TD Bank 2014 Annual Report Download - page 91

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS 89
Liquidity Risk
The risk of having insufficient cash or collateral to meet financial
obligations without, in a timely manner, raising funding at
unfavourable rates or selling assets at distressed prices. Financial
obligations can arise from deposit withdrawals, debt maturities,
commitments to provide credit or liquidity support, or the need
to pledge additional collateral.
TD’S LIQUIDITY RISK APPETITE
The Bank maintains a sound and prudent approach to managing its
potential exposure to liquidity risk. The Bank targets a 90-day survival
horizon under a combined Bank-specific and market-wide stress
scenario, and a 365-day survival horizon under a prolonged Bank-
specific stress scenario that impacts the Bank’s access to unsecured
wholesale funding. The resultant management strategies and actions
comprise an integrated liquidity risk management program that
ensures low exposure to identified sources of liquidity risk.
Liquidity Risk Management Responsibility
The Bank’s Asset, Liability and Capital Committee (ALCO) oversees the
Bank’s liquidity risk management program. It ensures there are effec-
tive management structures and policies in place to properly measure
and manage liquidity risk. The Global Liquidity Forum (GLF), a subcom-
mittee of the ALCO comprised of senior management from TBSM, Risk
Management, Finance, Wholesale Banking, and representatives from
foreign operations, identifies and monitors TD’s liquidity risks. The GLF
recommends actions to the ALCO to maintain TD’s liquidity positions
within limits under normal and stress conditions.
The following treasury areas are responsible for measuring, monitor-
ing, and managing liquidity risks for major business segments:
• TBSM is responsible for maintaining the Global Liquidity and Asset
Pledging Policy (GLAP) and associated limits, standards, and
processes to ensure that consistent and efficient liquidity manage-
ment approaches are applied across all of the Bank’s operations.
TBSM also manages and reports the combined Canadian Retail
(including domestic wealth businesses), Corporate segment, and
Wholesale Banking liquidity positions.
• U.S. TBSM is responsible for managing the liquidity position for
U.S. Retail operations.
• Other regional treasury-related operations, including those within
TD’s insurance, foreign branches, and/or subsidiaries are responsible
for managing their liquidity risk and positions.
• Management responsible for overseeing liquidity at the regional
level ensure that policies and liquidity risk management programs
are consistent with the GLAP and address local business conditions
and/or regulatory requirements.
• The GLAP is subject to review and approval by the GLF and endorse-
ment by the ALCO.
• The Risk Committee of the Board frequently reviews reporting
of the Bank’s liquidity position and approves the Liquidity Risk
Management Framework and Board Policies annually.
HOW TD MANAGES LIQUIDITY RISK
The Bank’s overall liquidity requirement is defined as the amount
of liquid assets the Bank needs to hold to be able to cover expected
future cash flow requirements, plus a prudent reserve against potential
cash outflows in the event of a capital markets disruption or other
events that could affect TD’s access to funding. The Bank does not
rely on short-term wholesale funding for purposes other than funding
marketable securities or short-term assets.
To define the amount of liquidity that must be held for a rolling 90-day
period, the Bank uses a conservative “Severe Combined Stress” scenario
that models potential liquidity requirements and asset marketability
during a crisis that has been triggered in the markets, specifically with
respect to a lack of confidence in TD’s ability to meet obligations as
they come due. The Bank also assumes loss of access toall forms of
external unsecured funding during the 90-day period.
In addition to this bank-specific event, the “Severe Combined
Stress” scenario also incorporates the impact of a stressed market-wide
liquidity event that results in a significant reduction in the availability of
both short-term and long-term funding for all institutions, a significant
increase in the Bank’s cost of funds, and a significant decrease in the
marketability of assets. The Bank also calculates “required liquidity”
for this scenario related to the following conditions:
• 100% of all maturing unsecured wholesale and secured funding
coming due;
• accelerated attrition or “run-off” of retail deposit balances;
• increased utilization of available credit facilities to personal,
commercial, and corporate lending customers;
• increased collateral requirements associated with downgrades in
TD’s credit rating and adverse movement in reference rates for all
derivative contracts; and
• coverage of maturities related to Bank-sponsored funding programs,
such as the bankers’ acceptances the Bank issues on behalf of
clients and short-term revolving asset-backed commercial paper
(ABCP) channels.
As a financial organization, TD must ensure that the Bank has continu-
ous access to sufficient and appropriate funding to cover its financial
obligations as they come due, and to sustain and grow TD’s businesses
under normal and stress conditions. In the event of a funding disrup-
tion, the Bank must be able to continue operating without being
required to sell non-marketable assets and/or significantly altering the
Bank’s business strategy. The process that ensures adequate access to
funding, and availability of liquid assets and/or collateral under both
normal and stress conditions is known as liquidity risk management.