Transcript Document 7551868

Presenters:
Ping-Teng Lin
Emily McLaughlin
Cindy Deng
Jason Huang
ROYAL BANK OF CANADA
Risk Management
Outline
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Introduction
Risk Governance
Market Risk
Credit Risk
Capital Management
Derivative Usage
Conclusion
Introduction - Industry Structure
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A Canadian Chartered Bank
 Schedule
I Bank: Domestic and widely held
 One of the Big 6 Banks in Canada
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Authorized to take deposits and issue loans and
credit cards
RBC is Canada’s largest bank
Introduction - Company Structure
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Five lines of business
 RBC
Banking
 RBC Investments
 RBC Insurance
 RBC Global Services
 RBC Capital Markets
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Also has operations in Caribbean and the USA
Risk Exposure
Risk Governance
Guiding Principles of Risk Management program:
1. Effective balancing of risk and reward by aligning risk
appetite
2. Shared responsibility for risk management as business
3. Business decisions are based on an understanding of risk
as
4. Avoid activities that are not consistent with our Values,
Code of Conduct or Policies
5. Proper focus on clients reduces our risks
6. Use of judgment and common sense
Risk Governance
Risk Governance
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RBC`s framework for managing risk:
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1. Define our Risk Capacity by identifying regulatory
constraints that restrict our ability to accept risk.
2. Establish and regularly confirm our Risk Appetite, defined
by Self-Imposed Constraints and Drivers in which we have
chosen to limit or otherwise influence the amount of risk
undertaken..
3. Translate our Risk Appetite into Risk Limits and
Tolerances that guide businesses in their risk taking activities.
4. Regularly measure and evaluate our Risk Profile against
Risk Limits and Tolerances ensuring appropriate action is
taken in advance of Risk Profile surpassing Risk Appetite.
Market risk
Exposed in trading activity and asset & liability
management activities (non-trading).
Interest
rate risk
Equity
Risk
Foreign
exchange
rate and
commodity
price risk
Credit
spread
Risk
Market risk
Level of Market risk
determined by:
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Market conditions
Expectations of future price
Yield movements
Composition of trading portfolio
Trading market activities
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Involves market-making, positioning and arbitrage
activities.
 Market-making
: quoting bid and offer prices to other
market participants with the intention of generating
revenue based on spread and volume.
 Positioning : managing market risk positions with the
expectation of profiting from favorable movements in
prices, rates or indices.
 Arbitrage activities : identifying and profiting from
price differentials between markets and products.
Non-Trading market risk (Asset &
Liability management)
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Traditional non-trading banking activities, such as
deposit taking and lending, expose to market risk,
of which interest rate risk is the largest component.
Interest rate risk
Basis Risk
Yield Curve
Risk
Option Risk
Repricing
Risk
Net interest income
Interest rate contracts for trading
Loan maturities and rates sensitivity
Interest Risk Measures
Foreign exchange rate and commodity price risk
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Transaction risk and Translation risk
Potential impact on earnings and economic value
due to currency rate and commodity price
movements and volatilities.
Through their proprietary positions they are exposed
to the spot and forward exchange market, derivatives
markets and commodities markets
Subordinated
Debentures
Equity Risk
Risk of impact on earnings caused by
movements in individual equity prices and in
the level of the stockmarket
 Exposed through investment banking activities
(buying and selling equities)
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Credit spread risk
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Risk exposure due to
creditworthiness and
credit rating of issuers
of bonds and money
market instruments, or
the names underlying
credit derivatives.
Monitoring and managing Market Risk
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Market Risk Group which operates independently
from trading operations is responible for daily
monitoring of their market risk exposure. And they
use:
 Value at Risk
 Sensitivity analysis
 Stress test
Value at Risk (VaR)
A statistical technique that measures the worstcase loss expected over a one-day period within
a 99% confidence level.
 Measure and monitor the effects of correlation
in the movements of interest rates, credit specific
risk, exchange rates, equity and commodity
prices.
 Highlight the benefit of diversification within the
trading portfolio.
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VaR after Diversification
Market Risk Management Strategy
Interest rate Risk
Foreign
Exchange risk
Equity risk
• Interest rate
swap
• Interest rate
option
• Interest rate
forward/future
• Cross currency
swap
• Foreign
exchange
forward and
future
• Foreign
currency
option
• Equity swap
• Index option
• Equity
option
Credit Spread
Risk
• Credit default
swap
Derivatives held for hedging purpose
2009
Hedging activities
2009
2008
2007
Credit Risk Introduction
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Risk of loss due to counterparty default
Significant impact on business
 Credit
products are key drivers
 Failure to manage risk leads to immediate impact on
earnings & reputation
Risk Measurement
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Quantify risk to reduce expected loss and minimize
unexpected loss
All risks measured with standard internal rating
methods
RBC uses AIRB in accordance with Basel II for
domestic portfolios
RBC uses a more standardized approach for
foreign operations
Wholesale Portfolio
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For mid to large corporations on individual basis
Risk measurement parameters
 Probability
of Default
 Loss Given Default
 Exposure at Default
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Parameters estimated from past experience
Retail Risk Portfolio
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For residential mortgages, credit cards, small
business loans on a pooled basis
Two risk rating systems:
 Acquisition
scoring model for new clients
 Behavioral scoring model for current clients
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Pooling risk is more accurate, precise, and consistent
Credit Risk Control
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Four parts:
 Risk
Assessment
 Use
 Risk
consistent risk assessment criteria
Mitigation
 Obtain
 Risk
collaterals; Use credit derivatives to transfer risk
Approval
 New
& changed credit products are reviewed strictly
 Portfolio
 Many
Management
limits on portfolio to ensure diversification
Credit Risk Exposure
Credit Risk Exposure
Provision for Credit Loss
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PCL is charged to income to bring allowances for
credit losses to acceptable levels
PCL Continued
Gross Impaired Loans
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Loans which no longer receive interest
Principal may or may not be paid back
GIL Continued
Allowance for Credit Losses
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Levels determined by management to offset
estimated losses
Credit Derivatives
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OTC contracts to transfer credit risk from one
counterparty to another
 E.g.
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credit default swaps, total return swaps
RBC buys these for protection against loss of value
for underlying assets
Credit Derivatives Continued
Credit Derivatives Continued
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Thus, we see a movement away from derivatives for
hedging
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RBC prefers stricter risk acceptance protocol
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RBC increasing greater allowance for credit loss
Operational Risk
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Operational risk is the risk of loss or harm resulting
from inadequate or failed internal processes,
people and systems or from external events.
Failure to manage operational risk can result in
direct or indirect financial loss
RBC adopts the Standardized Approach for
operational risk:
 Risk
and control assessment
 Operational event data collection and analysis
 Industry loss analysis
 Key risk indicators
Liquidity Risk
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The risk of being unable to generate or obtain
sufficient cash or its equivalent in a timely and costeffective manner to meet commitments as they come
due.
Other Risks
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Reputation Risk
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Regulatory and Legal Risk
Insurance Risk
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We must operate with integrity at all times in order to sustain a strong and
positive reputation.
Protecting our reputation is the responsibility of all our employees, including
senior management and extends to all members of the Board of Directors.
Ensure our insurance portfolio is well diversified
Reinsurance involves transferring insurance risk to independent insurance
companies
Environmental Risk
Capital Management
Capital Management
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Economic capital: an internal assessment of the
amount of capital required to underpin our risks.
Calculated based on credit, market, operational,
business and fixed asset, and insurance risks
Economic Capital increased $7.1 billion from a year
ago, largely due to increases in goodwill and
intangibles. Credit risk, market risk and operational
risk also contributed to the increase.
Benchmarked to leading industry practices
Capital Management
Capital Management
Capital Management
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RORC is used to measure returns on capital
required to support the risks related to ongoing
operations.
RORC calculations are based on net income
available to common shareholders divided by
attributed risk capital
Capital Management
Derivative Instruments
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Derivative instruments are categorized as either financial or non-financial
derivatives.
Financial derivatives are financial contracts whose value is derived from
an underlying interest rate, foreign exchange rate, credit risk, and equity or
equity index.
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Forwards and Futures
Swaps
Options
Credit Derivatives
Other Derivative Products
Non-financial derivatives are contracts whose value is derived from a
precious metal, commodity instrument or index.
Derivative Instruments
The purposes of issuing derivative instruments
 For
trading purposes:
Most derivative transactions relate to sales and
trading activities.
 For
other-than-trading purposes:
Derivatives are also used for purposes other
than trading, primarily for hedging.
Derivative Instruments
All derivative instruments (trading and other-thantrading) are recorded on the Consolidated Balance
Sheet (Assets/Liabilities) at Fair Value.
Consolidated Balance Sheet - Assets
Consolidated Balance Sheets Liabilities
Derivatives for Trading
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When derivatives are used for trading purposes,
the realized and unrealized gains/losses are
recognized in Non-interest income – Trading
revenue
Derivatives for Trading
Derivatives for Hedging
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Hedge accounting may be applied.
Fair value hedges
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carrying value is recorded in Non-interest income.
Cash flow hedges
 The
effective portion is recognized in OCI, while the
ineffective portion is recognized in Non-interest
income.
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Net investment hedges
 The
effective portion is recognized in OCI, the
ineffective portion in Non-interest income.
Consolidated Statements of Income
Consolidated Statements of
Comprehensive Income
Consolidated Statements of Changes in
Shareholders’ Equity
Consolidated Statements of
Cash Flows
Risk Management Information in the
RBC’s Annual Report
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RBC presents its risk management information and
activities in Note 7.
Note 7 – Derivative Instruments and Hedging
Activities.
Fare Values of the Derivatives
Results of Hedge Activities Recorded in
Net Income and OCI
Notional Amount of Derivatives
Fair Value of Derivatives
Derivative-Related Credit Risk
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Credit risk from derivative transactions is generated
by the potential for the counterparty to default on
its contractual obligations when one or more
transactions have a positive market value to us.
Derivative-related credit risk is represented by the
positive fair value of the instrument and is normally
a small fraction of the contract’s notional amount.
Derivative-Related Credit Risk
Conclusion
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Thank you for your attention
Any questions