On the weekend of March 15 and 16, as Canada plunged into a lockdown to contain the novel coronavirus, top executives at Toronto-Dominion Bank Toronto-Dominion Bank made a choice that would have seemed unthinkable even just weeks earlier: The bank would temporarily shut 40 per cent of its branches and reduce hours at the rest.
The decision, which was announced March 17 and coincided with similar closings by other major banks, came after more than six weeks of daily crisis response across the bank, spearheaded by its chief risk officer, Ajai Bambawale. In his role, Mr. Bambawale is used to preparing for the worst, from market crashes and other financial crises, to cyberattacks. But now he was grappling with an unfamiliar kind of risk: how to keep thousands of frontline staff and customers from catching and spreading a virus that had already proven how deadly it could be.
TD has about 2,300 branches across Canada and the United States and they still form the backbone of its retail banking business. But the crisis measures invoked that week marked an abrupt shift. As branches turned out the lights, TD executives were poring over crisis manuals, running computer simulations and rolling out health and safety measures on the fly. They even dispatched the head of TD’s office in Singapore – a city that had been fighting the virus longer than Canada – to scout out a branch of a local bank. He reported back about temperature checks, disinfection protocols and the use of Plexiglass dividers, helping shape TD’s approach.
“You had this big human element that you had to deal with,” Mr. Bambawale said in a recent video interview from his office in a mostly empty tower in downtown Toronto. “You had colleagues who were all over. You had to think about their safety.”
Since he became head of risk in 2018, part of Mr. Bambawale’s job has been ensuring that TD has plans to prepare for – and head off or weather – a wide array of calamities. The bank had already braced for the next economic downturn, not knowing exactly where it might come from. But none of the playbooks and protocols TD had in its toolkit fully prepared it for the crisis COVID-19 created.
“Having a framework and a playbook helped because there was a routine, and you sort of invoked the routine,” Mr. Bambawale said. “But what you realized is that a lot of what was playing out, you didn’t necessarily anticipate, which meant you had to adapt very, very fast.”
Planning for the worst
By many traditional measures, TD was prepared for a crisis. The bank had robust capital reserves, the quality of its loans and other assets was “pretty good and sound,” and its leaders had spent considerable energy building a culture that values risk management, Mr. Bambawale said.
Each of those was, to varying degrees, a legacy of the lessons learned from the 2008-09 global financial crisis, which TD codified in a crisis playbook. Since then, regulators have compelled banks to hold far more capital and liquidity as buffers against unforeseen shocks. Computerized stress tests by banks have become more rigorous and widespread. And the stature and scope of risk management has expanded dramatically, with a new focus on making banks’ daily operations resilient in a crisis.
As recently as the the late 1990s and early 2000s, risk officers focused mostly on credit, defending the bank deal-by-deal by asking: Is this a good loan? To many ambitious risk-taking bankers, that made those officers something of an obstacle – a speed bump on the way to a bonus, as an old industry saying goes.
The modern risk department still reviews individual loans to clients, but also strikes more intricate balances. It sets the bank’s overall appetite for risk using principles, limits and metrics that guide day-to-day decisions and serve as checks and balances to stamp out overly risky behaviour. But it is also supposed to provide strategic advice to senior leaders and bankers on the front lines that allows them to take reasonable risks so the bank can grow and boost profits. To do all that, risk managers rely on sophisticated statistical modelling and stress testing to anticipate a range of possible outcomes, and where their bank’s weak points might be.
No longer simply a box to tick to satisfy regulators, risk management is now woven into every corner of the business and TD has about 2,000 employees in its risk department. Aside from financial risks, dedicated teams in the department help head off threats from some of the thorniest issues confronting banks today: cybersecurity, fraud and money laundering, staff misconduct, geopolitical events, third-party vendors and even emerging technologies such as artificial intelligence.
Mr. Bambawale has played a key role in that evolution. He was previously chief risk officer for TD’s U.S. bank, and has overseen credit risk for its investment bank. And he has worked closely with CEO Bharat Masrani, who was chief risk officer himself in the early 2000s and ran the bank’s U.S. retail operations through the financial crisis.
So, in 2019, as TD’s leaders watched a strong economic cycle grow long in the tooth, TD did a thorough downturn readiness assessment. Mr. Bambawale’s team took a close look at all the bank’s risk areas, its crisis playbooks and resources, “not knowing that there was something literally around the corner,” he said. But that exercise was designed to prepare for a financial shock, and a pandemic posed a very different challenge.
By late January this year, as China sent millions of its citizens into lockdown and the first cases of the virus were detected in Canada, TD invoked the first of its crisis protocols. That involved assembling crisis management teams to plan for health and safety measures for employees and clients, and a host of other urgent concerns, with regular input from the bank’s chief medical director, Vipan Nikore.
“At the outset we couldn’t believe this was, in some ways, happening,” Mr. Bambawale said. “But we never assumed it was not coming to North America, which is why we invoked [crisis protocols] so early.”
In February, executives meeting with Mr. Masrani discussed projections that there could be 200,000 deaths in the U.S. from the disease within a matter of months. “Now, we didn’t want to believe it, but you can’t plan ahead by assuming or wishing something away,” he said. By late September, the U.S. reached that grim milestone, and more than 270,000 Americans have now died from COVID-19, while almost 12,000 people in Canada have also succumbed to the disease.
TD also began reviewing, updating and testing its business continuity management (BCM) plans in late February, starting with its operations in Asia. If some of their offices or operations have to shut down, banks maintain backup sites stocked with enough computers and servers to keep core operations running in a crisis. TD needed to test those sites to see if they worked – for example, moving traders to a remote trading floor in the event of a virus outbreak. At the same time, the bank started boosting its capacity for remote online access, anticipating that more staff might have to work from home.
The BCM plans included a pandemic scenario, but even that wasn’t built to respond to COVID-19. One of the lessons TD has learned is that it needs to do more pandemic planning.
“Work-from-home was not part of the business continuity plans, but it very quickly had to become part of your business continuity because you couldn’t keep people even in the alternative sites that were there,” Mr. Bambawale said.
By the first week of March, “we were pretty worried,” Mr. Bambawale said. The World Health Organization still hadn’t officially declared COVID-19 a global pandemic, but it seemed unavoidable.
The moment the WHO made the call, on March 11, TD’s crisis protocols went to “full rigour.” Mr. Bambawale would arrive at his desk around 7 a.m. most mornings and launch into “non-stop meetings,” which were held virtually throughout the early months of the pandemic. He rarely wrapped up his work day before 8:30 p.m. or 9 p.m.
Three of those meetings dominated the day, and Mr. Bambawale and his risk team took the lead in all of them.
The first, around 8 a.m., convened a group from several departments to get an “outside-in view” of the evolving crisis, he said. Senior managers from the human resources team devoted to health and safety, risk managers in charge of market and credit risk as well as operational readiness, and others from the technology and cyber team, the market intelligence arm of TD Securities, and the bank’s economics department.
They would discuss what was happening in markets, in the economy and trends in health statistics across the bank’s regions. Then the group would look closely at credit, how the bank’s market traders were doing, and get updates on technology and operations.
Around midday, a smaller group of Mr. Masrani’s direct reports – the Primary Executive Team, or PET, led by Mr. Bambawale – would gather to consider the question: “What decisions do we have to make today?” This group included top people from operational risk, treasury and human resources, and TD’s chief information officer, chief auditor, the head of communications and the head of digital and payments.
Most major decisions were made by this group, but a framework was also crafted to give parts of the business more decentralized authority to respond quickly as choices arose. Mr. Masrani would sometimes join the second half of this meeting when quick sign-off from the CEO was needed. Calls made at this meeting included setting employee travel restrictions as staff returned from March Break vacations and business trips abroad, giving employees extra days off to care for families and putting a range of non-essential activities on pause.
The PET also worked closely with a separate Financial Crisis Management Team that was formed in April and focused on liquidity, funding and the bank’s capital as the economic dislocation caused by the pandemic started to become more apparent.
The final key meeting, held each day through June, was with Mr. Masrani and a smaller subset of top executives: Mr. Bambawale, chief financial officer Riaz Ahmed, TD Securities CEO Bob Dorrance, head of treasury Barbara Hooper and head of operational risk Shannon McGinnis. It was a forum to brief Mr. Masrani, and to make remaining high-level decisions on issues such as the bank’s liquidity and capital, as well as TD’s role in deploying government relief programs, including emergency loans to small businesses.
This was also the final level where some of the most far-reaching measures required by the pandemic needed to be approved. Among them: sending about 60,000 employees to work from home – including traders and call centre staff, who needed special technology to do their jobs – and granting payment deferrals on hundreds of thousands of personal and commercial loans in Canada and the U.S. worth more than $57-billion.
As account managers and advisers talked with clients, what they heard helped inform decisions about individual loans. TD set up 16 credit command centres, with one overarching centre reporting to Mr. Bambawale, that brought risk managers and bankers together to jointly assess which asset classes and industries were most vulnerable in a pandemic.
Some sectors were hit particularly hard, of course, such as travel and tourism and small retailers. To anticipate broad pockets of TD’s loan books that could produce unexpected losses, managers considered whether the impact felt by clients in those sectors would be temporary or more permanent, and whether borrowers had enough liquidity to survive an extended downturn.
Risk managers aim to keep consistent lending standards in good times and bad. “We take this pretty seriously. We just won’t go and change the underwriting standard,” Mr Bambawale said. Even so, “we did end up with some selective tightening” of the bank’s appetite for certain types of credit, mostly unsecured loans such as credit cards and lines of credit. The command centres helped maintain some consistency across an array of credit decisions made under acute pressure.
“There was no luxury of time here," he said. “Everything was moving very, very fast.”
At the same time, TD had frequent and intense contact with regulators – particularly the Office of the Superintendent of Financial Institutions (OSFI). Mr. Bambawale met with regulators weekly, and there was daily contact with other parts of the bank, to take its pulse and ensure it was stable.
But the regulator also gave the banks breathing room, Mr. Bambawale said. In March, OSFI rolled out several temporary measures to give banks more flexibility through the crisis – allowing loans with deferred payments to be treated as though they were current, and releasing about $300-billion of capital banks had been required to stockpile to help keep the institutions lending through the pandemic.
“They were very helpful in sort of easing off a bit and letting us operate and manage the crisis,” he said.
The pandemic also put intense pressure on another key pillar of managing risk: Several times a year, banks conduct stress tests that evaluate their capacity to withstand an array of dire scenarios, guided by complex statistical models. Over the past six months, TD has run additional stress tests as it digested rapidly changing information about the fallout from COVID-19.
“What stress testing did for us is, in a situation where you just didn’t know where it was going and how it’s going to end, you at least had a range of outcomes,” Mr. Bambawale said.
Yet the complex models TD uses to make key predictions – including how much money it needs to set aside to cover potential losses on loans – are fallible when faced with a new kind of crisis. “There’s no doubt that the models are trained on historical data, and the data set here was different,” Mr. Bambawale said. “But, again, we recognized that early.”
To correct course when models might miss the mark, TD executives added a layer of their own judgment. The bank set aside $5.4-billion to cover potential losses on loans over its second and third quarters, and two-thirds of that sum was for loans that were still current. About 85 per cent of those funds were earmarked based on what TD’s statistical models spat out and based on accounting standards. But the other 15 per cent was driven by the judgment of its executives, and by what the bank gleaned from conducting bottom-up assessments of its loan books each quarter.
TD also set up a command centre to review its entire inventory of mathematical models, identifying a “fairly sizable” portion that needed to be updated and validated, and has begun reworking them. Throughout the crisis, the degree to which the bank relied on model output and judgment has “varied,” Mr. Bambawale said. “There were a lot of checks and balances put in place as these models continue to get updated.”
TD stress tests its liquidity to ensure it keeps adequate buffers of cash, which helped ensure that access to liquidity never became an acute problem, Mr. Bambawale said. “But were there tough days in the market? Absolutely. I don’t think they were specific to TD. For any financial player there would have been tough days.”
Even now, eight months after TD closed its first branches, Mr. Bambawale can’t predict what comes next. The bank has stopped providing its customary guidance on future financial results to investors, given lingering uncertainty about how severe a second wave of the virus sweeping across Canada and the U.S. will be.
“For example, you could very much have another lockdown,” he said. And in the U.S., where TD has a huge presence from New York to Florida, TD has been bracing for the possibility that there could be civil unrest arising from the bitterly contested presidential election.
“We don’t know today – you don’t know, I don’t know, nobody knows – how bad the second wave is going to be. But through our stress tests, we do know the range of outcomes,” Mr. Bambawale said. “What we do know is that a well capitalized bank like us can sustain a much, much harsher scenario.”
As some government stimulus programs start to wind down or enter a new phase, and payment deferrals on loans expire, the risks to TD’s credit portfolios are still top of mind. But Mr. Bambawale’s teams are continually doing scenario planning to anticipate where the next problem could arise.
“Certainly throughout the bank there’s a realization that this crisis is nowhere near over,” he said. “We’re not treating it as over. And we’re thinking ahead and planning ahead for what could unfold, and how do we be ready for that?”
Within a few weeks, TD went from watching and waiting – invoking early crisis protocols as a precaution – to full crisis mode, with staff working from home, branches shuttered and loan payments deferred. Here’s how events unfolded:
TD invokes its first protocols, assembling crisis management teams to gauge how ready the bank is to respond to a pandemic, and to plan health and safety measures.
The bank begins to review business continuity management (BCM) plans, testing backup offices and online sites, and practising protocols such as moving some traders to a remote trading floor. TD discovers that some of its BCM plans weren’t well-suited for the current pandemic.
Full crisis protocols are invoked, and TD’s most senior leaders begin a routine of three daily meetings to assess the evolving pandemic and make rapid decisions. The biggest decisions are made at an afternoon meeting of just six top executives.
Week of March 16
Many more BCM plans are invoked, setting in motion some of the most dramatic measures the bank will take, including shuttering nearly 40 per cent of its Canadian branches and moving most staff to remote work.
TD and other Big Six banks announce payment deferrals on loans to clients hurt by the pandemic, including six-month mortgage deferrals and relief on credit cards, lines of credit and business loans.
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