TD Bank 2014 Annual Report Download - page 82

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS80
Gross Credit Risk Exposure
Gross credit risk exposure, also referred to as EAD, is the total
amount the Bank is exposed to at the time of default of a loan and is
measured before counterparty-specific provisions or write-offs. Gross
credit risk exposure does not reflect the effects of credit risk mitiga-
tion and includes both on-balance sheet and off-balance sheet expo-
sures. On-balance sheet exposures consist primarily of outstanding
loans, acceptances, non-trading securities, derivatives, and certain
other repo-style transactions. Off-balance sheet exposures consist
primarily of undrawn commitments, guarantees, and certain other
repo-style transactions.
Gross credit risk exposure for the two approaches the Bank uses
to measure credit risk is included in the following table.
(millions of Canadian dollars) As at
October 31, 2014 October 31, 2013
Standardized AIRB Total Standardized AIRB Total
Retail
Residential secured $ 28,599 $ 261,063 $ 289,662 $ 25,671 $ 251,809 $ 277,480
Qualifying revolving retail – 59,316 59,316 – 43,862 43,862
Other retail 48,093 36,680 84,773 41,225 34,465 75,690
Total retail 76,692 357,059 433,751 66,896 330,136 397,032
Non-retail
Corporate 85,948 177,826 263,774 69,411 145,718 215,129
Sovereign 35,788 96,948 132,736 24,783 81,489 106,272
Bank 9,794 98,736 108,530 16,827 95,295 112,122
Total non-retail 131,530 373,510 505,040 111,021 322,502 433,523
Gross credit risk exposures $ 208,222 $ 730,569 $ 938,791 $ 177,917 $ 652,638 $ 830,555
GROSS CREDIT RISK EXPOSURE – Standardized and AIRB Approaches1,2
TABLE 53
1 Gross credit risk exposures represent EAD and are before the effects of credit
risk mitigation. This table excludes securitization, equity and other credit risk-
weighted assets.
2 Prior to 2014, the amounts have not been adjusted to reflect the impact of the
New IFRS Standards and Amendments.
Other Credit Risk Exposures
Non-trading Equity Exposures
TD’s non-trading equity exposures are at a level that represents less
than 5% of the Bank’s combined Tier 1 and Tier 2 Capital. As a result,
the Bank uses OSFI-prescribed risk weights to calculate RWA on non-
trading equity exposures.
Securitization Exposures
For externally rated securitization exposures, the Bank uses both the
Standardized Approach and the Ratings Based Approach (RBA). Both
approaches assign risk weights to exposures using external ratings.
The Bank uses ratings assigned by one or more external rating agen-
cies, including Moody’s and S&P. The RBA also takes into account
additional factors, including the time horizon of the rating (long-term
or short-term), the amount of detail available on the underlying asset
pool, and the seniority of the position.
The Bank uses the Internal Assessment Approach (IAA) to manage
the credit risk of its exposures relating to ABCP securitizations that are
not externally rated.
Under the IAA, the Bank considers all relevant risk factors in assess-
ing the credit quality of these exposures, including those published by
the Moody’s and S&P rating agencies. The Bank also uses loss coverage
models and policies to quantify and monitor the level of risk, and facili-
tate its management. The Bank’s IAA process includes an assessment
of the extent by which the enhancement available for loss protection
provides coverage of expected losses. The levels of stressed coverage
the Bank requires for each internal risk rating are consistent with the
rating agencies’ published stressed factor requirements for equivalent
external ratings by asset class.
All exposures are assigned an internal risk rating based on the Bank’s
assessment, which must be reviewed at least annually. The Bank’s
ratings reflect its assessment of risk of loss, consisting of the combined
PD and LGD for each exposure. The ratings scale TD uses corresponds
to the long-term ratings scales used by the rating agencies.
The Bank’s IAA process is subject to all of the key elements and
principles of the Bank’s risk governance structure, and is managed
in the same way as outlined in this Credit Risk section.
The Bank uses the results of the IAA in all aspects of its credit risk
management, including performance tracking, control mechanisms,
and management reporting, and the calculation of capital. Under the
IAA, exposures are multiplied by OSFI-prescribed risk weights to calcu-
late RWA for capital purposes.
Market Risk
Trading Market Risk is the risk of loss in financial instruments on the
balance sheet due to adverse movements in market factors such as
interest and exchange rates, prices, credit spreads, volatilities, and
correlations from trading activities.
Non-Trading Market Risk is the risk of loss in financial instruments,
or the balance sheet or in earnings, or the risk of volatility in earnings
from non-trading activities such as asset-liability management or
investments, predominantly from interest rate, foreign exchange
and equity risks.
The Bank is exposed to market risk in its trading and investment
portfolios, as well as through its non-trading activities. In the Bank’s
trading and investment portfolios, it is an active participant in the
market, seeking to realize returns for TD through careful management
of its positions and inventories. In the Bank’s non-trading activities, it is
exposed to market risk through the everyday banking transactions that
the Bank’s customers execute with TD.
The Bank complied with the Basel III market risk requirements as at
October 31, 2014, using the Internal Model Method.