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Canadian Chartered Banks – Example of RBC

Canadian Chartered Banks – Example of RBC. Cora Wong Boerge Hernes Lutz Firnkorn . Thursday, 17 March 2005. Overview. Structure of Industry Royal Bank of Canada Risk and Risk Management Use of Derivatives Stock Compensation Plans Capital Requirements Summary. Chartered Banks.

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Canadian Chartered Banks – Example of RBC

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  1. Canadian CharteredBanks – Example of RBC Cora Wong Boerge Hernes Lutz Firnkorn Thursday, 17 March 2005

  2. Overview • Structure of Industry • Royal Bank of Canada • Risk and Risk Management • Use of Derivatives • Stock Compensation Plans • Capital Requirements • Summary

  3. Chartered Banks • A type of financial institution • Take deposits, issue personal and corporate loans, and invest in marketable securities • Schedule I Banks • Schedule II Banks • Schedule III Banks

  4. Chartered Banks (Cont.) • Mature industry • Consolidating but highly competitive • Traditional division into 4 Pillars • Banks • Trust Companies • Insurance Companies • Investment Dealers • Now own each other and cross-sell each others’ services

  5. Chartered Banks (Cont.) • 19 domestic banks, 29 foreign bank subsidiaries, 22 foreign branches • Industry dominated by “Big 6” • Royal Bank of Canada • Bank of Montreal • Canada Imperial Bank of Commerce • National Bank of Canada • Scotia Bank • Toronto-Dominion Bank

  6. Chartered Banks (Cont.) • Big 6 hold over 92% of total assets in industry • Canada’s Schedule I Banks= • Big 6 • Laurentian Bank of Canada • Canadian Western Bank • 11 other domestic banks

  7. Regulatory Environment • The Bank Act • Central Bank • The Bank of Canada • Office of the Superintendent of Financial Institutions (OSFI) • Canada Deposit Insurance Corporation (CDIC)

  8. Regulation in Global Context • Bank for International Settlements (BIS) • Basel Committee on banking Supervision • International group of banking supervisors • Basel II • Revision of 1988 Basel Capital Accord (Basel I)

  9. Royal Bank of Canada • Schedule I Bank • Canada’s largest bank as measured by assets and market capitalization • 1300 domestic locations • 40 offices in Caribbean • Branches in more than 30 other countries around the world

  10. Royal Bank of Canada

  11. Net Income 2004 - Geographic Segment

  12. Net Income 2004 - Business Segment

  13. RBC- Products Offered • Divided into 5 business segments • RBC Banking • RBC Investments • RBC Insurance • RBC Capital Markets • RBC Global Services

  14. RBC- Banking • Serves individuals, small and medium-sized business, and mid-market commercial clients • Financial planning and advising on deposit accounts, investments, mutual funds, credit and debit cards, business and personal loans, residential and commercial mortgages • RBC Royal Bank, RBC Centura, RBC Mortgage, RBC Builder Finance, RBC Royal Bank of Canada

  15. RBC- Insurance • Creditor, life, health, travel, home, auto and reinsurance products and services • Offered through telephone, brokers, travel agents, the sales force and the internet

  16. RBC- Investments • Wealth management services • Brokerage, financial planning, investment counseling, personal trust, private banking, investment management products and services • RBC Investments, RBC Dain Rauscher, RBC Global Private Banking

  17. RBC- Capital Markets • Wholesale financial services to large corporations, government and institutions

  18. RBC- Global Services • Specialized transaction processing services to corporations and institutions • Global custody, investment administration, correspondent banking, cash management, payments, trade finance

  19. Royal Bank of Canada

  20. Stock Price 2004-Today

  21. Stock Price 2004-Today

  22. Economic Capital Average Economic Capital by Risk Type [2004]

  23. The Risk Pyramid

  24. Credit Risk Definition: Risk of default on given loans Credit risk management: • Credit scoring models • For consumer and small business credit • Applicant scoring model • Behavioral scoring model • For commercial and corporate clients • Risk limits • Credit derivative contracts • Loan sales

  25. Market Risk Definition: Loss due to environmental changes Types of market risk: • Equity risk • Foreign exchange rate and commodity price risk • Interest rate risk • Debt specific risk • Credit spread risk Market risk management: • VaR • Sensitivity analyses • Stress tests

  26. Liquidity Risk Definition:Not to be able to meet financial commitments as they fall due • Liquidity risk management • Structural liquidity risk management • Tactical liquidity management • Contingent liquidity risk management • Funding strategy • Credit ratings

  27. Insurance Risk Definition: Risk associated with design and underwriting of insurance policies • Sources of insurance risk • Product design risk • Product pricing risk • Insurance underwriting risk • Insurance risk management • Experience studies • Scenario testing • Diversification • Reinsurance

  28. Operational Risk Definition: Relates directly or indirectly to inadequate or failed processes, technology, and human performance or from external events Operational risk management framework: • Risk and Control Self-Assessment (RCSA) • Loss Event Database (LED) • Key Risk Indicators (KRIs)

  29. Off Balance Sheet Risk Definition: Items that don't occur or not with the full amount on the balance sheet • Derivatives • Special Purpose Entities • Often not consolidated, they are also used as vehicles to take over risk • Undertaken normally for Risk, Capital and/or funding management purposes • Guarantees • Cause Market, Credit and Liquidity Risk Exposure

  30. The Risk Pyramid

  31. Derivative types • Interest Rate derivatives • Foreign exchange Derivatives • Credit Derivatives • Equity Derivatives • Other

  32. For sale and trading Sales to clients, those can then hedge against risks Trading involves market making, positioning and arbitrage activities Also used for hedging Fair Value Hedge Cash Flow Hedge Hedge of Net Investment in foreign operations Economical Hedge Derivative types (cont.)

  33. Derivative types (cont.)

  34. Limits for stock holdings

  35. Remunerations • Stock Options /SAR (Stock appreciation rights) • Executives • Employees • Employee share ownership plan • Deferred shares units DSUs • Performance based deferred shares

  36. Stock Option overview

  37. Influence on EPS

  38. Share capital Economic capital : Target Equity Level for Rating Regulatory capital Tier 1 4% / Tier 2 8% Basel II from 2007 on requires a more detailed rating and risk access system Equity & Regulatory Requirements

  39. Regulatory Requirements-Risk Adjusted Assets

  40. Regulatory Requirements-Equity

  41. Summary • Bank are risk takers • Many sources of Risk • Highly complex Risk Management • Align risk appetite and corporate strategy

  42. Thank you for your attention

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