The Bank also uses collateral and master netting agreements to mitigate derivative counterparty exposure. Security for derivative exposures is primarily financial and includes cash and negotiable securities issued by highly rated governments and investment grade issuers. This approach includes pre-defined discounts and procedures for the receipt, safekeeping, and release of pledged securities. In all but exceptional situations, the Bank secures collateral by taking possession and controlling it in a jurisdiction where it can legally enforce its collateral rights. In exceptional situations and when demanded by TD’s counterparty, the Bank holds or pledges collateral with an acceptable third-party custodian. The Bank documents all such third-party arrangements with industry standard agreements. Occasionally, the Bank may take guarantees to reduce the risk
in credit exposures. For credit risk exposures subject to AIRB, the Bank only recognizes irrevocable guarantees for Commercial Banking and Wholesale Banking credit exposures that are provided by entities with a better risk rating than that of the borrower or counterparty to the transaction.
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 mitigation and includes both on-balance sheet and off-balance sheet exposures. On-balance
T ABLE 48
The Bank makes use of credit derivatives to mitigate credit risk.
The credit, legal, and other risks associated with these transactions are controlled through well-established procedures. The Bank’s policy is to enter into these transactions with investment grade financial institutions and transact on a collateralized basis. Credit risk to these counterparties is managed through the same approval, limit, and monitoring processes the Bank uses for all counterparties for which it has credit exposure.
The Bank uses appraisals and automated valuation models (AVMs) to support property values when adjudicating loans collateralized by residential real property. These are computer-based tools used to estimate or validate the market value of residential real property using market comparables and price trends for local market areas. The primary risk associated with the use of these tools is that the value of an individual property may vary significantly from the average for the market area. The Bank has specific risk management guidelines addressing the circumstances when they may be used, and processes to periodically validate AVMs including obtaining third party appraisals.
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 exposures for the two approaches the Bank uses to measure credit risk are included in the following table.
GROSS CREDIT RISK EXPOSURES – Standardized and Advanced Internal Ratings Based Approaches1,2 (millions of Canadian dollars) Standardized Retail Residential secured
Qualifying revolving retail Other retail
Total retail
Non-retail Corporate Sovereign Bank
Total non-retail
Gross credit risk exposures 1
$ 1,334 –
18,894 20,228
127,399 77,166 17,721
222,286 $ 242,514
Gross credit risk exposures represent EAD and are before the effects of credit risk mitigation. This table excludes securitization, equity, and other credit RWA.
2
$ 334,878 90,778 71,940
497,596
252,616 139,367 66,432
458,415 $ 956,011
$ 336,212 90,778 90,834
517,824
380,015 216,533 84,153
680,701 $ 1,198,525
$ 32,897 –
59,655 92,552
114,698 55,934 13,542
184,174 $ 276,726
$ 276,526 63,169 38,952
378,647
225,263 128,496 111,602
465,361 $ 844,008
$ 309,423 63,169 98,607
471,199
339,961 184,430 125,144
649,535 $ 1,120,734
Effective the third quarter of 2016, the majority of U.S. Retail’s retail portfolio credit risk RWA are calculated using AIRB approach. Prior to the third quarter of 2016, RWA were calculated using the Standardized Approach.
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 agencies, 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 number of underlying exposures in the 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 assessing 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 facilitate 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.
AIRB
October 31, 2016 Total
Standardized AIRB As at
October 31, 2015 Total
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
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