Canadian Banking Industry Canadian Banking Industry & Derivatives& Derivatives

Edwin CheungEdwin Cheung

Isaac Schweigert Isaac Schweigert

Sharan BrarSharan Brar

Tolek StrukoffTolek Strukoff

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

Economic & Market Economic & Market AnalysisAnalysis

Industry StructureIndustry Structure

CompetitionCompetition Market DynamicsMarket Dynamics

CompetitionCompetition

The Canadian banking system is The Canadian banking system is mature, sophisticated and highly mature, sophisticated and highly competitivecompetitive

14 domestic banks; 33 foreign 14 domestic banks; 33 foreign bank subsidiaries; 20 foreign bank bank subsidiaries; 20 foreign bank branchesbranches

They collectively manage over They collectively manage over $1.7 trillion in assets $1.7 trillion in assets

Market DynamicsMarket Dynamics

The six large Canadian banks manage The six large Canadian banks manage over 90% of total bank assetsover 90% of total bank assets

Banks operate through an extensive Banks operate through an extensive network of branches and automated network of branches and automated banking machines (ABM’s)banking machines (ABM’s)

Canada has the highest # of ABM’s Canada has the highest # of ABM’s per capitaper capita

Industry experiencing consolidationIndustry experiencing consolidation

Products ProducedProducts Produced

ProductsProducts TechnologyTechnology SubstitutesSubstitutes

ProductsProductsA bank performs the following A bank performs the following

activities: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 operation of trust and securities

subsidiariessubsidiaries banks to be involved in wealth banks to be involved in wealth

managementmanagement

TechnologyTechnology

Technology is significantly altering theTechnology is significantly altering the

structure of the Canadian bank industrystructure of the Canadian bank industry Internet Internet product innovation to improve product innovation to improve

services services Canada is a leader in automated Canada is a leader in automated

bankingbanking

SubstitutesSubstitutes

credit unionscredit unions foreign banksforeign banks small virtual competitorssmall virtual competitors small region-specific/culturally small region-specific/culturally

specific institutionsspecific institutions

Cost and Revenue Cost and Revenue StructureStructure

Revenue SourcesRevenue Sources Cost StructureCost Structure

Revenue SourcesRevenue Sources

Interest Income is a major sourceInterest Income is a major source Importance of non-interest income Importance of non-interest income

is increasingis increasing Fees for mutual fund management, Fees for mutual fund management,

credit cards, derivatives trading, credit cards, derivatives trading, cheque processing, foreign cheque processing, foreign exchangeexchange

Cost StructureCost Structure

OperationsOperations Human ResourcesHuman Resources

Firm Strategy & Future Firm Strategy & Future GrowthGrowth

Investment in technology and product Investment in technology and product innovationinnovation

Cost efficiency/alliances/consolidationCost efficiency/alliances/consolidation Expansion of customer baseExpansion of customer base Wealth management, corporate and Wealth management, corporate and

investment bankinginvestment banking Expansion to select international Expansion to select international

marketsmarkets

Regulatory Regulatory EnvironmentEnvironment

Bank Act Bank Act Regulation modified every 5 years Regulation modified every 5 years

to stay current and allow flexibilityto stay current and allow flexibility Office of the Superintendent of Office of the Superintendent of

Financial InstitutionsFinancial Institutions Restrictions in ownershipRestrictions in ownership

Regulatory Regulatory EnvironmentEnvironment

International Monetary FundInternational Monetary Fund Canada Deposit Insurance Canada Deposit Insurance

CorporationCorporation Canadian Securities Institute Canadian Securities Institute

(educational requirements)(educational requirements) Provincial securities regulatorsProvincial securities regulators IDA & MFDAIDA & MFDA

Risk Management Risk Management EnvironmentEnvironment

RisksRisks

Major Risks:Major Risks: Market RiskMarket Risk Credit RiskCredit Risk Liquidity RiskLiquidity Risk

Measurement:Measurement: StatisticsStatistics Economic CapitalEconomic Capital

Techniques & ProductsTechniques & Products

Techniques:Techniques: HedgingHedging

Products:Products: SwapsSwaps Futures (Currency)Futures (Currency) OptionsOptions

Prospects & HazardsProspects & Hazards

Prospects for Effective Risk Management:Prospects for Effective Risk Management: Banks in the business of RMBanks in the business of RM ComplicatedComplicatedHazardsHazards 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

RBCRBC

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

Divisions of RBCDivisions of RBC

RBC Capital MarketsRBC Capital Markets– financial services to companies and financial services to companies and

governmentgovernment– hedge funds and private equityhedge funds and private equity

RBC Global ServicesRBC Global Services– Transaction processing for mutual and Transaction processing for mutual and

hedge fundshedge funds– Custodian for CI Mutual Funds, AIM and Custodian for CI Mutual Funds, AIM and

MackenzieMackenzie

Net Income by SegmentNet Income by Segment

53%

7%

12%

15%

6%7% RBC Banking

RBC Insurance

RBC Investments

RBC CapitalMarketsRBC GlobalServicesOther

Factors Affecting Future Factors Affecting Future ResultsResults

Credit, market, liquidity, insurance, Credit, market, liquidity, insurance, operational and other risksoperational and other risks

Health of economy, businesses and Health 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

Risks to be ManagedRisks to be Managed

CreditCredit MarketMarket LiquidityLiquidity InsuranceInsurance OperationalOperational

Economic CapitalEconomic Capital

Calculation of equity needed to Calculation 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 intangibles, non-trading market risk, insurance, fixed asset and risk, insurance, fixed asset and trading market risktrading market risk

Economic CapitalEconomic Capital

34%

31%

10%

16%

9%

CreditGoodwillOperationalOtherBusiness Risk

Value at Risk (VaR)Value at Risk (VaR)

Used to manage trading risksUsed to manage trading risks RBC uses a 99% confidence level RBC uses a 99% confidence level

and back tests 500 previous daysand back tests 500 previous days

Credit RiskCredit Risk

Includes off balance sheetIncludes off balance sheet Diversify loans by type and Diversify loans by type and

geographygeography $1 billion in credit protection $1 billion in credit protection

(2002)(2002) $300 million in derivatives (2002)$300 million in derivatives (2002)

Credit QualityCredit Quality Major area of riskMajor area of risk Moving to lower-risk mortgages and less Moving to lower-risk mortgages and less

business loansbusiness loans Purchased $1 billion in credit protection in Purchased $1 billion in credit protection in

20022002 Only deal with reinsurers with AAA ratingOnly deal with reinsurers with AAA rating Largest domestic loan concentration is Largest domestic loan concentration is

OntarioOntario Largest international loan concentration is Largest international loan concentration is

USAUSA

Worldwide RevenuesWorldwide Revenues

0

10

20

30

40

50

60

70

80

90

Canada U.S. Int'l

20002002

Market RiskMarket Risk

Interest rateInterest rate Credit spread - from bonds and Credit spread - from bonds and

credit derivativescredit derivatives 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 arbitrage in interest rate, FX and equity marketsequity markets

Liquidity RiskLiquidity Risk

Managed dynamicallyManaged dynamically Overseen by the Liquidity Crisis Overseen by the Liquidity Crisis

TeamTeam Hedged with a pool of Hedged with a pool of

unencumbered, high-quality assetsunencumbered, high-quality assets Marketable or can be pledged as Marketable or can be pledged as

collateralcollateral

Liquidity ManagementLiquidity Management

$155 billion in liquid assets (41% of $155 billion in liquid assets (41% of total assets)total assets)

RBC maintains a high credit rating RBC maintains a high credit rating to have best possible access to to have best possible access to capitalcapital

Contingent liability planContingent liability plan Securitize assets to diversify Securitize assets to diversify

funding basefunding base

SecuritizationSecuritization

$1.7 billion of government $1.7 billion of government guaranteed mortgages in 2002, guaranteed mortgages in 2002, $2.4 billion outstanding$2.4 billion outstanding

$1.7 billion of credit card $1.7 billion of credit card receivables through an SPEreceivables through an SPE

Insurance RiskInsurance Risk

Product design and pricing riskProduct design and pricing risk Claims administration riskClaims administration risk Underwriting riskUnderwriting risk Liability riskLiability risk

Asset/Liability Asset/Liability ManagementManagement

Interest rate risk can be linear and Interest rate risk can be linear and non-linearnon-linear

Linear risk is hedged with interest Linear risk is hedged with interest rate swapsrate swaps

Non-linear risk comes from Non-linear risk comes from embedded options in products embedded options in products offeredoffered

Off Balance SheetOff Balance Sheet

Guarantees and standby credit Guarantees and standby credit lettersletters

Leases on premises and equipmentLeases on premises and equipment Derivatives which RBC is a counter Derivatives which RBC is a counter

party with other institutions and in party with other institutions and in tradingtrading– $10.6 billion in credit risk$10.6 billion in credit risk

Special Purpose EntitiesSpecial Purpose Entities

Special Purpose EntitiesSpecial Purpose Entities

Used to securitize credit card Used to securitize credit card receivablesreceivables

Non-operating and have no Non-operating and have no employeesemployees

Also provide SPE services to clientsAlso provide SPE services to clients Issue paper to purchase the assets Issue 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

DerivativesDerivatives

Most are FX forwards, interest rate Most are FX forwards, interest rate and currency forwards, FX and and currency forwards, FX and interest rate options and credit interest rate options and credit derivativesderivatives

Margin requirements and Margin requirements and premiums recorded as assetspremiums recorded as assets

Use hedge accounting for own Use hedge accounting for own derivatives if applicablederivatives if applicable

DerivativesDerivatives

Most relate to sales and trading Most relate to sales and trading activitiesactivities

Market-making, positioning and Market-making, positioning and arbitragearbitrage

No significant dealing in leveraged No significant dealing in leveraged derivativesderivatives

Used for hedging and investingUsed for hedging and investing

HedgesHedges

Fair Value Hedge-interest rate Fair Value Hedge-interest rate swapsswaps

Cash Flow Hedge-interest rate Cash Flow Hedge-interest rate swapsswaps

Foreign exchange investments in Foreign exchange investments in subsidiariessubsidiaries– FX forwardsFX forwards– US dollar denominated liabilitiesUS dollar denominated liabilities

HedgesHedges

Hedge mortgages by securitizationHedge mortgages by securitization– $3.7 billion in 2002, $1.7 billion sold $3.7 billion in 2002, $1.7 billion sold

to investorsto investors Redeemable deposits hedged with Redeemable deposits hedged with

interest rate optionsinterest rate options

BMOBMO

Enterprise-wide Risk Management

Comprehensive risk governance

Effective process & models Qualified risk professional

Integrated Risk ManagementIntegrated Risk Management

Management of risk is integrated Management of risk is integrated with the management of capital with the management of capital and strategyand strategy Capital at Risk (CaR)Capital at Risk (CaR)

Total Capital Risk by Risk Total Capital Risk by Risk TypeType

Strategic 11%Strategic 11% Operational Operational

24%24% Credit 38%Credit 38% Market 27%Market 27%

Total Capital RIsk by Risk Type

Strategic

Operational

Credit

Market

Direct Risk ManagementDirect Risk Management

Credit RiskCredit Risk Market riskMarket risk Liquidity and Funding RiskLiquidity and Funding Risk Operational RiskOperational Risk

Credit RiskCredit Risk

Is the risk of loss due to the failure Is the risk of loss due to the failure of a borrower, endorser, guarantor of a borrower, endorser, guarantor or counterparty to repay a loan of or counterparty to repay a loan of honor another predetermined honor another predetermined financial obligationfinancial obligation

Credit riskCredit risk

Provision for credit losses was $820 Provision for credit losses was $820 MM(0.56% of average net loans and (0.56% of average net loans and acceptance)acceptance)

Gross impaired loans totaled Gross impaired loans totaled $2,337M$2,337M

Net loans exposure to cable and telecom Net loans exposure to cable and telecom companies was approximately $2.0 companies was approximately $2.0 billionbillion

Credit riskCredit risk

Risk measurementRisk measurement– Gross impaired loans and acceptance Gross impaired loans and acceptance

Measure the financial condition of the Measure the financial condition of the portfolio portfolio

– Provision for credit lossesProvision for credit losses A measure of credit quality experienceA measure of credit quality experience

Provision for Credit Losses as a % ofAverage Net Loans and Acceptance

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

From 1998 to 2002

Market RiskMarket Risk

Is the risk of a negative impact on Is the risk of a negative impact on the balance sheet and income the balance sheet and income statement resulting from adverse statement resulting from adverse changes in the value of financial changes in the value of financial instruments as a result of changes instruments as a result of changes in certain market variables.in certain market variables.

Market RiskMarket Risk

The market variables include:The market variables include:Interest ratesInterest ratesForeign exchange ratesForeign exchange ratesEquity or commodity pricesEquity or commodity pricesCredit spreads Credit spreads Credit migration and defaultCredit migration and default

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 market calculate the magnitude of BMO’s market risk.risk.

Earnings Volatility (EV), a measure of the Earnings Volatility (EV), a measure of the adverse impact of potential changes in adverse impact of potential changes in market variables on 12-months after tax market variables on 12-months after tax incomeincome

Liquidity and Funding RiskLiquidity and Funding Risk

Is the risk of being unable to meet Is the risk of being unable to meet financial commitments in a timely financial commitments in a timely manner at reasonable prices as the manner at reasonable prices as the fall due. fall due. Financial commitments include Financial commitments include liabilities to depositors and liabilities to depositors and suppliers, and lending and suppliers, and lending and investment commitments.investment commitments.

Liquidity and Funding RiskLiquidity and Funding Risk

Risk measurementRisk measurement1)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

Core Deposits as 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

Off-balance sheet special purpose Off-balance sheet special purpose entities (SPEsentities (SPEs))– To securitize BMO assets in support of To securitize BMO assets in support of

capital or funding managementcapital or funding management Customer credit commitmentsCustomer credit commitments

– Integral part of BMO credit-granting Integral part of BMO credit-granting practices and create liquidity and practices and create liquidity and funding exposure.funding exposure.

Operational RiskOperational Risk

Is the risk of loss resulting form Is the risk of loss resulting form inadequate or failed internal inadequate or failed internal processes, system or human error, processes, system or human error, or external eventsor external events– Never be eliminatedNever be eliminated

Operational RiskOperational Risk

Composed ofComposed of– Operational risks, which include physical Operational risks, which include physical

and logical security, transaction and logical security, transaction processing, operations control technology processing, operations control technology and outsourcing risksand outsourcing risks

– Business and event risks, which include Business 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 legal, regulatory requirement and HR risks.risks.

Operational RiskOperational Risk

Risk measurement:Risk measurement:– Combines the likelihood of an Combines the likelihood of an

operational risk event occurring with operational risk event occurring with the probable loss if it does occurthe probable loss if it does occur

– Expected and unexpected loss can be Expected and unexpected loss can be determined by the loss distributiondetermined by the loss distribution

Operational RiskOperational Risk

BMO’s goal:BMO’s goal:– To make this risk transparent To make this risk transparent

throughout the enterprise throughout the enterprise

Derivative portfolioDerivative portfolio

Interest rate contractsInterest rate contracts– Swap, Futures, OptionSwap, Futures, Option

Foreign Exchanges ContractsForeign Exchanges Contracts– Cross-Currency swaps, Futures, Forward FXCross-Currency swaps, Futures, Forward FX

Commodity ContractsCommodity Contracts– Swap, Futures, Forward, OptionSwap, Futures, Forward, Option

Equity ContractsEquity Contracts Credit ContractsCredit Contracts

CIBCCIBC

CIBC Business LinesCIBC Business Lines

CIBC Retail: 49.4% of total assetsCIBC Retail: 49.4% of total assets– Financial Services and lending, Financial Services and lending,

credit cards, mortgages, deposits, credit cards, mortgages, deposits, insurance and investment products insurance and investment products to retail and small businessto retail and small business

– CIBC branches, ABM network, CIBC branches, ABM network, telephone and internet bankingtelephone and internet banking

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 services and products through a sales force of investment sales force of investment professionals.professionals.

– Full service brokerage in Canada Full service brokerage in Canada and US, discount brokerage, global and US, discount brokerage, global private banking and trust services, private banking and trust services, and asset managementand asset management

CIBC Business LinesCIBC Business Lines

CIBC World Markets: 39.5%CIBC World Markets: 39.5%– Provides integrated and corporate Provides 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 of research, sales/trading of securities/derivatives, merchant securities/derivatives, merchant banking and commercial bankingbanking and commercial banking

CIBC Business LinesCIBC Business Lines

Amicus: 1.8%Amicus: 1.8%– Co-branded electronic retail banking Co-branded electronic retail banking

services.services.– Operates through pavilions in retail Operates through pavilions in retail

locations; offers variety of deposit locations; offers variety of deposit and credit products and credit products

Factors Affecting Future Factors Affecting Future ResultsResults

Credit, market, liquidity, operational Credit, market, liquidity, operational and other risksand other risks

Health of economy, businesses and Health 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

Risks to be ManagedRisks to be Managed

CreditCredit MarketMarket LiquidityLiquidity OperationalOperational

Risk Management Structure:Risk Management Structure:

Manages risk within tolerance Manages risk within tolerance levels established by is levels established by is management committees, BOD, management committees, BOD, and BOD committees with the and BOD committees with the objective of optimizing shareholder objective of optimizing shareholder wealthwealth

Credit Risk:Credit Risk:

Essentially Default RiskEssentially Default Risk

Credit Risk Management:Credit Risk Management:

Reviewed by Capital & Risk Reviewed by Capital & Risk Committee (CRC)Committee (CRC)

Reduce ConcentrationsReduce Concentrations Majority of risk from loan and Majority of risk from loan and

acceptance portfolioacceptance portfolio Credit risk also from off-balance Credit risk also from off-balance

sheet activitiessheet activities Two key policiesTwo key policies

LoansLoans

Consumer Loans:Consumer Loans:– 67% of CIBC portfolio: Inherently 67% of CIBC portfolio: Inherently

diversifieddiversified Business and Government Loans:Business and Government Loans:

– 33% of portfolio, 87% of which is in 33% of portfolio, 87% of which is in North America (the rest in UK, North America (the rest in UK, Western Europe), Asian exposure Western Europe), Asian exposure managed down managed down

*Country Risk:*Country Risk:

Risk that assets may become Risk that assets may become frozen in a foreign countryfrozen in a foreign country

Manage risk through limits on Manage risk through limits on exposure exposure

Argentina ordeal Argentina ordeal

Derivative Use:Derivative Use:

Active in credit derivative markets Active in credit derivative markets CLO’sCLO’s Credit derivatives are used to mitigate Credit derivatives are used to mitigate

sector concentrationssector concentrations Largest Sectors Hedged: telecom ($724 Largest Sectors Hedged: telecom ($724

million), utilities ($354 million), and million), utilities ($354 million), and financial institutions ($346 million)financial institutions ($346 million)

Notional amount outstanding to credit Notional amount outstanding to credit protection: $4 billion (Oct. 31, 2002)protection: $4 billion (Oct. 31, 2002)

Counterparty Credit Counterparty Credit Exposure:Exposure:

Arises from its interest rate, Arises from its interest rate, foreign exchange, equity, foreign exchange, equity, commodity and credit derivatives commodity and credit derivatives market making and portfolio market making and portfolio management activities.management activities.

Investment grade: 91% of CIBC’s Investment grade: 91% of CIBC’s derivative credit exposurederivative credit exposure

Management of Market Risk:Management of Market Risk:

The risk of financial loss arising The risk of financial loss arising from changes in the values of from changes in the values of financial instruments and includes financial instruments and includes interest rate credit spread, foreign interest rate credit spread, foreign exchange equity, commodity and exchange equity, commodity and liquidity risksliquidity risks

Measures of Market Risk:Measures of Market Risk:

VaR: Values-at-RiskVaR: Values-at-Risk RMU RMU Stress testing and scenario Stress testing and scenario

analysis, analysis, Backtesting, Backtesting,

VaR and RMU:VaR and RMU:

Statistically defined Statistically defined Market risk measure of the Market risk measure of the

potential loss from adverse potential loss from adverse movements that can occur under movements that can occur under normal market conditionsnormal market conditions

An RMU is defined as the overnight An RMU is defined as the overnight loss with less than a 1% probability loss with less than a 1% probability of occurring in normal markets.of occurring in normal markets.

Traded Activities:Traded Activities:

Holds positions in both liquid and Holds positions in both liquid and less liquid trade’s financial less liquid trade’s financial instruments as a fundamental instruments as a fundamental component of providing integrated component of providing integrated financial solutions to meet clients financial solutions to meet clients needs.needs.

Foreign Exchange RiskForeign Exchange Risk

Non-trading Activities and Non-trading Activities and Risks:Risks:

Interest RateInterest Rate Non-Trading Equity ExposureNon-Trading Equity Exposure FX-RiskFX-Risk Non-Exchange Traded Commodity Non-Exchange Traded Commodity

DerivativesDerivatives

Management of Liquidity Management of Liquidity Risk:Risk:

Dynamic infrastructure, policies and Dynamic infrastructure, policies and standards, measurement, standards, measurement, monitoring and control.monitoring and control.

Liquid assetsLiquid assets $103.8 billion of wholesale term $103.8 billion of wholesale term

debtdebt Moodys and S&P rating downgradesMoodys and S&P rating downgrades

SPE’sSPE’s

Securitized various financial Securitized various financial assets, including credit card assets, including credit card receivables, residential and receivables, residential and commercial mortgages, and commercial mortgages, and business loans through SPE’sbusiness loans through SPE’s

*Securitization: entity transfers *Securitization: entity transfers assets to an SPE in exchange for assets to an SPE in exchange for cashcash

Management of Operational Management of Operational Risk:Risk:

Failures in internal controls, which Failures in internal controls, which include people, processes and include people, processes and systemssystems

InsuranceInsurance

Recommendation about Risk Recommendation about Risk Management:Management:

Banks are in the business of risk Banks are in the business of risk managementmanagement

Continual improvement Continual improvement methodology for risk managementmethodology for risk management

ReferencesReferences

Canadian banks 2002: Perspectives on the Canadian Canadian banks 2002: Perspectives on the Canadian banking industry. banking industry. Pricewaterhousecoopers Survey Pricewaterhousecoopers Survey ReportReport. Accessed October 14, 2003 from . Accessed October 14, 2003 from <http://www.pwc.com><http://www.pwc.com>

Canadian securities course: Volume 1. (2001). Canadian securities course: Volume 1. (2001). Canadian Canadian Securities Institute.Securities Institute.

Canada’s Banks. 2002. Canada’s Banks. 2002. Department of Finance.Department of Finance. Accessed Accessed October 14 from <http://www.fin.gc.ca>October 14 from <http://www.fin.gc.ca>