TD Bank 2014 Annual Report Download - page 94

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS92
Unencumbered liquid assets are represented in a cumulative liquidity
gap framework with adjustments made for estimated market or trading
depth for each asset class, settlement timing, and/or other identified
impediments to potential sale or pledging. In addition, the fair market
value of securities will fluctuate based on changes in prevailing interest
rates, credit spreads, and/or market demand. Where appropriate, the
Bank applies a downward adjustment to current market value reflective
of expected market conditions and investor requirements during the
“Severe Combined Stress” scenario. Overall, the Bank expects the
reduction in current market value to be low given the underlying high
credit quality and demonstrated liquidity of the Bank’s liquid asset port-
folio. Available liquidity also includes the Bank’s estimated borrowing
capacity through the Federal Home Loan Bank (FHLB) System in the U.S.
TD has access to the Bank of Canada’s Emergency Lending Assistance
Program, the Federal Reserve Bank Discount Window in the U.S. and
European Central Bank standby liquidity facilities. TD does not consider
borrowing capacity at central banks as a source of available liquidity
when assessing liquidity positions.
Average liquid assets held in The Toronto-Dominion Bank and multiple
domestic and foreign subsidiaries and branches are summarized in the
following table.
(billions of Canadian dollars) Average for the year ended
October 31 October 31
2014 2013
The Toronto-Dominion Bank (Parent) $ 71.1 $ 60.0
Bank subsidiaries 149.5 131.4
Foreign branches 34.9 31.5
Total $ 255.5 $ 222.9
1 Certain comparative amounts have been reclassified to conform with
the presentation adopted in the current year.
SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1
TABLE 61
The Bank does not consolidate the surplus liquidity of U.S. Retail
with the positions of other entities due to investment restrictions
imposed by the U.S. Federal Reserve on funds generated from deposit
taking activities by member financial institutions. Surplus liquidity
domiciled in certain wealth and insurance business subsidiaries are also
not included in the enterprise liquidity position calculation due to local
regulatory investment restrictions.
The ongoing management of business segment liquidity in accor-
dance with stress scenario related limits ensures there will be sufficient
sources of cash and collateral in a liquidity stress event. Additional
stress scenarios are also used to evaluate the potential range of liquidity
requirements the Bank could encounter. The Bank has liquidity contin-
gency funding plans (CFP) in place at the enterprise level and for local
entities, to document liquidity management actions and governance in
relation to stress events. CFP documentation is an integral component
of the Bank’s overall liquidity risk management program.
Credit ratings are important to TD’s borrowing costs and ability to
raise funds. Rating downgrades could potentially result in higher financ-
ing costs and reduce access to capital markets, and could also affect the
Bank’s ability to enter into routine derivative or hedging transactions.
Credit ratings and outlooks provided by rating agencies reflect their
views and are subject to change from time-to-time, based on a number
of factors including the Bank’s financial strength, competitive position,
and liquidity, as well as factors not entirely within the Bank’s control,
including the methodologies used by rating agencies and conditions
affecting the overall financial services industry.
October 31, 2014
Short-term Senior long-term
Ratings agency debt rating debt rating and outlook
Moody’s P-1 Aa1 Negative
S&P A-1+ AA- Negative
DBRS R-1 (high) AA Stable
1 The above ratings are for The Toronto-Dominion Bank legal entity. A more
extensive listing, including subsidiaries’ ratings, is available on the Bank’s website
at http://www.td.com/investor/credit.jsp. Credit ratings are not recommendations
to purchase, sell or hold a financial obligation inasmuch as they do not comment
on market price or suitability for a particular investor. Ratings are subject to
revision or withdrawal at any time by the rating organization.
The Bank regularly reviews the level of increased collateral its trading
counterparties would require in the event of a downgrade of TD’s
credit rating. The Bank holds liquid assets to ensure TD is able to
provide additional collateral required by trading counterparties in the
event of a one-notch downgrade in the Bank’s senior long-term credit
ratings. Severe downgrades could have an impact on liquidity require-
ments by necessitating the Bank to post additional collateral for the
benefit of the Bank’s trading counterparties. The following table pres-
ents the additional collateral payments that could have been called at
the reporting date in the event of one, two, and three-notch down-
grades of the Bank’s credit ratings.
CREDIT RATINGS1
TABLE 62
(billions of Canadian dollars) Average for the year ended
October 31 October 31
2014 2013
One-notch downgrade $ 0.3 $ 0.4
Two-notch downgrade 0.3 0.7
Three-notch downgrade 0.6 0.9
ADDITIONAL COLLATERAL REQUIREMENTS
FOR RATING DOWNGRADES
TABLE 63