TD Bank 2014 Annual Report Download - page 77

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS 75
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.
The Bank’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 endorsement by senior management committees of
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
The Bank monitors and reports on risk levels on a regular basis against
TD’s risk appetite and Risk Management reports on its risk monitoring
activities to senior management, 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
the Bank’s ICAAP. Complementing regular risk monitoring and report-
ing, ad hoc risk reporting is provided to senior management, the Risk
Committee, and the Board, as appropriate, for new and emerging risk
or any significant changes to the Bank’s risk profile.
Separate from the EWST program, the Bank’s U.S. based subsidiaries
complete their own capital planning and regulatory stress testing exer-
cises. These include Office of the Comptroller (OCC) Dodd-Frank Act
Stress Testing (DFAST) requirements for operating banks, and the
Federal Reserve Board’s capital plan rule and related Comprehensive
Capital and Analysis Review (CCAR) requirements beginning in 2015
for the holding company.
Enterprise-Wide Stress Testing
EWST at TD is part of the long-term strategic, financial and capital
planning exercise that helps validate the risk appetite of the Bank. TD’s
EWST 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 Risk Capital Committee, which is a subcommittee of the Asset
Liability and Capital Committee, provides oversight of the processes
and practices governing the EWST program.
As part of its 2014 program, the Bank evaluated two internally
generated macroeconomic stress scenarios covering a range of severi-
ties and duration, as described below. The scenarios were constructed
to cover a wide variety of risk factors meaningful to TD’s risk profile in
both the North American and global economies. Stressed macroeco-
nomic variables such as unemployment, GDP, resale home prices and
interest rates were forecast over the stress horizon which drives the
assessment of impacts. In both scenarios evaluated in the 2014
program, the Bank remained adequately capitalized with management
actions. Results of the scenarios were reviewed by senior executives,
incorporated in the Bank’s planning process, and presented to the Risk
Committee and the Board.
TD also employs reverse stress testing as part of a comprehensive
Crisis Management Recovery Planning program to assess potential
mitigating actions and contingency planning strategies. The scenario
contemplates significantly stressful events that would result in TD
reaching the point of non-viability in order to consider meaningful
remedial actions for replenishing the Bank’s capital and liquidity position.
ENTERPRISE-WIDE STRESS SCENARIOS
Extreme Scenario Severe Scenario
• The scenario emanates from a banking crisis stemming from emerg-
ing markets leading to sovereign and private sector defaults and a
subsequent global recession. Wholesale funding markets around the
world experience massive disruptions, as confidence in the banking
system rapidly deteriorates.
• External shocks to the Canadian economy trigger an unwinding of
household imbalances. Unemployment rises sharply as home prices
deteriorate significantly.
• The severe scenario is modeled from historical recessions that have
taken place in the United States and Canada. The recessions extend
four consecutive quarters followed by a modest recovery.
• Deterioration in key macroeconomic variables such as GDP, home
prices and unemployment align with historically observed recessions.