Risk Management Assessment: The Canadian Banking System

1. Risk Management Assessment: The Canadian Banking System Nawal K Roy Vice President Risk Management Specialist April 13, 2007

2. Moody’s Perspective on Risk • Rating process already includes top level business risk assessment • Detailed risk assessments enrich information set • Enhance Moody’s core analysis capabilities with accurate picture of issuer’s risk positioning • Support analysts on specific risk and derivatives issues • Use risk picture to inform ratings of firms • Relative scale for competitors across sector • Changes for same firm across time dimension • Provide fixed income investors with relevant and value-adding risk discussions • Risk cannot be completely separated from strategic and overall financial goals

3. Risk Assessments and Ratings Process • Separate RMA process for larger institutions • Deepening of Moody’s/issuer relationship • Evolving process • Participation of risk specialists in rating committees • Risk management capabilities qualitatively weighted against other rating drivers • Explicit identification of influence of risk management on credit where appropriate • In RMA reports, risk management categorized as strength/neutral/weakness • Relative rankings within an industry • Overall assessment of 4 pillars = mix of quantitative and qualitative indicators.

4. Objectives of RMA Initiative • Enhance Moody’s core analysis capabilities with accurate picture of issuer’s risk positioning • Support analysts on specific risk and derivatives issues • Use risk picture to inform ratings of firms • Relative scale for competitors across sector • Changes for same firm across time dimension • Provide fixed income investors with relevant and value-adding risk discussions • Influence development of better public disclosures around risk

5. The 4 Pillars of RMA • Risk Governance • Risk governance at board and executive management level • Risk management organization and its influence • Risk Management • Risk control processes • Risk appetite and limit setting • Risk mitigation • Risk Analysis and Quantification • Risk quantification • Risk monitoring and reporting • Risk Infrastructure and Intelligence • Risk infrastructure • Risk intelligence The dynamic interactions between the 4 pillars are at the center of the risk assessments. They create an actionable knowledge framework

6. Key Themes in Risk Assessments • Integrated and Strategic view of risks • Risk culture v. risk infrastructure • Timeliness and relevance of risk information • Identification of hidden and potential “iceberg” risks • Structured/complex/off balance sheet deals • Model risk • Gaps in operations • Compliance policies and procedures for product design, marketing, distribution, sales and pricing • Systems integration and data integrity across business lines and risk factors (ex: static data, outsourcing) • Practical implementation of operational risk tools (score cards, control self assessments and audits,…)

7. Key Themes in Risk Assessments • Integrated and Strategic view of risks • Risk culture v. risk infrastructure • Timeliness and relevance of risk information • Identification of hidden and potential “iceberg” risks • Structured/complex/off balance sheet deals • Model risk • Gaps in operations • Compliance policies and procedures for product design, marketing, distribution, sales and pricing • Systems integration and data integrity across business lines and risk factors (ex: static data, outsourcing) • Practical implementation of operational risk tools (score cards, control self assessments and audits,…)

8. Gold Benchmark – Risk Governance

9. Gold Benchmark – Risk Management

10. Gold Benchmark – Risk Measurement

11. Gold Benchmark – Risk Intelligence

12. Practical Implementation • Gather preliminary information from public disclosures and Moody’s previous meetings • Use structured approach (work plan) from highest level (board) to Business Lines • Understand organization of risk management function and extent of risk culture within firm • Clarify dynamics of risk decisions (appetite, mitigation, liquidation, exception reporting,…) • Understand internal risk communication and reporting framework • Focus meetings on key sensitive areas • Economic capital and risk-adjusted returns • Risk appetite and risk limits • Reporting and communication framework

13. Canadian Banking System • Top six banks • Royal Bank of Canada • Bank of Nova Scotia • Canadian Imperial Bank of Commerce • Bank of Montreal • Toronto-Dominion Bank • National Bank of Canada • In 2005, 80% of total asset base of deposits

14. Canadian Banking System – Overall assessment • Well positioned to sustain stress without catastrophic consequences • OSFI- active regulation in its oversight of compliance and Bank’s implementation of Basel II framework • Bank’s co-operation for systematic risk planning (i.e., avian flu) • Balancing growth ambitions with common heritage as primarily a domestic market participants (Enron etc)

15. Key positive attributes • Strong risk governance and an empowered risk management function in most of the banks • An appreciation of the need for risk management input at the highest management levels of the banks • Collaborative efforts among banks to address system- wide threats • A complete tool-box of risk measures for most banks • A strong regulator, OSFI, with strict governance principles

16. Areas of Concern • Some banks have largely reactive risk management at the top indicating a lack of robust risk culture • Some banks have been better at risk taking activities into quality earnings • Only one of the six banks has opted for the Advanced Measurement Approach (AMA) to Operational Risk for Basel II regulatory capital • Systematic risk resulting from the global transfer of risk from traditional banks to hedge funds

17. ANY QUESTIONS?? • Nawal.roy@moodys.com