Canadian Chartered Banks

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Canadian Chartered Banks

  1. 1. Canadian Banking Industry &Canadian Banking Industry & DerivativesDerivatives Edwin CheungEdwin Cheung Isaac SchweigertIsaac Schweigert Sharan BrarSharan Brar Tolek StrukoffTolek Strukoff
  2. 2. AgendaAgenda Economic & Market Analysis -Economic & Market Analysis - SharanSharan Risk Management Environment -Risk Management Environment - SharanSharan Royal Bank of Canada -Royal Bank of Canada - IsaacIsaac Bank of Montreal -Bank of Montreal - EdwinEdwin Canadian Imperial Bank of Commerce -Canadian Imperial Bank of Commerce - TolekTolek
  3. 3. Economic & Market AnalysisEconomic & Market Analysis
  4. 4. Industry StructureIndustry Structure CompetitionCompetition Market DynamicsMarket Dynamics
  5. 5. CompetitionCompetition The Canadian banking system isThe Canadian banking system is mature, sophisticated and highlymature, sophisticated and highly competitivecompetitive 14 domestic banks; 33 foreign bank14 domestic banks; 33 foreign bank subsidiaries; 20 foreign bank branchessubsidiaries; 20 foreign bank branches They collectively manage over $1.7They collectively manage over $1.7 trillion in assetstrillion in assets
  6. 6. Market DynamicsMarket Dynamics The six large Canadian banks manageThe six large Canadian banks manage over 90% of total bank assetsover 90% of total bank assets Banks operate through an extensiveBanks operate through an extensive network of branches and automatednetwork of branches and automated banking machines (ABM’s)banking machines (ABM’s) Canada has the highest # of ABM’s perCanada has the highest # of ABM’s per capitacapita Industry experiencing consolidationIndustry experiencing consolidation
  7. 7. Products ProducedProducts Produced ProductsProducts TechnologyTechnology SubstitutesSubstitutes
  8. 8. ProductsProducts A bank performs the following activities:A bank performs the following activities: accepts depositsaccepts deposits grants commercial loansgrants commercial loans Bank Act 1954 & 1967 allowed:Bank Act 1954 & 1967 allowed: granting of mortgages and consumer loansgranting of mortgages and consumer loans Bank Act 1992 allowed:Bank Act 1992 allowed: operation of trust and securities subsidiariesoperation of trust and securities subsidiaries banks to be involved in wealth managementbanks to be involved in wealth management
  9. 9. TechnologyTechnology Technology is significantly altering theTechnology is significantly altering the structure of the Canadian bank industrystructure of the Canadian bank industry InternetInternet product innovation to improve servicesproduct innovation to improve services Canada is a leader in automatedCanada is a leader in automated bankingbanking
  10. 10. SubstitutesSubstitutes credit unionscredit unions foreign banksforeign banks small virtual competitorssmall virtual competitors small region-specific/culturally specificsmall region-specific/culturally specific institutionsinstitutions
  11. 11. Cost and RevenueCost and Revenue StructureStructure Revenue SourcesRevenue Sources Cost StructureCost Structure
  12. 12. Revenue SourcesRevenue Sources Interest Income is a major sourceInterest Income is a major source Importance of non-interest income isImportance of non-interest income is increasingincreasing Fees for mutual fund management,Fees for mutual fund management, credit cards, derivatives trading, chequecredit cards, derivatives trading, cheque processing, foreign exchangeprocessing, foreign exchange
  13. 13. Cost StructureCost Structure OperationsOperations Human ResourcesHuman Resources
  14. 14. Firm Strategy & FutureFirm Strategy & Future GrowthGrowth Investment in technology and productInvestment in technology and product innovationinnovation Cost efficiency/alliances/consolidationCost efficiency/alliances/consolidation Expansion of customer baseExpansion of customer base Wealth management, corporate andWealth management, corporate and investment bankinginvestment banking Expansion to select internationalExpansion to select international marketsmarkets
  15. 15. Regulatory EnvironmentRegulatory Environment Bank ActBank Act Regulation modified every 5 years toRegulation modified every 5 years to stay current and allow flexibilitystay current and allow flexibility Office of the Superintendent ofOffice of the Superintendent of Financial InstitutionsFinancial Institutions Restrictions in ownershipRestrictions in ownership
  16. 16. Regulatory EnvironmentRegulatory Environment International Monetary FundInternational Monetary Fund Canada Deposit Insurance CorporationCanada Deposit Insurance Corporation Canadian Securities InstituteCanadian Securities Institute (educational requirements)(educational requirements) Provincial securities regulatorsProvincial securities regulators IDA & MFDAIDA & MFDA
  17. 17. Risk ManagementRisk Management EnvironmentEnvironment
  18. 18. RisksRisks Major Risks:Major Risks: Market RiskMarket Risk Credit RiskCredit Risk Liquidity RiskLiquidity Risk Measurement:Measurement: StatisticsStatistics Economic CapitalEconomic Capital
  19. 19. Techniques & ProductsTechniques & Products Techniques:Techniques: HedgingHedging Products:Products: SwapsSwaps Futures (Currency)Futures (Currency) OptionsOptions
  20. 20. Prospects & HazardsProspects & Hazards Prospects for Effective Risk Management:Prospects for Effective Risk Management: Banks in the business of RMBanks in the business of RM ComplicatedComplicated HazardsHazards Large position sizesLarge position sizes ComplexComplex Significant values at riskSignificant values at risk Operational riskOperational risk Many external factors: interest rates,Many external factors: interest rates, exchange ratesexchange rates
  21. 21. RBCRBC
  22. 22. Divisions of RBCDivisions of RBC RBC BankingRBC Banking – RBC Royal BankRBC Royal Bank – RBC Centura (USA)RBC Centura (USA) RBC InvestmentsRBC Investments – full service and self-directed brokeragesfull service and self-directed brokerages – private bankingprivate banking – RBC Dain Rauscher (USA brokerage)RBC Dain Rauscher (USA brokerage) RBC InsuranceRBC Insurance
  23. 23. Divisions of RBCDivisions of RBC RBC Capital MarketsRBC Capital Markets – financial services to companies andfinancial services to companies and governmentgovernment – hedge funds and private equityhedge funds and private equity RBC Global ServicesRBC Global Services – Transaction processing for mutual andTransaction processing for mutual and hedge fundshedge funds – Custodian for CI Mutual Funds, AIM andCustodian for CI Mutual Funds, AIM and MackenzieMackenzie
  24. 24. Net Income by SegmentNet Income by Segment 53% 7% 12% 15% 6% 7% RBC Banking RBC I nsurance RBC I nvestments RBC Capital Markets RBC Global Services Other
  25. 25. Factors Affecting Future ResultsFactors Affecting Future Results Credit, market, liquidity, insurance,Credit, market, liquidity, insurance, operational and other risksoperational and other risks Health of economy, businesses andHealth of economy, businesses and capital marketscapital markets Monetary policy in Canada and USAMonetary policy in Canada and USA CompetitionCompetition Statute and regulatory changesStatute and regulatory changes
  26. 26. Risks to be ManagedRisks to be Managed CreditCredit MarketMarket LiquidityLiquidity InsuranceInsurance OperationalOperational
  27. 27. Economic CapitalEconomic Capital Calculation of equity needed toCalculation of equity needed to underpin the riskunderpin the risk – based on solvency and debt ratingsbased on solvency and debt ratings Calculated for credit, goodwill &Calculated for credit, goodwill & intangibles, non-trading market risk,intangibles, non-trading market risk, insurance, fixed asset and tradinginsurance, fixed asset and trading market riskmarket risk
  28. 28. Economic CapitalEconomic Capital 34% 31% 10% 16% 9% Credit Goodw ill Operational Other Business Risk
  29. 29. Value at Risk (VaR)Value at Risk (VaR) Used to manage trading risksUsed to manage trading risks RBC uses a 99% confidence level andRBC uses a 99% confidence level and back tests 500 previous daysback tests 500 previous days
  30. 30. Credit RiskCredit Risk Includes off balance sheetIncludes off balance sheet Diversify loans by type and geographyDiversify loans by type and geography $1 billion in credit protection (2002)$1 billion in credit protection (2002) $300 million in derivatives (2002)$300 million in derivatives (2002)
  31. 31. Credit QualityCredit Quality Major area of riskMajor area of risk Moving to lower-risk mortgages and lessMoving to lower-risk mortgages and less business loansbusiness loans Purchased $1 billion in credit protection in 2002Purchased $1 billion in credit protection in 2002 Only deal with reinsurers with AAA ratingOnly deal with reinsurers with AAA rating Largest domestic loan concentration is OntarioLargest domestic loan concentration is Ontario Largest international loan concentration is USALargest international loan concentration is USA
  32. 32. Worldwide RevenuesWorldwide Revenues 0 10 20 30 40 50 60 70 80 90 Canada U.S. I nt'l 2000 2002
  33. 33. Market RiskMarket Risk Interest rateInterest rate Credit spread - from bonds and creditCredit spread - from bonds and credit derivativesderivatives FX - brokerage, investment, trading,FX - brokerage, investment, trading, arbitrage and proprietary tradingarbitrage and proprietary trading Trading activities - market making,Trading activities - market making, arbitrage in interest rate, FX and equityarbitrage in interest rate, FX and equity marketsmarkets
  34. 34. Liquidity RiskLiquidity Risk Managed dynamicallyManaged dynamically Overseen by the Liquidity Crisis TeamOverseen by the Liquidity Crisis Team Hedged with a pool of unencumbered,Hedged with a pool of unencumbered, high-quality assetshigh-quality assets Marketable or can be pledged asMarketable or can be pledged as collateralcollateral
  35. 35. Liquidity ManagementLiquidity Management $155 billion in liquid assets (41% of total$155 billion in liquid assets (41% of total assets)assets) RBC maintains a high credit rating toRBC maintains a high credit rating to have best possible access to capitalhave best possible access to capital Contingent liability planContingent liability plan Securitize assets to diversify fundingSecuritize assets to diversify funding basebase
  36. 36. SecuritizationSecuritization $1.7 billion of government guaranteed$1.7 billion of government guaranteed mortgages in 2002, $2.4 billionmortgages in 2002, $2.4 billion outstandingoutstanding $1.7 billion of credit card receivables$1.7 billion of credit card receivables through an SPEthrough an SPE
  37. 37. Insurance RiskInsurance Risk Product design and pricing riskProduct design and pricing risk Claims administration riskClaims administration risk Underwriting riskUnderwriting risk Liability riskLiability risk
  38. 38. Asset/Liability ManagementAsset/Liability Management Interest rate risk can be linear and non-Interest rate risk can be linear and non- linearlinear Linear risk is hedged with interest rateLinear risk is hedged with interest rate swapsswaps Non-linear risk comes from embeddedNon-linear risk comes from embedded options in products offeredoptions in products offered
  39. 39. Off Balance SheetOff Balance Sheet Guarantees and standby credit lettersGuarantees and standby credit letters Leases on premises and equipmentLeases on premises and equipment Derivatives which RBC is a counterDerivatives which RBC is a counter party with other institutions and inparty with other institutions and in tradingtrading – $10.6 billion in credit risk$10.6 billion in credit risk Special Purpose EntitiesSpecial Purpose Entities
  40. 40. Special Purpose EntitiesSpecial Purpose Entities Used to securitize credit cardUsed to securitize credit card receivablesreceivables Non-operating and have no employeesNon-operating and have no employees Also provide SPE services to clientsAlso provide SPE services to clients Issue paper to purchase the assetsIssue paper to purchase the assets from RBCfrom RBC – Issued in SPE name, $20.6 billion o/sIssued in SPE name, $20.6 billion o/s
  41. 41. DerivativesDerivatives Most are FX forwards, interest rate andMost are FX forwards, interest rate and currency forwards, FX and interest ratecurrency forwards, FX and interest rate options and credit derivativesoptions and credit derivatives Margin requirements and premiumsMargin requirements and premiums recorded as assetsrecorded as assets Use hedge accounting for ownUse hedge accounting for own derivatives if applicablederivatives if applicable
  42. 42. DerivativesDerivatives Most relate to sales and tradingMost relate to sales and trading activitiesactivities Market-making, positioning andMarket-making, positioning and arbitragearbitrage No significant dealing in leveragedNo significant dealing in leveraged derivativesderivatives Used for hedging and investingUsed for hedging and investing
  43. 43. HedgesHedges Fair Value Hedge-interest rate swapsFair Value Hedge-interest rate swaps Cash Flow Hedge-interest rate swapsCash Flow Hedge-interest rate swaps Foreign exchange investments inForeign exchange investments in subsidiariessubsidiaries – FX forwardsFX forwards – US dollar denominated liabilitiesUS dollar denominated liabilities
  44. 44. HedgesHedges Hedge mortgages by securitizationHedge mortgages by securitization – $3.7 billion in 2002, $1.7 billion sold to$3.7 billion in 2002, $1.7 billion sold to investorsinvestors Redeemable deposits hedged withRedeemable deposits hedged with interest rate optionsinterest rate options
  45. 45. BMOBMO
  46. 46. Enterprise-wide Risk Management Comprehensive risk governance Effective process & models Qualified risk professional
  47. 47. Integrated Risk ManagementIntegrated Risk Management Management of risk is integrated withManagement of risk is integrated with the management of capital and strategythe management of capital and strategy  Capital at Risk (CaR)Capital at Risk (CaR)
  48. 48. Total Capital Risk by RiskTotal Capital Risk by Risk TypeType Strategic 11%Strategic 11% Operational 24%Operational 24% Credit 38%Credit 38% Market 27%Market 27% Total Capital RIsk by Risk Type Strategic Operational Credit Market
  49. 49. Direct Risk ManagementDirect Risk Management Credit RiskCredit Risk Market riskMarket risk Liquidity and Funding RiskLiquidity and Funding Risk Operational RiskOperational Risk
  50. 50. Credit RiskCredit Risk Is the risk of loss due to the failure of aIs the risk of loss due to the failure of a borrower, endorser, guarantor orborrower, endorser, guarantor or counterparty to repay a loan of honorcounterparty to repay a loan of honor another predetermined financialanother predetermined financial obligationobligation
  51. 51. Credit riskCredit risk Provision for credit losses was $820 MProvision for credit losses was $820 M (0.56% of average net loans and acceptance)(0.56% of average net loans and acceptance) Gross impaired loans totaled $2,337MGross impaired loans totaled $2,337M Net loans exposure to cable and telecomNet loans exposure to cable and telecom companies was approximately $2.0 billioncompanies was approximately $2.0 billion
  52. 52. Credit riskCredit risk Risk measurementRisk measurement – Gross impaired loans and acceptanceGross impaired loans and acceptance Measure the financial condition of the portfolioMeasure the financial condition of the portfolio – Provision for credit lossesProvision for credit losses A measure of credit quality experienceA measure of credit quality experience
  53. 53. Provision for Credit Losses as a % of Average Net Loans and Acceptance 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% From 1998 to 2002
  54. 54. Market RiskMarket Risk Is the risk of a negative impact on theIs the risk of a negative impact on the balance sheet and income statementbalance sheet and income statement resulting from adverse changes in theresulting from adverse changes in the value of financial instruments as a resultvalue of financial instruments as a result of changes in certain market variables.of changes in certain market variables.
  55. 55. Market RiskMarket Risk The market variables include:The market variables include: Interest ratesInterest rates Foreign exchange ratesForeign exchange rates Equity or commodity pricesEquity or commodity prices Credit spreadsCredit spreads Credit migration and defaultCredit migration and default
  56. 56. Market RiskMarket Risk Risk measurementRisk measurement – Market Value Exposure (MVE)Market Value Exposure (MVE) – 12-month Earnings Volatility12-month Earnings Volatility Value at Risk (VaR), an MVE measure,Value at Risk (VaR), an MVE measure, calculate the magnitude of BMO’s marketcalculate the magnitude of BMO’s market risk.risk. Earnings Volatility (EV), a measure of theEarnings Volatility (EV), a measure of the adverse impact of potential changes inadverse impact of potential changes in market variables on 12-months after taxmarket variables on 12-months after tax incomeincome
  57. 57. Liquidity and Funding RiskLiquidity and Funding Risk Is the risk of being unable to meetIs the risk of being unable to meet financial commitments in a timelyfinancial commitments in a timely manner at reasonable prices as the fallmanner at reasonable prices as the fall due.due. Financial commitments include liabilitiesFinancial commitments include liabilities to depositors and suppliers, and lendingto depositors and suppliers, and lending and investment commitments.and investment commitments.
  58. 58. Liquidity and Funding RiskLiquidity and Funding Risk Risk measurementRisk measurement 1)1) Cash and securities-to-total assets ratioCash and securities-to-total assets ratio • Cash and securities totaled $63.0 billionCash and securities totaled $63.0 billion • Total assets $252.9 billionTotal assets $252.9 billion 2)2) Core deposits-to-total deposits ratioCore deposits-to-total deposits ratio • Core deposits totaled $96.5 billionCore deposits totaled $96.5 billion • Total deposits totaled $161.8 billionTotal deposits totaled $161.8 billion
  59. 59. Core Depositsas a%of Total deposits 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% From 1998 to 2002 Cash and Securities as a % of Total Assets 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% From 1998 to 2002 Liquidity and Funding RiskLiquidity and Funding Risk
  60. 60. Off-balance sheet special purpose entitiesOff-balance sheet special purpose entities (SPEs(SPEs)) – To securitize BMO assets in support ofTo securitize BMO assets in support of capital or funding managementcapital or funding management Customer credit commitmentsCustomer credit commitments – Integral part of BMO credit-grantingIntegral part of BMO credit-granting practices and create liquidity and fundingpractices and create liquidity and funding exposure.exposure.
  61. 61. Operational RiskOperational Risk Is the risk of loss resulting formIs the risk of loss resulting form inadequate or failed internal processes,inadequate or failed internal processes, system or human error, or externalsystem or human error, or external eventsevents – Never be eliminatedNever be eliminated
  62. 62. Operational RiskOperational Risk Composed ofComposed of – Operational risks, which include physicalOperational risks, which include physical and logical security, transactionand logical security, transaction processing, operations control technologyprocessing, operations control technology and outsourcing risksand outsourcing risks – Business and event risks, which includeBusiness and event risks, which include strategic, image and reputation, taxation,strategic, image and reputation, taxation, accounting and financial management,accounting and financial management, legal, regulatory requirement and HR risks.legal, regulatory requirement and HR risks.
  63. 63. Operational RiskOperational Risk Risk measurement:Risk measurement: – Combines the likelihood of an operationalCombines the likelihood of an operational risk event occurring with the probable lossrisk event occurring with the probable loss if it does occurif it does occur – Expected and unexpected loss can beExpected and unexpected loss can be determined by the loss distributiondetermined by the loss distribution
  64. 64. Operational RiskOperational Risk BMO’s goal:BMO’s goal: – To make this risk transparent throughoutTo make this risk transparent throughout the enterprisethe enterprise
  65. 65. Derivative portfolioDerivative portfolio Interest rate contractsInterest rate contracts – Swap, Futures, OptionSwap, Futures, Option Foreign Exchanges ContractsForeign Exchanges Contracts – Cross-Currency swaps, Futures, ForwardCross-Currency swaps, Futures, Forward FXFX Commodity ContractsCommodity Contracts – Swap, Futures, Forward, OptionSwap, Futures, Forward, Option Equity ContractsEquity Contracts Credit ContractsCredit Contracts
  66. 66. CIBCCIBC
  67. 67. CIBC Business LinesCIBC Business Lines CIBC Retail: 49.4% of total assetsCIBC Retail: 49.4% of total assets – Financial Services and lending, creditFinancial Services and lending, credit cards, mortgages, deposits, insurancecards, mortgages, deposits, insurance and investment products to retail andand investment products to retail and small businesssmall business – CIBC branches, ABM network, telephoneCIBC branches, ABM network, telephone and internet bankingand internet banking
  68. 68. CIBC Business LinesCIBC Business Lines Wealth Management: 9.3%Wealth Management: 9.3% – Relationship based advisory sales,Relationship based advisory sales, services and products through a salesservices and products through a sales force of investment professionals.force of investment professionals. – Full service brokerage in Canada andFull service brokerage in Canada and US, discount brokerage, global privateUS, discount brokerage, global private banking and trust services, and assetbanking and trust services, and asset managementmanagement
  69. 69. CIBC Business LinesCIBC Business Lines CIBC World Markets: 39.5%CIBC World Markets: 39.5% – Provides integrated and corporateProvides integrated and corporate banking solutionsbanking solutions – North America, UK, and Asia primarilyNorth America, UK, and Asia primarily – Specializations: Mergers/Acquisitions,Specializations: Mergers/Acquisitions, research, sales/trading ofresearch, sales/trading of securities/derivatives, merchant bankingsecurities/derivatives, merchant banking and commercial bankingand commercial banking
  70. 70. CIBC Business LinesCIBC Business Lines Amicus: 1.8%Amicus: 1.8% – Co-branded electronic retail bankingCo-branded electronic retail banking services.services. – Operates through pavilions in retailOperates through pavilions in retail locations; offers variety of deposit andlocations; offers variety of deposit and credit productscredit products
  71. 71. Factors Affecting Future ResultsFactors Affecting Future Results Credit, market, liquidity, operational andCredit, market, liquidity, operational and other risksother risks Health of economy, businesses andHealth of economy, businesses and capital marketscapital markets Monetary policy in Canada and USAMonetary policy in Canada and USA CompetitionCompetition Statute and regulatory changesStatute and regulatory changes
  72. 72. Risks to be ManagedRisks to be Managed CreditCredit MarketMarket LiquidityLiquidity OperationalOperational
  73. 73. Risk Management Structure:Risk Management Structure: Manages risk within tolerance levelsManages risk within tolerance levels established by is managementestablished by is management committees, BOD, and BODcommittees, BOD, and BOD committees with the objective ofcommittees with the objective of optimizing shareholder wealthoptimizing shareholder wealth
  74. 74. Credit Risk:Credit Risk: Essentially Default RiskEssentially Default Risk
  75. 75. Credit Risk Management:Credit Risk Management: Reviewed by Capital & Risk CommitteeReviewed by Capital & Risk Committee (CRC)(CRC) Reduce ConcentrationsReduce Concentrations Majority of risk from loan andMajority of risk from loan and acceptance portfolioacceptance portfolio Credit risk also from off-balance sheetCredit risk also from off-balance sheet activitiesactivities Two key policiesTwo key policies
  76. 76. LoansLoans Consumer Loans:Consumer Loans: – 67% of CIBC portfolio: Inherently67% of CIBC portfolio: Inherently diversifieddiversified Business and Government Loans:Business and Government Loans: – 33% of portfolio, 87% of which is in North33% of portfolio, 87% of which is in North America (the rest in UK, Western Europe),America (the rest in UK, Western Europe), Asian exposure managed downAsian exposure managed down
  77. 77. *Country Risk:*Country Risk: Risk that assets may become frozen inRisk that assets may become frozen in a foreign countrya foreign country Manage risk through limits on exposureManage risk through limits on exposure Argentina ordealArgentina ordeal
  78. 78. Derivative Use:Derivative Use: Active in credit derivative marketsActive in credit derivative markets CLO’sCLO’s Credit derivatives are used to mitigate sectorCredit derivatives are used to mitigate sector concentrationsconcentrations Largest Sectors Hedged: telecom ($724Largest Sectors Hedged: telecom ($724 million), utilities ($354 million), and financialmillion), utilities ($354 million), and financial institutions ($346 million)institutions ($346 million) Notional amount outstanding to creditNotional amount outstanding to credit protection: $4 billion (Oct. 31, 2002)protection: $4 billion (Oct. 31, 2002)
  79. 79. Counterparty Credit Exposure:Counterparty Credit Exposure: Arises from its interest rate, foreignArises from its interest rate, foreign exchange, equity, commodity and creditexchange, equity, commodity and credit derivatives market making and portfolioderivatives market making and portfolio management activities.management activities. Investment grade: 91% of CIBC’sInvestment grade: 91% of CIBC’s derivative credit exposurederivative credit exposure
  80. 80. Management of Market Risk:Management of Market Risk: The risk of financial loss arising fromThe risk of financial loss arising from changes in the values of financialchanges in the values of financial instruments and includes interest rateinstruments and includes interest rate credit spread, foreign exchange equity,credit spread, foreign exchange equity, commodity and liquidity riskscommodity and liquidity risks
  81. 81. Measures of Market Risk:Measures of Market Risk: VaR: Values-at-RiskVaR: Values-at-Risk RMURMU Stress testing and scenario analysis,Stress testing and scenario analysis, Backtesting,Backtesting,
  82. 82. VaR and RMU:VaR and RMU: Statistically definedStatistically defined Market risk measure of the potentialMarket risk measure of the potential loss from adverse movements that canloss from adverse movements that can occur under normal market conditionsoccur under normal market conditions An RMU is defined as the overnight lossAn RMU is defined as the overnight loss with less than a 1% probability ofwith less than a 1% probability of occurring in normal markets.occurring in normal markets.
  83. 83. Traded Activities:Traded Activities: Holds positions in both liquid and lessHolds positions in both liquid and less liquid trade’s financial instruments as aliquid trade’s financial instruments as a fundamental component of providingfundamental component of providing integrated financial solutions to meetintegrated financial solutions to meet clients needs.clients needs.
  84. 84. Foreign Exchange RiskForeign Exchange Risk
  85. 85. Non-trading Activities and Risks:Non-trading Activities and Risks: Interest RateInterest Rate Non-Trading Equity ExposureNon-Trading Equity Exposure FX-RiskFX-Risk Non-Exchange Traded CommodityNon-Exchange Traded Commodity DerivativesDerivatives
  86. 86. Management of Liquidity Risk:Management of Liquidity Risk: Dynamic infrastructure, policies andDynamic infrastructure, policies and standards, measurement, monitoringstandards, measurement, monitoring and control.and control. Liquid assetsLiquid assets $103.8 billion of wholesale term debt$103.8 billion of wholesale term debt Moodys and S&P rating downgradesMoodys and S&P rating downgrades
  87. 87. SPE’sSPE’s Securitized various financial assets,Securitized various financial assets, including credit card receivables,including credit card receivables, residential and commercial mortgages,residential and commercial mortgages, and business loans through SPE’sand business loans through SPE’s *Securitization: entity transfers assets to*Securitization: entity transfers assets to an SPE in exchange for cashan SPE in exchange for cash
  88. 88. Management of Operational Risk:Management of Operational Risk: Failures in internal controls, whichFailures in internal controls, which include people, processes and systemsinclude people, processes and systems InsuranceInsurance
  89. 89. Recommendation about RiskRecommendation about Risk Management:Management: Banks are in the business of riskBanks are in the business of risk managementmanagement Continual improvement methodology forContinual improvement methodology for risk managementrisk management
  90. 90. ReferencesReferences Canadian banks 2002: Perspectives on the Canadian bankingCanadian banks 2002: Perspectives on the Canadian banking industry.industry. Pricewaterhousecoopers Survey ReportPricewaterhousecoopers Survey Report. Accessed. Accessed October 14, 2003 from <http://www.pwc.com>October 14, 2003 from <http://www.pwc.com> Canadian securities course: Volume 1. (2001).Canadian securities course: Volume 1. (2001). Canadian SecuritiesCanadian Securities Institute.Institute. Canada’s Banks. 2002.Canada’s Banks. 2002. Department of Finance.Department of Finance. Accessed OctoberAccessed October 14 from <http://www.fin.gc.ca>14 from <http://www.fin.gc.ca>

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