Capital.
5
Total Capital ratio is calculated as Total Capital divided by Total Capital RWA.
6
The ACM is calculated as total assets plus off-balance sheet credit instruments,
such as certain letters of credit and guarantees, less investments in associated
corporations, goodwill and net intangibles, divided by Total Capital.
OSFI has provided IFRS transitional provisions for the ACM, which
allows for the exclusion of assets securitized and sold through CMHC-
sponsored programs prior to March 31, 2010 from the calculation
of ACM.