TD Bank 2014 Annual Report Download - page 78

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS76
Strategic Risk
Strategic risk is the potential for financial loss or reputational damage
arising from ineffective business strategies, improper implementation
of business strategies, or a lack of responsiveness to changes in
the business environment. Business strategies include merger and
acquisition activities.
WHO MANAGES STRATEGIC RISK
The CEO manages strategic risk supported by the members of the SET
and the ERMC. The CEO, together with the SET, defines the overall
strategy, in consultation with, and subject to approval by the Board.
The Enterprise Strategy group, under the leadership of the Group Head
Insurance, Credit Cards, and Enterprise Strategy is charged with devel-
oping the Bank’s overall long-term and short-term strategy with input
and support from senior executives across TD. In addition, each
member of the SET is responsible for establishing and managing long-
term and short-term strategies for their business areas (organic and
through acquisitions), and for ensuring such strategies are aligned with
the overall enterprise strategy and risk appetite. Each SET member is
also accountable to the CEO for identifying and assessing, measuring,
controlling and reporting on the effectiveness and risks of their busi-
ness strategies. The ERMC oversees the identification and monitoring
of significant and emerging risks related to TD’s strategies and ensures
that mitigating actions are taken where appropriate. The CEO, SET
members, and other senior executives report to the Board on the
implementation of the Bank’s strategies, identifying the risks within
those strategies, and explaining how they are managed.
The shaded areas of this MD&A represent a discussion on risk manage-
ment policies and procedures relating to credit, market, and liquidity
risks as required under IFRS 7, which permits these specific disclosures
to be included in the MD&A. Therefore, the shaded areas which
include Credit Risk, Market Risk, and Liquidity Risk, form an integral
part of the audited Consolidated Financial Statements for the years
ended October 31, 2014 and 2013.
Credit Risk
Credit risk is the risk of loss if a borrower or counterparty in a transaction
fails to meet its agreed payment obligations.
Credit risk is one of the most significant and pervasive risks in bank-
ing. Every loan, extension of credit, or transaction that involves the
transfer of payments between the Bank and other parties or financial
institutions exposes the Bank to some degree of credit risk.
The Bank’s primary objective is to be methodical in its credit risk
assessment so that the Bank can better understand, select, and
manage its exposures to reduce significant fluctuations in earnings.
The Bank’s strategy is to ensure central oversight of credit risk in
each business, and reinforce a culture of transparency, accountability,
independence, and balance.
WHO MANAGES CREDIT RISK
The responsibility for credit risk management is enterprise-wide. To
reinforce ownership of credit risk, credit risk control functions are inte-
grated into each business, but each credit risk control unit separately
reports to Risk Management to ensure objectivity and accountability.
Each business segment’s credit risk control unit is responsible for its
credit decisions and must comply with established policies, exposure
guidelines, credit approval limits, and policy/limit exception procedures.
It must also adhere to established enterprise-wide standards of credit
assessment and obtain Risk Management’s approval for credit decisions
beyond their discretionary authority.
Risk Management provides independent oversight of credit risk by
developing policies that govern and control portfolio risks, and prod-
uct-specific policies, as required.
The Risk Committee of the Board oversees the management
of credit risk and annually approves major credit risk policies.
HOW TD MANAGES STRATEGIC RISK
The strategies and operating performance of significant business units
and corporate functions are assessed regularly by the CEO and the
relevant members of the SET through an integrated financial and stra-
tegic planning process, management meetings, operating/financial
reviews, and strategic business reviews. The Bank’s annual planning
process considers individual segment long-term and short-term strate-
gies and associated key initiatives while also establishing enterprise
asset concentration limits. The process evaluates alignment between
segment-level and enterprise-level strategies and risk appetite. Once
the strategy is set, regular strategic business reviews conducted
throughout the year ensure that alignment is maintained. The reviews
include an evaluation of the strategy of each business, the overall
operating environment including competitive position, performance
assessment, initiatives for strategy execution, and key business risks.
The frequency of strategic business reviews depends on the risk profile
and size of the business or function. The overall state of Strategic Risk
and adherence to TD’s risk appetite is reviewed by the ERMC in the
normal course. Additionally, each material acquisition is assessed for
its fit with the Bank’s strategy and risk appetite in accordance with its
Due Diligence Policy. This assessment is reviewed by the SET and Board
as part of the decision process.
HOW TD MANAGES CREDIT RISK
The Bank’s Credit Risk Management Framework outlines the internal
risk and control structure to manage credit risk and includes risk appe-
tite, policies, and processes, as well as limits and governance. The
Credit Risk Management Framework is maintained by Risk Management
and supports alignment with the Bank’s risk appetite for credit risk.
Risk Management centrally approves all credit risk policies and credit
decision-making strategies, including policy and limit exception
management guidelines, as well as the discretionary limits of officers
throughout the Bank for extending lines of credit.
Limits are established to monitor and control country, industry,
product, geographic, and group exposure risks in the portfolios in
accordance with enterprise-wide policies.
In TD’s Retail businesses, the Bank uses established underwriting
guidelines (which includes collateral and loan-to-value constraints)
along with approved scoring techniques and standards in extending,
monitoring, and reporting personal credit. Credit scores and decision
strategies are used in the origination and ongoing management of
new and existing retail credit exposures. Scoring models and decision
strategies utilize a combination of borrower attributes, including
employment status, existing loan exposure and performance, and size
of total bank relationship, as well as external data such as credit
bureau information, to determine the amount of credit it is prepared
to extend to retail customers and to estimate future credit perfor-
mance. Established policies and procedures are in place to govern the
use and ongoing monitoring and assessment of the performance of
scoring models and decision strategies to ensure alignment with
expected performance results. Retail credit exposures approved within
the regional credit centres are subject to ongoing Retail Risk
Management review to assess the effectiveness of credit decisions and
risk controls, as well as identify emerging or systemic issues and
trends. Larger dollar exposures and material exceptions to policy are
escalated to Retail Risk Management. Material policy exceptions are
tracked and reported to monitor portfolio trends and identify potential
weaknesses in underwriting guidelines and strategies. Where unfa-
vourable trends are identified, remedial actions are taken to address
those weaknesses.