Scotiabank

2) Risk Management in the Bank

a) Liquidity Management

i) Policy-

Scotiabank believes liquidity risk is crucial in maintaining the confidence of the depositors and counter parties. This risk is managed within the framework of policies and limits that are approved by the Board of Directors. The Board has regular reports on risk exposures and risk performance against approved limits. The Liability Committe provides their senior management an oversight of the current liquidity risk and meets weekly to review the Bank's liquidity profile.

The framework used to manage Scotiabank liquidity risk is

* Set limits to control the key elements of risk

* Measure and forecast cash commitments

* Diversify funding sources

* Maintain appropriate holdings of liquid assets

* Conduct regular liquidity crisis stress testing

* Maintain contingency plans that can be activated to facilitate managing liquidity risk through a disruption

ii) Strategies

The Bank of Nova Scotia maintains large holdings of liquid assets to support its operations. These assets are available to be sold or pledged to meet the Bank's obligations. The Bank relies on a broad range of funding sources. The main source of funding being capital, deposits drawn from retail and commercial clients domestic and international as well as wholesale funding. The bank does not rely on a single entity as a funding source, and maintains a limit on the amount of deposits it will accept from any one entity.

iii) Liquidity Ratios

Definition of Ratios 2004 2003 2002

Liquid Assets/Total Assets 24.6 26.3 22.5

Total Loans/ Total Deposits 88.0 89.1 94.9

iv) Comments

Since 2000, the Bank's liquidity ratio (liquid assets/Total assets) has ranged from low of 20% to a high of 26%. The current year over year decline in liquid assets is a result of lower balances of Government of Canada and other debt securities and deposits with other banks. This is partially offset by an increase in equity securities. The bank appears to be doing what it can to keep liquidity in balance. A too high a ratio would result in non productive cash and too low a ratio making liquidity too fine, needing a call from the liabilities to produce cash.

On the total loans to total Deposit ratio - Scotiabank