Royal Bank of Canada

1. Presenters: Ping-Teng Lin Emily McLaughlin Cindy Deng Jason Huang Royal Bank of Canada Risk Management

2. Outline • Introduction • Risk Governance • Market Risk • Credit Risk • Capital Management • Derivative Usage • Conclusion

3. Introduction - Industry Structure • A Canadian Chartered Bank • Schedule I Bank: Domestic and widely held • One of the Big 6 Banks in Canada • Authorized to take deposits and issue loans and credit cards • RBC is Canada’s largest bank

4. Introduction - Company Structure • Five lines of business • RBC Banking • RBC Investments • RBC Insurance • RBC Global Services • RBC Capital Markets • Also has operations in Caribbean and the USA

5. Risk Exposure

6. 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

7. Risk Governance

8. Risk Governance • RBC`s framework for managing risk: • 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.

9. Market risk Exposed in trading activity and asset & liability management activities (non-trading).

10. Market risk

11. Trading market activities • 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.

12. Non-Trading market risk (Asset & Liability management) • Traditional non-trading banking activities, such as deposit taking and lending, expose to market risk, of which interest rate risk is the largest component.

13. Interest rate risk

14. Net interest income

15. Interest rate contracts for trading

16. Loan maturities and rates sensitivity

17. Interest Risk Measures

18. Foreign exchange rate and commodity price risk • 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

19. Subordinated Debentures

21. 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)

22. Credit spread risk • Risk exposure due to creditworthiness and credit rating of issuers of bonds and money market instruments, or the names underlying credit derivatives.

23. Monitoring and managing Market Risk • 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

24. Value at Risk (VaR) • A statistical technique that measures the worst-case 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.

26. VaR after Diversification

27. Market Risk Management Strategy

28. Derivatives held for hedging purpose 2009

29. Hedging activities

30. 2009 2008 2007

31. Credit Risk Introduction • 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

32. Risk Measurement • 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

33. Wholesale Portfolio • For mid to large corporations on individual basis • Risk measurement parameters • Probability of Default • Loss Given Default • Exposure at Default • Parameters estimated from past experience

34. Retail Risk Portfolio • For residential mortgages, credit cards, small business loanson a pooled basis • Two risk rating systems: • Acquisition scoring model for new clients • Behavioral scoring model for current clients • Pooling risk is more accurate, precise, and consistent

35. Credit Risk Control • Four parts: • Risk Assessment • Use consistent risk assessment criteria • Risk Mitigation • Obtain collaterals; Use credit derivatives to transfer risk • Risk Approval • New & changed credit products are reviewed strictly • Portfolio Management • Many limits on portfolio to ensure diversification

36. Credit Risk Exposure

37. Credit Risk Exposure

38. Provision for Credit Loss • PCL is charged to income to bring allowances for credit losses to acceptable levels

39. PCL Continued

40. Gross Impaired Loans • Loans which no longer receive interest • Principal may or may not be paid back

41. GIL Continued

42. Allowance for Credit Losses • Levels determined by management to offset estimated losses

43. Credit Derivatives • OTC contracts to transfer credit risk from one counterparty to another • E.g. credit default swaps, total return swaps • RBC buys these for protection against loss of value for underlying assets

44. Credit Derivatives Continued

45. Credit Derivatives Continued • Thus, we see a movement away from derivatives for hedging • RBC prefers stricter risk acceptance protocol • RBC increasing greater allowance for credit loss

46. Operational Risk • 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

47. Liquidity Risk • The risk of being unable to generate or obtain sufficient cash or its equivalent in a timely and cost-effective manner to meet commitments as they come due.

48. Other Risks • Reputation Risk • 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. • Regulatory and Legal Risk • Insurance Risk • Ensure our insurance portfolio is well diversified • Reinsurance involves transferring insurance risk to independent insurance companies • Environmental Risk

49. Capital Management

50. Capital Management • 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